Alexander v. Anthony Intl ( 2003 )

Opinions of the United
2003 Decisions States Court of Appeals
for the Third Circuit
8-19-2003
Alexander v. Anthony Intl
Precedential or Non-Precedential: Precedential
Docket No. 02-3764P
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PRECEDENTIAL
Filed August 19, 2003
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 02-3764
BLAISE ALEXANDER;
GERALD FREEMAN,
Appellants
v.
ANTHONY INTERNATIONAL, L.P.
On Appeal from the District Court
of the Virgin Islands
(D.C. Civil No. 97-cv-00058)
District Judge: Hon. Raymond L. Finch, Chief Judge
Argued April 30, 2003
BEFORE: ROTH, MCKEE and COWEN, Circuit Judges
(Filed August 19, 2003)
K. Glenda Cameron, Esq. (Argued)
Law Office of Lee J. Rohn
1101 King Street, Suite 2
Christiansted, St. Croix
USVI, 00820
Counsel for Appellants
2
Linda J. Blair, Esq. (Argued)
Bryant, Barnes & Moss
1134 King Street, 2nd Floor
Christiansted, St. Croix
USVI, 00820
Counsel for Appellee
OPINION OF THE COURT
COWEN, Circuit Judge.
Blaise Alexander and Gerald Freeman appeal from the
order of the District Court for the Virgin Islands compelling
arbitration pursuant to the Federal Arbitration Act (“FAA”),
9 U.S.C. § 1, et seq., and dismissing their complaint against
Anthony Crane International, L.P. (“Anthony Crane”)1 with
prejudice. Plaintiffs asserted several claims under Virgin
Islands law arising out of the alleged discriminatory
conduct of Anthony Crane, their previous employer.
Because of an arbitration agreement in the employment
contract, the District Court ruled that such claims must be
pursued in the arbitral forum and dismissed plaintiffs’
complaint. We, however, conclude that this agreement to
arbitrate is unenforceable pursuant to the well-established
doctrine of unconscionability. We therefore will reverse.
I.
Plaintiffs have worked for over twenty years as heavy
equipment and certified crane operators at the Hess oil
refinery on St. Croix, United States Virgin Islands.
Plaintiffs, originally from St. Lucia, attended schools
operating under the British system of education. Alexander
left school at the age of fourteen, having received the
equivalent of a seventh-grade education. Freeman, who also
left school at the same age, had no more than the
equivalent of a fifth-grade education.
Hess Oil Virgin Islands Corporation has entered
1. The caption identifies the defendant as Anthony International, L.P.
3
arrangements with a series of contractors to provide heavy
equipment services. It announced in June 1996 that the
equipment contract was awarded to Anthony Crane.
Anthony Crane, a Pennsylvania company, has offices
throughout the United States and the world.
On August 10, 1996, plaintiffs, along with other
prospective employees, attended an orientation meeting
conducted by Anthony Crane. The attendees received
several documents, including the Hourly Employee
Contract. The acceptance of this standard form contract
constituted a condition of employment, and plaintiffs had
no opportunity to negotiate or otherwise reject its specific
terms. Plaintiffs signed the agreement and began working
for Anthony Crane. They claimed that they accepted the
terms of the contract because they needed the job.
Alexander actually had three children in college at the time.
Among its various provisions, the Hourly Employee
Contract contains several clauses governing the resolution
of disputes. It provides that “[a]ny controversy or claim
arising out of or relating in any way to this Contract, to the
breach of this Contract, and/or to EMPLOYEE’s
employment with ANTHONY . . . shall be settled by
arbitration and not in a court or before an administrative
law judge.” App. at 17, 30. Arbitrable matters include all
claims “arising out of or relating in any fashion to this
Contract, to the breach of this Contract, or to EMPLOYEE’S
employment with ANTHONY.”2 App. at 18, 31. The employee
2. The Hourly Employee Contract continues:
Arbitrable matters include, but are not limited to, the following:
claims for wrongful or retaliatory discharge or wrongful treatment
under Virgin Islands or Federal law, including, but not limited to,
the Civil Rights Acts of 1866, 1871, and 1964, Title VII, the Equal
Employment Opportunity Act, the Equal Pay Act, the Fair Labor
Standards Act, the Age Discrimination in Employment Act, the
Americans with Disabilities Act, the Family and Medical Leave Act,
and Titles 10 and 24 of the Virgin Islands Code; claims for
employment discrimination under Virgin Islands law or Federal law;
defamation or matters sounding in tort; and the issue of arbitrability
of any claim or dispute.
App. at 18.
4
also waives the right to a trial by jury as to any claim or
dispute ruled non-arbitrable.
The arbitration must occur pursuant to the FAA and “the
arbitration provisions of the Employment Dispute
Resolution Rules of the American Arbitration Association
(Rules 11-35 of the January 1993 version, to the extent
applicable).” App. at 19, 32. According to the Hourly
Employee Contract, the employee must satisfy a thirty-day
limitations period in order to pursue a claim against
Anthony Crane:
EMPLOYEE must present EMPLOYEE’s claim in
written form to the Company within thirty (30) calender
days of the event which forms the basis of the claim.
For the purposes of this time limitation, the event
forming the basis of a claim arising from discharge of
EMPLOYEE shall be the date of discharge. In no event
may EMPLOYEE bring a claim of any nature against
ANTHONY unless the claim is filed as set forth in this
paragraph within thirty (30) days of the last day
EMPLOYEE was employed by ANTHONY. The written
notice submitted by the EMPLOYEE shall describe the
event forming the basis of claim, a description of his
claim, the relief sought by EMPLOYEE, and an address
and telephone number where EMPLOYEE can be
reached. Notice must be given to the General Manager
by hand delivery or by certified mail, return receipt
requested, and must be received by the General
Manager on or before the expiration of thirty (30)
calender days from the date of the event forming the
basis of the claim. If notice is given by hand delivery,
EMPLOYEE must retain a receipted copy of the notice.
If notice is given by certified mail, EMPLOYEE must
retain a copy of the return receipt. In the event that
timely notice is not provided to the Company as set
forth herein, it is agreed that the EMPLOYEE has
waived EMPLOYEE’s right to assert the claim, and
shall have no further remedy against the Company. It
is further agreed that this time limitation is to be
strictly enforced by the arbitrator.
App. at 19-20, 32-33. The contract further requires
Anthony Crane to submit, within fifteen calender days of its
5
receipt of the employee’s timely notice, a request to the
Federal Mediation and Conciliation Service or the American
Arbitration Association (“AAA”) for a list of five impartial
arbitrators in order to commence the selection process.
The Hourly Employee Contract also allocates the costs of
arbitration. It provides that the “losing party shall bear the
costs of the arbitrator’s fees and expenses.” App. at 20, 33.
Anthony Crane agreed to advance these fees and expenses,
but, if it prevails in the proceeding, the employee is bound
to provide reimbursement. The contract states that, with
the exception of the arbitrator’s fees and expenses, “each
party shall bear its own costs and expenses, including
attorney’s fees.” App. at 20, 33.
The Hourly Employee Contract delineates the form and
extent of any arbitration award in the employee’s favor. It
authorizes the arbitrator to uphold Anthony Crane’s actions
or grant relief to the employee. Such relief “shall consist of
net pecuniary damages and/or reinstatement.” App. at 21,
34. “Net pecuniary damages” is defined as:
. . . gross wages which EMPLOYEE could have earned
with ANTHONY during any period of suspension or
from the time period commencing on the date of
discharge and terminating on the date of the
arbitration award, minus any compensation from other
employment earned by EMPLOYEE during such time
period, and minus any unemployment compensation
received by EMPLOYEE during such time period.
App. at 21, 34. The contract “specifically excluded”
incidental or consequential damages from this definition.
App. at 21, 34. The arbitrator is also prohibited from
substituting his or her judgment for the judgment of
Anthony Crane and from altering or amending the form of
any disciplinary action if the arbitrator found such action
was merited. The Hourly Employee Contract finally contains
an invalidity provision, stating that the invalidity of any
portion of the contract shall not affect the validity of any
other provision and that the parties agree that any
remaining provisions “shall remain in full force and effect.”
App. at 22, 35.
6
Anthony Crane allegedly engaged in discriminatory
conduct after its hiring of plaintiffs. Plaintiffs claimed that
it used “white, Statesider employees” to perform the same
or similar work at higher pay and benefits. App. at 42.
Anthony Crane allegedly discriminated in making
promotions, with all foreman and higher positions filled by
these “white, Stateside employees.” App. at 42. Michael
Cain, the operations manager, allegedly informed Anthony
Crane workers at a September 1996 meeting that the
company would not recognize seniority and “that no ‘old
men’ would be filling” crane operator positions. App. at 43.
On February 17, 1997, Anthony Crane ordered Alexander
to take a qualification test. Plaintiffs alleged that Alexander
was given no warning or an opportunity to prepare and that
only certain older, black employees were required to take
this examination. Anthony Crane then terminated
Alexander based on his test performance. According to
plaintiffs, the company interpreted the test results in a
discriminatory fashion. Alexander was fifty-nine years old
at the time of his termination.
Anthony Crane informed Freeman on December 26, 1996
that he was being laid off because of a work reduction.
Plaintiffs challenged this purported justification, claiming
that Anthony Crane retained younger, white employees with
less experience and fewer qualifications and hired such
employees to perform the same or similar work after
Freeman’s “layoff.” Although Freeman allegedly discovered
that Anthony Crane was still hiring crane operators, the
company informed him that no work was available.
Plaintiffs filed charges with both the Equal Employment
Opportunity Commission and the Virgin Islands
Department of Labor. On May 27, 1997, plaintiffs filed a
complaint in the District Court. Alleging that Anthony
Crane is a citizen of Pennsylvania, plaintiffs premised
jurisdiction on diversity of citizenship. The complaint
lacked any federal causes of action but contained five
counts under Virgin Islands law. Anthony Crane allegedly
violated both the Virgin Islands Wrongful Discharge Act and
the Virgin Islands Civil Rights Act. The complaint further
alleged that Anthony Crane’s actions constituted intentional
and negligent infliction of emotional distress. Plaintiffs
7
sought punitive damages in addition to back pay, costs,
and attorney’s fees.
On December 22, 1997, Anthony Crane moved to stay
this action pending arbitration. In an order dated April 6,
1998, the Magistrate Judge determined that, because it is
the responsibility of the court and not the arbitrator to
ascertain the validity of an arbitration agreement, he must
decide whether the agreement at issue here constitutes a
contract of adhesion and is unconscionable or contrary to
public policy.3 The Magistrate Judge granted Anthony
Crane’s motion in a May 6, 1998 order. The Magistrate
Judge accepted that the Hourly Employee Contract was a
form document and that prospective employees “may have
no realistic ability to modify its terms.” App. at 128. He,
however, still decided to enforce the agreement to arbitrate,
rejecting plaintiffs’ contention that the agreement is
unconscionable or offends public policy.
Expecting any arbitration to take at least seven days,
plaintiffs claimed that they informed Anthony Crane of their
inability to afford arbitration. Plaintiffs relied on
information submitted by the potential arbitrators to
demonstrate the amount of fees at issue. One prospective
arbitrator indicated that she charged $175.00 per hour or
between $800.00 and $1000.00 per day. Another arbitrator
said that he is compensated at the rate of $275.00 per
hour. A third possible choice stated that he charged
$175.00 per hour or $1000.00 per diem. Anthony Crane
paid the AAA’s arbitration administration fee on April 1,
1998. In a September 14, 1998 letter, Lee J. Rohn, Esq.,
counsel for plaintiffs, responded to an inquiry from defense
counsel concerning the selection process. She indicated
that Glenda Cameron, Esq., who was responsible for
researching and striking proposed arbitrators, had gone to
Washington, D.C. for emergency surgery and would not
3. The Magistrate Judge originally ordered a factual hearing on this issue
of enforceability. For purposes of its motion for a stay, Anthony Crane
stipulated to the truthfulness of plaintiffs’ account of the signing of the
Hourly Employee Contract and even conceded “ ‘that the court could find
that the employment contract is one of adhesion.’ ” App. at 127. No
evidentiary hearing was ever held.
8
return for at least two weeks. Rohn stated that she would
ask her to make this selection process a priority upon her
return. It also appears that Maurice Cusick, Esq., another
attorney handling plaintiffs’ case, “developed heart
problems and was out of the office and the matter did not
advance for a period of time.” App. at 134. The AAA closed
this case in January 1999.
Plaintiffs accordingly filed a notice of status and motion
to vacate the order of arbitration on May 7, 2002. Finding
that he lacked the authority to decide a motion to compel
arbitration, the Magistrate Judge referred this motion to
Chief Judge Finch.
In an order dated September 12, 2002, the District Court
vacated the stay, compelled arbitration, and dismissed
plaintiffs’ complaint with prejudice. It concluded in an
accompanying memorandum opinion that the Magistrate
Judge did not have jurisdiction to decide Anthony Crane’s
original motion. It therefore considered the Magistrate
Judge’s order as a report containing proposed findings of
fact and recommendations and plaintiffs’ motion to vacate
as untimely objections to this “report.” The District Court
reviewed these proposed findings and recommendations for
clear error. It ruled that the Magistrate Judge’s finding that
the agreement to arbitrate is enforceable regardless of
Virgin Islands public policy was not clearly erroneous
because of the application of the FAA and its preemption of
any alleged territorial policy against arbitration in the
employment context. The District Court then considered
plaintiffs’ contention that the arbitration agreement
improperly provided for the surrender of several rights
under Virgin Islands law. Plaintiffs challenged the thirty-
day notice requirement based on territorial statutes of
limitations and claimed that the contract also restricted
their right to obtain attorney’s fees as well as incidental,
consequential, and punitive damages. The District Court,
however, concluded that the enforceability of such waivers
must be decided by the arbitrator. The District Court finally
held that the Magistrate Judge did not commit any clear
error as to the matter of arbitration expenses because
plaintiffs never argued before the Magistrate Judge that
they were deterred by the “loser pays” provision from
9
pursuing arbitration and never provided any evidence to
the Magistrate Judge of the actual costs at issue or their
inability to pay them. Plaintiffs timely appealed.
II.
Plaintiffs challenge the manner in which the District
Court considered the Magistrate Judge’s ruling. Although
they agree with the District Court that the Magistrate Judge
lacked the authority to grant the stay, they assert that the
District Court erred in treating the Magistrate Judge’s order
as proposed findings of fact and recommendations.
According to plaintiffs, the District Court was required to
vacate this ruling as a nullity and render a fully de novo
determination regarding the validity and enforceability of
the agreement to arbitrate. They alternatively assert that
the District Court, even if it properly considered the order
of the Magistrate Judge as proposed findings and
recommendations, failed to subject the Magistrate Judge’s
legal conclusions to the proper de novo review. Anthony
Crane, while defending the decision to treat the order as a
recommendation under a clear error standard of review,
argues that the Magistrate Judge actually possessed the
power to issue this order to stay.
Because we clearly have appellate jurisdiction over the
District Court’s order dismissing this action, see, e.g., Blair
v. Scott Specialty Gases, 283 F.3d 595, 598-602 (3d Cir.
2002), we need not resolve these preliminary issues. We
instead proceed directly to whether the Magistrate Judge
and the District Court erred in finding that the parties
entered a valid and enforceable agreement to arbitrate their
disputes. We exercise plenary review. See, e.g., Harris v.
Green Tree Fin. Corp., 183 F.3d 173, 176 (3d Cir. 1999).
Plaintiffs challenge the agreement to arbitrate and its
specific components on a number of grounds. We, however,
need only consider the dispositive matter of
unconscionability. We agree with plaintiffs that the
agreement to arbitrate is fundamentally unconscionable.
Needing to work for Anthony Crane, they were presented
with its terms without any real opportunity to negotiate.
The thirty-day time limitation, the restrictions on relief
10
available to the plaintiffs, and, under the circumstances of
this case, the “loser pays” provision for arbitrator’s fees and
expenses unreasonably favor Anthony Crane to the
plaintiffs’ detriment. These numerous elements of illegality
permeate the overall agreement to arbitrate. Refusing to
sever, we must strike down the arbitration agreement as
unenforceable.4
III.
Congress enacted the FAA in 1925 in response to the
traditional judicial hostility to the enforcement of
arbitration agreements. See, e.g., Circuit City Stores, Inc. v.
Adams, 532 U.S. 105, 112 (2001); Harris v. Green Tree Fin.
Corp., 183 F.3d 173, 178 (3d Cir. 1999). The FAA provides
that such agreements are “enforceable to the same extent
as other contracts.” Seus v. John Nuveen & Co., 146 F.3d
175, 178 (3d Cir. 1998). The enactment establishes a
strong federal policy in favor of the resolution of disputes
through arbitration. See, e.g., Moses H. Cone Mem’l Hosp.
v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983).
Accordingly, “federal law presumptively favors the
enforcement of arbitration agreements.” Harris, 183 F.3d at178 (citing In re Prudential Ins. Co. of Am. Sales Practice
Litig., 133 F.3d 225, 231 (3d Cir. 1998)). A party to a valid
and enforceable arbitration agreement is entitled to a stay
4. Plaintiffs also challenge the prohibition on filing an administrative
claim and the AAA’s “confidentiality” requirements on unconscionability
grounds. Because we need not find these specific aspects
unconscionable in order to strike down the arbitration agreement, we do
not address them.
Anthony Crane argues that we should not consider some assertions of
plaintiffs due to a failure to advance such arguments before the
Magistrate Judge or the District Court. These include the challenges to
the thirty-day limitations period and the requirement that each party
generally bear its own costs and attorney’s fees. Plaintiffs clearly
asserted below that the agreement to arbitrate is unconscionable, and
the Magistrate Judge expressly rejected these assertions. Although
plaintiffs could have further developed their contentions as to
unconscionability, Anthony Crane fully responded to any further
elaborations offered on appeal. We therefore consider all of the relevant
arguments of the parties.
11
of federal court proceedings pending arbitration as well as
an order compelling such arbitration. See, e.g., 9 U.S.C.
§§ 3-4; Seus, 146 F.3d at 179.
Defendants apparently contest the ability of a court to
consider any challenge to an arbitration agreement on such
grounds as unconscionability. In Great Western Mortgage
Corp. v. Peacock, 110 F.3d 222 (3d Cir. 1997), the Third
Circuit indicated that it is for the arbitrator to address “any
argument that the provisions of the Arbitration Agreement
involve a waiver of substantive rights afforded by the state
statute.” Id. at 231. But a court, before directing the parties
to proceed with this favored method of dispute resolution,
must still ascertain whether the parties entered a valid
agreement to arbitrate. See, e.g., id. at 228, 231. 9 U.S.C.
§ 2 provides:
A written provision in any maritime transaction or a
contract evidencing a transaction involving commerce
to settle by arbitration a controversy thereafter arising
out of such contract or transaction, or the refusal to
perform the whole or any part thereof, or an agreement
in writing to submit to arbitration an existing
controversy arising out of such a contract, transaction,
or refusal, shall be valid, irrevocable, and enforceable,
save upon such grounds as exist at law or in equity for
the revocation of any contract.
We are to look to the relevant state law of contracts in
making this determination. See, e.g., Blair v. Scott Specialty
Gases, 283 F.3d 595, 603 (3d Cir. 2002); Harris, 183 F.3d
at 179. An agreement to arbitrate may be unenforceable
based on a generally applicable contractual defense, such
as unconscionability. See, e.g., Doctor’s Assocs., Inc. v.
Casarotto, 517 U.S. 681, 687 (1996). According to the
Supreme Court, courts must “remain attuned to well-
supported claims that the agreement to arbitrate resulted
from the sort of fraud or overwhelming economic power that
would provide grounds ‘for the revocation of any contract.’ ”
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473
U.S. 614, 624 (1985). Although possibly relevant,
considerations of public policy and the loss of state
statutory rights are not dispositive in the unconscionability
inquiry. The generally applicable standards of this
12
contractual doctrine continue to dictate the result of any
analysis. Consistent with the Supreme Court’s call, we have
on several occasions dealt with claims that an arbitration
contract is invalid on grounds of unconscionability or
disparity in bargaining power.5 See Harris, 183 F.3d at 181-
84; Seus, 146 F.3d at 184; Great Western Mortgage Corp.,
110 F.3d at 228-30; Pritzker v. Merrill Lynch, Pierce, Fenner
& Smith, Inc., 7 F.3d 1110, 1118 (3d Cir. 1993).
It appears uncontested that Virgin Islands law furnishes
the relevant contractual principles in this case. Statutory
law mandates that we turn to “the rules of the common
law, as expressed in the restatements of the law approved
by the American Law Institute.” 1 V.I. Code Ann. § 4.
A. Unconscionability
Section 208 of the Restatement (Second) of Contracts
provides:
If a contract or term thereof is unconscionable at the
time the contract is made a court may refuse to enforce
the contract, or may enforce the remainder of the
contract without the unconscionable term, or may so
limit the application of any unconscionable term as to
avoid any unconscionable result.
Restatement (Second) of Contracts § 208 (1981).6
5. At oral argument, Anthony Crane acknowledged that a court may
resolve an unconscionability challenge to an arbitration contract.
6. Section 208 is based on a provision of the Uniform Commercial Code:
(1) If the court as a matter of law finds the contract or any clause
of the contract to have been unconscionable at the time it was made
the court may refuse to enforce the contract, or it may enforce the
remainder of the contract without the unconscionable clause, or it
may so limit the application of any unconscionable clause as to
avoid any unconscionable result.
(2) When it is claimed or appears to the court that the contract or
any clause thereof may be unconscionable the parties shall be
afforded a reasonable opportunity to present evidence as to its
commercial setting, purpose and effect to aid the court in making
the determination.
11A V.I. Code Ann. § 2-302.
13
Courts have generally recognized that the doctrine of
unconscionability involves both “procedural” and
“substantive” elements. See, e.g., Harris, 183 F.3d at 181-
82 (applying Pennsylvania law); Ting v. AT&T, 319 F.3d
1126, 1148 (9th Cir.) (applying California law), pet. for cert.
filed, 71 U.S.L.W. 3680 (U.S. Apr. 16, 2003). “Procedural
unconscionability pertains to the process by which an
agreement is reached and the form of an agreement,
including the use therein of fine print and convoluted or
unclear language.” Harris, 183 F.3d at 181 (citing E. Allan
Farnsworth, Contracts § 4.28 (2d ed. 1990)). This element is
generally satisfied if the agreement constitutes a contract of
adhesion. See, e.g., Ting, 319 F.3d at 118 (citing
Armendariz v. Found. Health Psychcare Servs., Inc., 6 P.3d
669, 690 (Cal. 2000)). A contract of adhesion “ ‘is one which
is prepared by the party with excessive bargaining power
who presents it to the other party for signature on a take-
it-or-leave-it basis.’ ” Trailer Marine Transp. Corp. v.
Charley’s Trucking, Inc., 20 V.I. 282, 284 (1984) (citation
omitted).
A contract, however, is “not unconscionable merely
because the parties to it are unequal in bargaining
position.” Restatement (Second) of Contracts, supra, § 208
cmt. d; see also, e.g., Gilmer v. Interstate/Johnson Lane
Corp., 500 U.S. 20, 33 (1991); Great Western Mortgage
Corp., 110 F.3d at 229; Pritzker, 7 F.3d at 1118. An
adhesion contract is not necessarily unenforceable. See,
e.g., Seus, 146 F.3d at 184.
The party challenging the contract therefore must also
establish “substantive unconscionability.” This element
refers to terms that unreasonably favor one party to which
the disfavored party does not truly assent. Harris, 183 F.3d
at 181 (citing Germantown Mfg. Co. v. Rawlinson, 491 A.2d
138, 145-47 (Pa. Super. Ct. 1985); Denlinger, Inc. v.
Dendler, 608 A.2d 1061, 1068 (Pa. Super. Ct. 1992)).
According to the commentary accompanying section 208:
[G]ross inequality of bargaining power, together with
terms unreasonably favorable to the stronger party,
may confirm indications that the transaction involved
elements of deception or compulsion, or may show that
the weaker party had no meaningful choice, no real
14
alternative, or did not in fact assent or appear to
assent to the unfair terms.
Restatement (Second) of Contracts, supra, § 208 cmt. d; see
also Plaskett v. Bechtel Int’l, Inc., 243 F. Supp. 2d 334, 340
(D.V.I. 2003) (quoting section 208). In the end,
unconscionability “ ‘requires a two-fold determination: that
the contractual terms are unreasonably favorable to the
drafter and that there is no meaningful choice on the part
of the other party regarding acceptance of the provisions.’ ”
Harris, 183 F.3d at 181 (quoting Bensalem Township v. Int’l
Surplus Lines Ins. Co., 38 F.3d 1303, 1312 (3d Cir. 1994));
see also, e.g., Seus, 146 F.3d at 184.
1. Procedural Unconscionability
The arbitration agreement in the Hourly Employee
Contract was “ ‘prepared by the party with excessive
bargaining power’ ” and presented to plaintiffs “ ‘for
signature on a take-it-or-leave-it basis.’ ” Trailer Marine
Transp. Corp., 20 V.I. at 284 (citation omitted). Anthony
Crane, which conducts business throughout the nation and
the world, clearly possessed more bargaining power than
two long-time equipment operators with limited educational
backgrounds and, at best, very narrow options for other
employment. The acceptance of the standard form contract
was a condition of employment, and, as the Magistrate
Judge acknowledged, prospective employees “may have no
realistic ability to modify its terms.” App. at 128. Even
Anthony Crane conceded for purposes of its motion to stay
“that the court could find that the employment contract is
one of adhesion.” App. at 127. The Magistrate Judge did
correctly point out that the arbitration provision is not
hidden in small print. Anthony Crane also presents its own
account of the orientation meeting, in which a full
explanation of the arbitration clauses was provided to
plaintiffs and other employees. Plaintiffs nevertheless were
still presented with a “take-it-or-leave-it” agreement to
arbitrate by a multinational corporation. Because plaintiffs
had no real choice but to accept these terms, they have
established the existence of procedural unconscionability.
2. Substantive Unconscionability
In order to pursue an arbitration proceeding under the
Hourly Employee Contract, an employee must present his
15
or her claim in written form to the General Manager within
thirty days of the event providing the basis of the claim.
The agreement to arbitrate expressly prohibits such an
employee from bringing any claim unless it is filed within
thirty days of the last day of employment. We recognize that
a provision limiting the time to bring a claim or provide
notice of such a claim to the defendant is not necessarily
unfair or otherwise unconscionable. But such a time period
must still be reasonable. See, e.g., Order of United
Commercial Travelers v. Wolfe, 331 U.S. 586, 608 (1947)
(noting that contractual provision may validly limit time for
bringing action as long as “the shorter period itself shall be
a reasonable period”); Soltani v. Western & Southern Life
Ins. Co., 258 F.3d 1038, 1042-47 (9th Cir. 2001) (upholding
six-month limitation provision for bringing suit but striking
down 10-day contractual notice of suit requirement as
unconscionable). The thirty-day limitations period, however,
is clearly unreasonable and unduly favorable to Anthony
Crane.
Virgin Islands law generally provides that a tort cause of
action may be initiated within two years and establishes a
six-year statute of limitations for contractual actions. See 5
V.I. Code Ann. § 31(3), (4). Anthony Crane does point out
that collective bargaining agreements sometimes mandate
limitations periods of less than thirty days and that the
Virgin Islands Wrongful Discharge Act provides for an
employee to file a written complaint with the Virgin Islands
Commissioner of Labor “within thirty (30) days after
discharge.” 24 V.I. Code Ann. § 77(a). Nevertheless, as the
District Court of the Virgin Islands recognized in Plaskett v.
Bechtel International, Inc., 243 F. Supp. 2d 334 (D.V.I.
2003), a requirement to notify the employer “within thirty
days of the event forming the basis of the claims with the
further qualification that such limitation be strictly
enforced” is unreasonable. Id. at 341. In addition to
providing an apparently insufficient time to bring a well-
supported claim, such an obligation prevents an employee
from invoking the continuing violation and tolling doctrines.
The Ninth Circuit has actually struck down more generous
one-year limitations periods on the grounds that they
deprived the plaintiff of the benefit of the continuing
violation doctrine. Ingle v. Circuit City Stores, Inc., 328 F.3d
161165, 1175 (9th Cir. 2003); Circuit City Stores, Inc. v.
Adams, 279 F.3d 889, 894 (9th Cir. 2002), cert. denied, 535
U.S. 1112 (2002); see also, e.g., Stirlen v. Supercuts, Inc., 60
Cal. Rptr. 2d 138, 152 (Ct. App. 1997) (striking down one-
year statute of limitation that expressly provides it is not
subject to tolling).
Parties do generally benefit from the efficient resolution of
disputes. But the requirement in this case inappropriately
assists Anthony Crane by making it unnecessarily
burdensome for an employee to seek relief from the
company’s illegal conduct. Such an unfair advantage is
only compounded by the fact that Anthony Crane is
apparently not required to provide detailed and written
notice to an employee of any of its own claims within a
strictly enforced thirty-day time period.7 We therefore find
that the thirty-day time restriction is substantively
unconscionable.
The arbitration agreement also substantially limits the
relief available to plaintiffs. Reinstatement and narrowly
defined “net pecuniary damages” constitute the only
available forms of relief for a successful employee. The
parties also bear their own costs and expenses, including
attorney’s fees. The Virgin Islands Wrongful Discharge Act,
however, provides that a court shall award “reasonable
attorney’s fees and costs” to a prevailing plaintiff. 24 V.I.
Code Ann. § 79. Section 541 also states:
The measure and mode of compensation of attorneys
shall be left to the agreement, express or implied, of
the parties; but there shall be allowed to the prevailing
party in the judgment such sums as the court in its
discretion may fix by way of indemnity for his
attorney’s fees in maintaining the action or defenses
thereto; provided, however, the award of attorney’s fees
in personal injury cases is prohibited unless the court
finds that the complaint filed or the defense is
frivolous.
5 V.I. Code Ann. § 541(b).
7. The Hourly Employee Contract does require Anthony Crane to submit
an arbitration request within fifteen days of the receipt of timely notice.
17
These restrictions are one-sided in the extreme and
unreasonably favorable to Anthony Crane. They prevent an
employee from recovering not only his or her attorney’s fees
but also such potentially significant relief as punitive
damages. An employee therefore is not entitled to complete
compensation for any harm done and the company is able
to evade full responsibility for its actions. Anthony Crane
does correctly note that both parties surrendered any
eligibility for attorney’s fees under section 541. See
Plaskett, 243 F. Supp. 2d at 340-41 (finding elimination of
attorney’s fees unconscionable as to Title VII but not
substantively unconscionable under Virgin Islands law
because both parties surrendered eligibility for such fees).
Such a relinquishment, however, clearly helps Anthony
Crane, the party with a substantially stronger bargaining
position and more resources, to the disadvantage of an
employee needing to obtain legal assistance. Furthermore,
Anthony Crane did not similarly accept a general restriction
of relief for any arbitration claim it may assert against its
employees. Under such circumstances, these restrictions
are substantively unconscionable.
As an exception to the general obligation that each party
to the arbitration pay for costs and expenses, the
agreement requires the losing party to “bear the costs of the
arbitrator’s fees and expenses.” App. at 20, 33. The
Supreme Court considered the issue of arbitration costs in
Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S.
79 (2000). The purchaser of a mobile home brought claims
against several financial institutions pursuant to the Truth
in Lending Act and the Equal Opportunity Credit Act. Id. at
82-84. The Court rejected the contention that an
arbitration agreement that is silent as to arbitration costs
is unenforceable because of failure to provide sufficient
protection from substantial costs. Id. at 89-92. Although
acknowledging that high costs “could preclude a litigant . . .
from effectively vindicating her federal statutory rights in
the arbitral forum,” it found that the “ ‘risk’ ” that the
plaintiff would bear such prohibitive expenses was too
speculative.8 Id. at 91. The Court added:
8. The Court further found that the evidence submitted by the plaintiff
to demonstrate the cost of arbitration was insufficient. Green Tree, 531
U.S. at 91 n.6.
18
[Where] a party seeks to invalidate an arbitration
agreement on the ground that arbitration would be
prohibitively expensive, that party bears the burden of
showing the likelihood of incurring such costs. . . .
How detailed the showing of prohibitive expenses must
be before the party seeking arbitration must come
forward with contrary evidence is a matter we need not
discuss[.]
Id. at 92.
In Blair v. Scott Specialty Gases, 283 F.3d 595 (3d Cir.
2002), the Third Circuit considered the enforceability of a
“fee-sharing” or “fee-splitting” provision. In this employment
discrimination action, the plaintiff asserted both federal
and state law claims against her former employer. Id. at
598. The arbitration agreement, by reference to AAA rules,
effectively required the plaintiff to pay one-half of the
arbitrator’s compensation and expenses. Id. at 604-05.
Applying Green Tree’s burden-shifting approach, we agreed
with the district court that the plaintiff, who formerly
worked as a plant manager, did not establish either her
inability to pay her share or the high cost of arbitration. Id.
at 607-08. We specifically observed that the plaintiff ’s
affidavit contained only conclusory assertions of financial
distress without any supporting documentation and that
she presented no information regarding arbitration costs.
Id. We, however, determined that the Supreme Court’s
Green Tree ruling entitled a party to limited discovery as to
these issues. Id. at 608-10. This Court therefore ordered a
remand to allow limited discovery and give the plaintiff “the
opportunity to prove, as required under Green Tree, that
resort to arbitration would deny her a forum to vindicate
her statutory rights.” Id. at 610. We further indicated that
the defendant should be afforded the chance “to meet its
burden to prove that arbitration will not be prohibitively
expensive, or as has been suggested in other cases, offer to
pay all of the arbitrator’s fees.” Id.We recently applied the Green Tree standard in Spinetti v.
Service Corp. International, 324 F.3d 212 (3d Cir. 2003).
The plaintiff previously worked for the defendant as a “sales
counselor.” Id. at 214. Following the termination of her
employment, she alleged that the defendant violated Title
19
VII and the Age Discrimination in Employment Act. Id. In
responding to defendant’s motion to compel arbitration, the
plaintiff argued inter alia that the agreement to arbitrate
was unenforceable because of its fee-splitting provision. Id.
at 214-15. The district court refused to enforce this
payment scheme, finding that the plaintiff established that
the costs of arbitrating her statutory claims were
prohibitive. Id. at 215, 217-18.
Although reiterating that a party challenging an
arbitration contract on the grounds of prohibitive costs has
the burden of proving the likelihood of incurring such
expenses, we noted that “ ‘Green Tree does not provide us
with a standard for how detailed the showing of prohibitive
expenses must be to support the conclusion that the
provision, at minimum, is unenforceable.’ ” Id. at 217(quoting Morrison v. Circuit City Stores, Inc., 317 F.3d 646,
660 (6th Cir. 2003)). We, however, expressed our
satisfaction “that the district court’s analysis properly
followed the ‘case-by-case’ approach of Green Tree on how
to decide if a cost-splitting provision in an arbitration
agreement denies potential litigants the opportunity to
vindicate their statutory rights.” Id. Under the arbitration
agreement, the plaintiff was required to pay $4250.00 in
assorted filing fees, an additional charge of $150.00 for
each day of the hearing, and one-half of the cost of an
arbitrator. Id. The evidence indicated that “a mid-range
arbitrator” in the region charges about $250.00 an hour at
a minimum per diem rate of $2000.00. Id. While the
plaintiff made $65,000.00 a year working for the defendant,
she did not work for six months following her termination.
Id. When she obtained employment, she earned less than
$300.00 a week, and her monthly food expenses and rent
were approximately $2,000.00. Id. She was forced to take
cash advances from credit cards to cover the difference. Id.The district court therefore properly “intended that the
employer pay all costs of arbitration.” Id.Like the plaintiff in Spinetti, Alexander and Freeman
submitted evidence as to the rates of the prospective
arbitrators, ranging from $800.00 a day to $1000.00 a day.
Plaintiffs admittedly did not provide any detailed
information about their own financial status. They,
20
however, needed the job at the St. Croix refinery, and
Alexander also apparently had to support three children in
college. As discharged refinery workers, they clearly could
not meet this financial burden even if the arbitration did
not last the seven days they predicted. See, e.g., Giordano
v. Pep Boys - - Manny, Moe & Jack, Inc., No. CIV. A. 99-
1281, 2001 WL 484360, at *6 (E.D. Pa. Mar. 29, 2001)
(“However, nothing in Green Tree requires courts to
undertake detailed analyses of the household budgets of
low-level employees to conclude that arbitration costs in the
thousands of dollars deter the vindication of employees’
claims in arbitral fora.”). Plaintiffs thereby are effectively
denied recompense for Anthony Crane’s alleged
misconduct, resulting in an unfair advantage for their
former employer.9 Anthony Crane does assert that plaintiffs
did not allege any inability to pay until their motion to
vacate and that it was never given the opportunity to offer
to pay the arbitrator’s fees and expenses. Even if such an
offer to pay constitutes a relevant consideration,10 the
employer possessed numerous opportunities following the
submission of this motion to indicate that it would not seek
reimbursement from the plaintiffs. But it neither made
such an offer nor presented any evidence to challenge
plaintiffs’ own submissions regarding the arbitrators’ rates.
See, e.g., Blair, 283 F.3d at 607-10 (noting shift in burden).
We therefore must find that the “loser pays” provision is
unconscionable as to these particular plaintiffs.11
9. Plaintiffs in their opening brief assert that they were denied the right
to discovery regarding the costs of arbitration. Because plaintiffs have
shown the existence of prohibitive costs, we need not remand this matter
for further proceedings.
10. In Blair, this Court indicated that the other party should be given the
opportunity to “offer to pay all of the arbitrator’s fees.” Blair, 283 F.3d at
610. However, we apparently rejected such “after-the-fact” offers as
irrelevant to the cost inquiry in Spinetti. Spinetti, 324 F.3d at 217 n.2
(quoting Morrison, 317 F.3d at 660). We express no opinion at this time
as to the appropriate role of these offers.
11. There does appear to be a question about whether the arbitration
cost analysis developed in Green Tree and its successors actually applies
to a “loser pays” provision. Unlike a fee-splitting arrangement, the “cost-
shifting” approach at issue here does not require the parties to share in
21
We conclude that plaintiffs have sufficiently established
both the substantive and the procedural aspects of
unconscionability. A multinational corporation presented
them with an agreement to arbitrate without providing any
opportunity to negotiate its terms. We must find that the
thirty-day notice requirement, the various restrictions on
remedies as well as the recovery of attorney’s fees, and the
provision regarding arbitrator’s fees and expenses are one-
sided and unreasonable. At the very least, these specific
provisions are not enforceable.
B. Severability
Anthony Crane urges us to sever any unenforceable
provision and compel arbitration of plaintiffs’ claims under
the remainder of the arbitration agreement. Applying Virgin
Islands contract law, we must turn to Restatement
principles. Section 603 of the Restatement (First) of
Contracts provides:
A bargain that is illegal only because of a promise or a
provision for a condition, disregard of which will not
defeat the primary purpose of the bargain, can be
enforced with the omission of the illegal portion by a
party to the bargain who is not guilty of serious moral
turpitude unless this result is prohibited by statute.
Recovery is more readily allowed where there has been
part performance of the legal portion of the bargain.
Restatement (First) of Contracts § 603 (1932). The
Restatement (Second) of Contracts similarly states:
(1) If less than all of an agreement is unenforceable
the costs of arbitration but ensures that the “losing party” is responsible
for arbitrator’s fees and expenses. See Morrison v. Circuit City Stores,
Inc., 317 F.3d 646, 658 n.3 (6th Cir. 2003) (distinguishing between cost-
splitting and cost-shifting). Some courts have refused to strike down
such provisions, partly because any costs remain speculative unless and
until the objecting party actually loses the arbitration. See, e.g., Musnick
v. King Motor Co. of Fort Lauderdale, 325 F.3d 1255, 1260-62 (11th Cir.
2003); Goodman v. Espe America, Inc., No. 00-CV-862, 2001 WL 64749,
at *3-*4 (E.D. Pa. Jan. 19, 2001). We, however, need not resolve this
question because the parties do not address it.
22
under the rule stated in § 178,12 a court may
nevertheless enforce the rest of the agreement in favor
of a party who did not engage in serious misconduct if
the performance as to which the agreement is
unenforceable is not an essential part of the agreed
exchange.
(2) A court may treat only part of a term as
unenforceable under the rule stated in Subsection (1)
if the party who seeks to enforce the term obtained it
in good faith and in accordance with reasonable
standards of fair dealing.
Restatement (Second) of Contracts, supra, § 184 (footnote
added). A court may either refuse to enforce a contract
containing an unconscionable provision or “enforce the
remainder of the contract without the unconscionable
term.” Id. § 208.
In Spinetti, we considered Restatement principles and
Pennsylvania case law to determine whether offensive
provisions requiring the parties to pay their own attorney’s
fees and to share the costs of arbitration vitiated the entire
agreement to arbitrate. Spinetti, 324 F.3d at 213-14, 218-
23. Because the primary purpose of the agreement was “to
provide a mechanism to resolve employment-related
disputes,” id. at 219, we affirmed the district court’s
determination to sever the unenforceable provisions and
compel arbitration under the remaining terms of the
contract. Id. at 213-14, 218-23.
Severance is not an appropriate remedy in this case. The
Hourly Employee Contract does contain a clause providing
that the remaining agreement shall remain in force even if
any provision is held to be invalid. Even taking this
provision into account, we must still find that
unconscionability permeates the agreement between
plaintiffs and Anthony Crane and thoroughly taints its
central purpose of requiring the arbitration of employment
disputes. See, e.g., Plaskett, 243 F. Supp. 2d at 345(refusing to enforce arbitration provisions because of
12. Section 178 governs the unenforceability of contractual terms on the
grounds of public policy.
23
numerous unconscionable provisions). Confronting only two
illegal provisions, we emphasized that “[y]ou don’t cut down
the trunk of a tree because some of its branches are
sickly.” Spinetti, 324 F.3d at 214. Plaintiffs in this case
were given no real choice but to accept arbitration on
Anthony Crane’s terms. In addition to facing a burdensome
requirement to pay the arbitrator’s fees and costs if
unsuccessful, an employee must comply with an
unreasonable time limitation, lose any right to attorney’s
fees, and give up the chance to receive any relief beyond
either reinstatement or “net pecuniary damages.” These
draconian terms unreasonably favor Anthony Crane to the
severe disadvantage of plaintiffs and other St. Croix
employees. The cumulative effect of so much illegality
prevents us from enforcing the arbitration agreement.
Because the sickness has infected the trunk, we must cut
down the entire tree.
In refusing to allow severance, we do not challenge the
liberal policy in favor of arbitration. We also continue to
recognize the real benefits of arbitration in the employment
context and do not by any means intend to discourage the
adoption of fair and appropriate arbitration arrangements
by employers and their employees. See id. at 223. But we
cannot give effect to an agreement to arbitrate afflicted by
so much fundamental and pervasive unfairness.13
13. According to the partial dissent, we should allow the District Court
to determine in the first instance whether severance of the unenforceable
provisions would defeat the central purpose of the parties in entering
this agreement to arbitrate. We agree that a district court should
ordinarily be accorded the opportunity to rule on the issue of severance
based on a sufficiently developed record. But, under the circumstances
of this case, no reasonable finder of fact could conclude that severance
is appropriate. We are confronted with a procedurally unconscionable
agreement containing multiple unreasonable terms. Unconscionability
accordingly permeates the essence of this contract. The invalidation of
the thirty-day time restriction, the limitations on the recovery of damages
and attorney’s fees, and the “loser pays” provision leaves little of any
substance in the agreement between plaintiffs and their former
employer. This agreement cannot be redeemed by permitting further
District Court proceedings and the development of a more extensive
record.
24
IV.
The arbitration agreement between plaintiffs and Anthony
Crane is unenforceable under the theory of
unconscionability. Because no enforceable contractual
provision mandates the arbitration of plaintiffs’ claims, the
District Court erred in compelling arbitration and
dismissing the complaint. Its order therefore will be
reversed and the matter remanded to the District Court for
further proceedings consistent with this opinion.
25
ROTH, Circuit Judge, concurring in part, dissenting in part:
I agree with the majority that the District Court should
be reversed because the provisions of the arbitration
agreement relating to notice, remedies, attorney’s fees and
costs, and the arbitrator’s costs and fees are unreasonable.
However, I respectfully disagree with the majority’s decision
to strike the entire arbitration agreement. I would remand
to the District Court to determine if the unenforceable
provisions are severable. Having concluded that the
challenged provisions were enforceable, the District Court
did not have an opportunity to rule on whether to strike the
entire arbitration agreement, or to sever the unenforceable
provisions.
The majority concludes that, under Spinetti v. Service
Corporation International, 324 F.3d 212 (3d Cir. 2003), the
four unenforceable provisions in the arbitration agreement
at issue in the present case cannot be severed from the rest
of the arbitration agreement. In Spinetti, we held that
unenforceable provisions regarding the costs and fees of
arbitrators and attorneys are severable because these
provisions cannot “be considered the essential part of the
bargain,” which is “to provide a mechanism to resolve
employment-related disputes . . . .” Id. at 219.1 Contrary to
the majority’s conclusion, it is not clear from the record
before us that the unenforceable provisions at issue in the
present case constitute the central part of the bargain,
such that they cannot be severed under Spinetti.
The majority fails to explain how the statute of
limitations and damages available are any more related to
the central purpose of choosing a forum in which to resolve
disputes than the provisions relating to the allocation of
1. In Spinetti, this Court applied Pennsylvania law to determine whether
to sever the unenforceable provisions. See 324 F.3d at 219. However, the
law of the Virgin Islands does not differ materially in this respect. Both
Pennsylvania and Virgin Islands law rely on the Restatement (First) of
Contracts and the Restatement (Second) of Contracts, which recognize
that an unenforceable provision may be severed if the unenforceable
provisions are not an essential part of the agreement. See id. (quoting
Restatement (First) of Contracts § 603 (1932); Restatement (Second) of
Contracts § 194 (1981)).
26
costs and fees for attorneys and arbitrators that the Spinetti
Court found are severable. Apparently the majority believes
that Spinetti is distinguishable because the arbitration
agreement in Spinetti only involved two unenforceable
provisions, while the arbitration agreement in the present
case involves four unenforceable provisions (two of which
were similar to the unenforceable provisions in Spinetti).
However, the issue for purposes of severability analysis is
not the number of unenforceable provisions, but rather
whether those provisions go to the central purpose of the
agreement. To continue the analogy that the majority draws
from Spinetti, it does not matter whether two or four
branches are sick, the issue in determining whether to
chop down the tree is whether the trunk can survive.
The majority also relies on the extent to which the four
provisions are unfair in deciding not to sever them from the
rest of the contract. This analysis improperly blurs the
issue whether the four provisions are unenforceable and
the issue whether the provisions are severable if they are
unenforceable. The degree to which the unenforceable
provisions are unfair is not relevant to the decision whether
to sever them or strike the entire agreement because, in
either case, the plaintiffs will not be subject to the unfair
provisions. To draw further upon the majority’s analogy,
since the sickly branches will be removed, it does not
matter how sick the branches are, so long as they have not
infected the trunk.
While it may turn out that the unenforceable provisions,
taken together, are an essential part of the bargain struck
between the parties, the majority’s reasoning does not
adequately support this conclusion. Rather than attempting
to resolve this issue at this time, the more appropriate
course of action would be to give the District Court the
opportunity to determine, in the first instance, whether
severing the unenforceable provisions would defeat the
parties’ central purpose in entering into the arbitration
agreement. Id.; Restatement (First) of Contacts § 603;
Restatement (Second) of Contracts § 184. This approach
would allow for the development of a more extensive record
on the issue, which in turn would give us more to work
with on appeal. In particular, it would permit the District
27
Court to make the factual determination of what the
inclusion of a severability clause, which was not part of the
arbitration agreement at issue in Spinetti, reveals about the
relationship between the struck provisions and the parties’
intentions in entering into the agreement. Accordingly, I
respectfully concur in part and dissent in part.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit