In recent decades, courts nationwide have grappled with various aspects of arbitrating disputes between workers and companies. A recent decision—Brown v. Peregrine Enterprises, Inc., d/b/a Rick’s Cabaret New York—addresses a pivotal issue: whether an arbitration service provider’s fee schedule overrides the parties’ agreement to split arbitration costs.
Arbitration agreements are essentially contracts where parties opt for a private arbitrator to resolve disputes instead of a traditional legal process. These agreements typically involve predetermined allocations of arbitration costs, which can be substantial.
In the Brown case, entertainers sued a Manhattan-based club under the Fair Labor Standards Act (FLSA). The federal court ‘stayed’ the lawsuit so that the 18 plaintiffs could comply with their agreements to arbitrate disputes with the club. The plaintiffs complied and initiated separate arbitrations with the American Arbitration Association (“AAA”), the entity that the parties agreed would be in charge of administering the arbitration process. Despite the club’s agreement with the plaintiffs to equally split arbitration costs, the AAA enforced its fee schedule, placing a disproportionate financial burden on the alleged employer. When the club refused to pay the inflated fees unless it honored the parties’ cost-splitting agreement, the AAA refused and dismissed all arbitrations for lack of payment.
The plaintiffs returned to federal court, where they successfully argued that the club’s refusal to pay the AAA’s fees meant that it had ‘waived’ the right to insist on arbitration, so therefore the case should proceed in court. The Second Circuit Court of Appeals reversed the lower court, emphasizing the club’s attempt to uphold its “contractual entitlements.”
Texas labor and employment attorney Will King, who has dealt with numerous arbitration issues, explains a key takeaway from the Brown decision: courts will enforce arbitration agreements like any other contract. Suppose the parties agree to split arbitration costs. In that case, a third party like the AAA cannot enter the picture and say that some other agreement applies, and a plaintiff can’t come and say that a business’s effort to enforce those terms somehow means it waived the right to arbitrate.”
However, King explains, “Brown doesn’t mean courts will always enforce cost-splitting provisions in arbitration agreements. While this case is a good start, it doesn’t address defenses to arbitration like substantive unconscionability, where a plaintiff argues that an arbitration agreement is unenforceable because they cannot pay the arbitration expenses.” Despite this, King suggests incorporating cost-splitting provisions in arbitration agreements. “One of the keys to a good arbitration agreement is to make sure that the rules the parties have to follow, including who will pay what, are spelled out in clear terms.”
See the March issue of ED Magazine for a more in-depth analysis of the Brown v. Peregrine decision and the arbitration process as it applies to adult clubs.
Larry Kaplan has for 23 years been the Legal Correspondent for ED Magazine. Mr. Kaplan is a broker in the sales and purchase of adult nightclubs and adult retail stores and the Executive Director of the ACE of Michigan adult nightclub state trade association. Contact Larry Kaplan at 313-815-3311 or larry@kaplanclubsales.com.
Will King, a senior attorney at McDowell Hetherington LLP, represents adult clubs nationally in First Amendment challenges, regulatory matters, employment disputes, etc. He’s secured numerous wins, including Fifth Circuit opinions addressing dancer classification, collective action procedures, and the constitutionality of regulatory fees. Contact Will King at 713-221-3840 or william.king@mhllp.com.
