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Unconscionable fee-splitting provision in arbitration agreement could be severed from agreement as a whole.

Although a fee-splitting provision in an arbitration agreement was unconscionable based on the plaintiff’s financial situation, the Court of Appeals ruled that the fee-splitting provision was severable and that defendant’s motion to compel arbitration should have been granted.

In Stokes v. Allenbrooke Nursing and Rehabilitation Center LLC, No. W2019-01983-COA-R3-CV (Tenn. Ct. App. Sept. 15, 2020), plaintiff filed an HCLA complaint against defendant nursing home alleging that he had contracted sepsis due to the negligence of one of defendant’s nurses, and that he had suffered severe permanent injuries. Defendant filed a motion to compel arbitration, attaching a three-page arbitration agreement that plaintiff had signed on two occasions. The agreement contained a provision stating that the parties would split the arbitration expenses equally. Plaintiff opposed the motion on a “cost-based unconscionability defense,” arguing that plaintiff would never be able to afford paying half of the arbitration costs. Defendant responded that this argument was moot, as it had offered to cover the entire cost of the arbitration. After a hearing, the trial court refused to compel arbitration, finding that the agreement was unconscionable. This appeal followed.

The Court of Appeals has previously explained that “[a] fee-splitting arrangement may be unconscionable if information specific to the circumstances indicates that fees are cost-prohibitive and preclude the vindication of statutory rights in an arbitral forum.” (internal citation omitted). In a different case, the Court concluded that “an agreement to arbitrate that places excessive costs on the claimant as a precondition to arbitration may be unconscionable because of the inequality of the bargain, the oppressiveness of the terms, or the one-sided advantage to the drafter,” and that “the costs to initiate…arbitration…is a factor to be considered in determining whether the agreement to arbitrate is enforceable.” (internal citation omitted).

Here, it was undisputed that plaintiff could not afford the costs to initiate arbitration. He lived on a fixed income through Social Security and was “allotted $30 per month for spending money.” Defendant argued, though, that its offer to pay the entire cost of arbitration made the unconscionability argument moot. The Court disagreed.

While noting that some jurisdictions had followed such logic, the Court of Appeals reasoned:

As to the narrow question of whether an arbitration agreement’s cost provision is unconscionable, [defendant’s] suggested rule cannot be followed. …[I]n a case like this where the claims at issue implicate only Tennessee law and not a federal statutory right, state unconscionability law must be the polestar for examining a cost prohibitive argument… As such, we take specific heed of the fact that Tennessee jurisprudence directs that a determination of contract unconsionability is based on the circumstances as they existed at the time the parties executed the contract. This being the case, we reject a party’s after-the-fact offer to pay the costs of arbitration as being relevant to the unconscionability inquiry[.]

(internal citations and quotations omitted). The Court thus agreed with the trial court that the fee sharing provision at issue was unconscionable and could not be enforced.

The Court of Appeals went on to explain, though, that there was more to the issue of whether this case should be sent to arbitration, as the trial court failed to address whether the fee-splitting provision was severable. The arbitration agreement contained a severability provision, and thus the Court found that “the parties’ intent as expressed through their contract was clear: if a particular provision was deemed to be unenforceable, it was not to thwart their overriding intention to arbitrate.” The Court stated:

Here, only the costs provision has been at issue. This is not a case where the arbitration agreement should not be enforced because it is plagued by multiple defects in the agreement that go to the essence of the parties’ bargain or where the entire agreement to arbitrate is somehow tainted. …Because only the costs provision was at issue here, and given the parties’ stated intention to arbitrate even if certain provisions of their agreement were deemed unenforceable, we hold that the trial court erred in failing to order arbitration.

The Court thus held that the fee-splitting provision should not be enforced, but that the motion to compel arbitration should be granted.

NOTE: This opinion was released one month after oral argument.

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