Decided April 1, 2013
The Fourth Circuit Court of Appeals reversed the district court’s holding that it could not compel arbitration based on the unconscionability of three provisions in the parties’ franchise agreement. The Fourth Circuit did not find these contractual provisions unconscionable and, therefore, vacated the district court’s judgment and remanded the case for entry of an order compelling arbitration.
The plaintiff, Samuel Muriithi, brought suit based on the franchise agreement he signed as part of his employment with the defendant taxicab service, Shuttle Express, Inc (“Shuttle Express”). Muriithi claims that Shuttle Express induced him to sign a Unit Franchise Agreement that improperly classified him as an “independent contractor,” rather than an “employee” and thereby afforded him lesser compensation. Muriithi asserted claims against Shuttle Express based on the Fair Labor Standards Act and Maryland state law. Shuttle Express moved to dismiss the complaint or to compel arbitration. Shuttle Express based its motion to compel arbitration on the Arbitration Clause included in the parties’ Franchise Agreement. The district court held that because Muriithi’s claims “arise out of” the Franchise Agreement, they were within the scope of the Arbitration Clause. However, the district court concluded that the Arbitration Clause was not enforceable based on three unconscionable provisions in the Franchise Agreement: (1) the fee-splitting provision, (2) the class action waiver, and (3) the one-year limitations provision.
The Fourth Circuit first addressed the enforceability of the class action waiver. The district court held that the class action waiver prevented Muriithi from fully vindicating his statutory rights and thereby rendered the Arbitration Clause unconscionable. On appeal, Shuttle Express cited the Supreme Court’s recent decision in Concepcion, which held that “[r]equiring the availability of class-wide arbitration interferes with the fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” Although Muriithi tried to argue that the Supreme Court’s holding is limited in scope to the FAA’s preemption of state law on this issue, the Fourth Circuit disagreed and concluded that the Supreme Court’s holding was not merely an assertion of federal preemption, but also plainly prohibited application of the general contract defense of unconscionability to invalidate an otherwise valid arbitration agreement under these circumstances.
The Fourth Circuit next addressed the enforceability of the fee-splitting provision. The district court held that this provision imposed prohibitive arbitration costs on Muriithi and thereby rendered the Arbitration Clause unconscionable. However, the Fourth Circuit indicated that the party seeking to invalidate an arbitration agreement based on prohibitive costs bears the “substantial” burden of showing a likelihood of incurring such costs. The Fourth Circuit concluded that Muriithi did not meet this burden because he merely alleged the likelihood of incurring prohibitive costs, rather than establishing the likelihood with firm proof. Muriithi also failed to provide evidence about the value of his claim. Further, Shuttle Express agreed to pay all arbitration costs if this case is referred to arbitration. Therefore, the Fourth Circuit concluded that Muriithi has not carried his burden of showing that he likely would incur prohibitive costs as a result of arbitration subject to the fee-splitting provision.
Finally, the Fourth Circuit addressed the enforceability of the one-year limitations provision, which the district court found unconscionable because it unreasonably restricted Muriithi’s ability to arbitrate “employment-related statutory claims.” Because the one-year limitations provision is not referenced in the Arbitration Clause, but is only applicable generally to the Franchise Agreement, the Fourth Circuit concluded that it was not properly considered by the court in a motion to compel.
– Sarah Bishop