Consumer Finance Litigation

In Zaborowski v. MHN Gov't Services, Inc., 2013 WL 1363568 (N.D. Cal. April 3, 2013), the Northern District of California held that an employment contract arbitration agreement, which incorporated the filing fee schedule set forth in the rules of the American Arbitration Association ("AAA"), was unconscionable. The Zaborowski plaintiffs brought a class action lawsuit against their employer seeking damages in excess of $75,000, alleging that the employer had deprived them of overtime compensation by misclassifying them as independent contractors rather than employees. The employer brought a motion to compel arbitration based on an arbitration agreement contained in the standard employment contract between it and each plaintiff. In opposition to the motion, the plaintiffs argued that various provisions of the arbitration agreement were unconscionable, including a provision requiring plaintiffs to pay filing fees as provided by the AAA rules. Under these rules, the fee for employment disputes is only $175, whereas the fee for other types of claims varies depending on the amount in controversy. Plaintiffs' claim, which exceeded $75,000, would have been subject to a $2,600 filing fee under the rules. Holding that the fee provision of the arbitration agreement was unconscionable, the court observed that, under the provision, the plaintiffs would be subject to a filing fee nearly fifteen times greater than the fee the employer would be required to pay in employment disputes. While the employer argued that the plaintiffs had not adequately shown that they would be subject to the $2,600 fee, the court noted that the plaintiffs had pled in good faith that their damages exceeded $75,000 and supported their pleadings with declarations. Because significant filing fees are unconscionable under California law, the court held that the provision was unconscionable. The court also found several other provisions of the arbitration clause to be unconscionable and, thus, denied the employer's motion to compel arbitration. While Zaborowski does not necessarily mean that any and all arbitration agreements incorporating the AAA filing fees would be unconscionable, it highlights the imprudence of mechanically incorporating the AAA fees into an arbitration agreement. Companies contracting with employees, consumers, or other groups with lesser bargaining power should take special care in evaluating the potential unconscionability of AAA filing fees. For more information on consumer finance litigation topics, please contact one of the Burr & Forman team members for assistance. We are happy to answer any questions or concerns you may have.