With the Epic Systems case broadly supporting employers’ rights to use arbitration agreements with class waivers, what is now emerging is the result of the necessary trade-off. Employers can, in the wake of Epic Systems, use arbitration agreements to compel the arbitration of putative class claims on an individual basis. But the quid pro quo is that they must then deal with the case in arbitration. A recent case suggests the perils of arbitration once the dispute is sent there.

In Hernandez v. Acosta Tractors, Inc., Case No. 17-13057 (11th Cir. Aug. 8, 2018), the two plaintiffs brought a putative collection action under the Fair Labor Standards Act for alleged off-the-clock work. The employer successfully compelled arbitration of the matter, but things did not go well there. The arbitrator refused to consolidate the two matters, effectively doubling the cost. The arbitrator then refused to limit discovery, resulting in the taking of 29 depositions. The arbitrator’s own fees exceeded $100,000, well more than the amounts in dispute for the two individual claimants.

Exasperated, the employer refused to pay those fees and then tried to return the matter to court on the grounds that “the Arbitration of this matter has failed of its essential purpose.” But the District Court curtly noted the employer’s refusal to pay the arbitrator’s fee, and then entered a default judgment against it.

The court of appeals reversed. It found that ordinarily the appropriate remedy if the employer failed to pay the arbitration fees under the FAA was to reinstitute the litigation in court, not a default judgment. However, the court of appeals went on to explain that the employer’s conduct in arbitration could conceivably rise to the level of bad faith, giving rise to a default as a sanction. The court noted that, in addition to the high fees, the employer seemed unhappy with the arbitrator because of unfavorable rulings. As the court stated “[a] calculated choice to abandon arbitration after getting adverse rulings from the arbitrator certainly looks like forum shopping.”

Arbitration is a trade-off. Under Epic Systems, the employer can enforce a class action waiver in arbitration, but that is not a guarantee that the arbitration will prove less expensive than an individual action in court or that the employer will like the arbitrator’s rulings. In this instance, it isn’t clear how large the putative class was, but reliance on arbitration may have proven more expensive than defending a collective action in the first place.

The bottom line:

Mere failure to pay the arbitrator’s fee is not a basis for default, but that and other factors may lead to sanctions. Employers should consider the cost of arbitration both when drafting their agreements and in seeking to enforce them.