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Court of Appeals of Tennessee Upholds Arbitration Provision in Employment Contract

In a recent case, the Court of Appeals of Tennessee was asked by a terminated employee (“Employee”) to rule that an agreement to arbitrate in his employment contract (Employment Agreement”) was not enforceable because arbitration would be too expensive.  The court disagreed with the Employee, and affirmed the order of the trial court which mandated that the Employee’s claims be submitted to arbitration in conformance with the rules of the American Arbitration Association (“AAA”).

In the case, Trigg v. Little Six Corporation, the Employee was a well-educated, highly paid, top level employee.  In exchange for signing the Employment Agreement and releasing Employer from any claims he had against it under a previous employment agreement, the Employer had paid Employee over one and a half million dollars.  As well, although the Employee was defined as an “at will” employee in the Employment Agreement, it also provided that Employee would receive a payment of $50,000 in the event his employment was terminated without cause.

The Employment Agreement mandated that any dispute be resolved by a three member arbitration panel.  It also provided that the expenses of arbitration be paid equally by the parties.

The Employer terminated Employee without cause and paid him the required $50,000 Employee, after his termination, filed a lawsuit against Employer alleging that he had been discriminated against because of this age and setting forth a cause of action under the Tennessee Whistleblower Act.  Employer filed a motion to compel Employee to arbitrate. The trial court granted it.

On appeal, Employee argued that the arbitration provision should not be enforced because it was unconscionable and, therefore, unenforceable.  As grounds for this argument, Employee asserted that the costs of arbitration would be prohibitively expensive. He filed an affidavit in which he stated that he had been unable to find a new job; was making about $25,000 per year as a self-employed engineer; and that he had to use retirement savings to “make ends meet.”

The record established that Employee was claiming between two million and six million dollars in damages.  The trial court concluded that the Employee’s share of the cost of arbitration would likely be between $10,000 and $30,000.  The Court of Appeals pointed out that the filing fee which the Employee would have to pay to initiate arbitration with the AAA would be between $11,450 and $14,200.

In analyzing whether the arbitration provision in the Employment Agreement was unconscionable, and thus unenforceable under Tennessee law, the court focused on whether it unreasonably favored Employer over Employee.  As discussed by the court in the Little Six opinion, Tennessee courts have refused, in other instances, to enforce arbitration provisions where the cost of arbitration would have been prohibitively expensive.  It also pointed out that, when a party challenges an agreement to arbitrate on the grounds that arbitration would be prohibitively expensive, that party has the burden of proof on that issue.

In the Little Six case, the court held that the Employee had failed to carry his burden of proving that arbitration would be prohibitively expensive to him.  The “to him” part of the court’s opinion is important because the court expressed concern with the amount of arbitration costs which would be incurred in that case as they might affect or impede other litigants.  The court noted that the Employee’s affidavit did not contain any statement that he would be unable to pay arbitration expenses or that such expenses would even cause him a financial hardship.  Of course, the court was also influenced by the fact that, in exchange for signing the Employment Agreement with the arbitration provision which Employee opposed, Employee was paid over a million and a half dollars.

For lawyers who handle arbitration cases, the Little Six case is worth the read.