By

Ava McCartin

Under the Federal Arbitration Act (“FAA”), United States courts will uphold and enforce arbitration agreements unless they are voidable under contract law.¹ While not specifically stated in the FAA, the doctrine of “effective vindication” empowers courts to void what would otherwise be facially valid arbitration agreements when the agreement would preclude a party from effectively vindicating their legal claims.² When bringing an effective vindication claim, claimants primarily argue that the cost associated with arbitration bars effective vindication of legal rights.

In 2013, the Supreme Court addressed this judicially crafted doctrine directly in American Express Co. v. Italian Colors.³ In Italian Colors, the court recognized the doctrine as a valid exception to the general mandate of the FAA but declined to apply it in that particular instance.⁴ However, the court explained that a party could “certainly” rely on effective vindication to escape an arbitration provision where the agreement forbade asserting a statutory right in any forum, and possibly where filing and administrative fees were high enough to preclude a party from accessing the forum.⁵ But what if the administrative fees are uncertain or premised on losing on the merits?

In Payne v. Savanah College of Art and Design, the Eleventh Circuit was faced with those very issues.⁶ Payne concerned an arbitration provision in an employment contract, which Payne—the employee—sought to avoid under the doctrine of effective vindication.⁷ In Payne, the would-be-litigant argued that the agreement’s “loser pays” provision was unconscionable because if he were to lose at arbitration he would not be able to pay the arbitrator’s bill.⁸ To support this claim, Payne provided expert testimony that predicted the cost of arbitration could be up to $39,000 or more, declarations about his inability to pay, and testimony from another former SCAD employee who explained that “the risk of paying significant arbitration costs discouraged him from continuing [to pursue] his discrimination case against SCAD.”⁹ The risk of financial ruin, Payne argued, prevented him from effectively vindicating his statutory right to be free from racial discrimination.¹⁰ The Eleventh Circuit disagreed.

Because the employer would pay the cost up-front, the court distinguished this situation from the hypotheticals in Italian Colors, where fees were required as a threshold matter to initiate arbitration.¹¹ Unlike threshold costs, which will certainly be incurred, the costs in Payne were “speculative.” The court reasoned that the only way Payne could prevail with his effective vindication argument would be if he could show that he would be “likely” to pay.¹² But the only way that Payne would be likely to pay would be if he were “likely” to lose on the merits of his case. “The ‘problem,’” the court explained “is that [Payne] might win.”¹³ This standard is unworkable.

When costs are assigned only to a losing party, the Eleventh Circuit’s standard essentially forces a party to admit that their case lacks merit as a prerequisite to bringing forth the effective vindication doctrine. But even if a party believes that they have a sound case, as they should to initiate litigation, the fear of losing at arbitration and subsequently going bankrupt could still deter that party from arbitration. And in fact, that scenario is exactly what happened to Darnell Holcomb, another former SCAD employee whose testimony Payne introduced in his case.

Like Payne, Holcomb was fired from his position at SCAD, attempted to sue, but “the risk of paying significant arbitration costs discouraged him from continuing his discrimination case against SCAD.”¹⁴ By creating a loser-pays cost shifting agreement, SCAD effectively forces employees to gamble on their legal claims: the employee must either proceed with arbitration and risk footing tens of thousands of dollars in fees, or drop the claim entirely. But how much money are litigants forced to gamble with? Could an arbitration agreement impose a one-million-dollar fee on the losing party? Under Eleventh Circuit precedent, unless a party could show they would be likely to lose that case, the answer seems to be “yes.”

To remedy this paradoxical standard, legislative intervention is required. Congress should codify a clear effective vindication doctrine in the FAA itself that considers both front and back-end costs of arbitration. A workable standard should ask whether the certain and uncertain costs of arbitration would deter a reasonable person in the plaintiff’s position from pursuing claims in the arbitral forum. In doing so, Congress could end the judicial interpretation of the doctrine of effective vindication, close this cost shifting contract loophole, and better serve the pursuit of justice for Payne and other plaintiffs like him.