"Loser pays" provision in arbitration agreement may doom the arbitration entirely

You do not see this very often: an employee sues in court to enjoin mandatory arbitration because the arbitration provision that he signed at the start of his employment was unlawful and unenforceable under state law. The Court of Appeals agrees with the lower court and the case returns to the lower court for more proceedings which may ultimately stop the arbitration from proceeding.

The case is Vidal v. Advanced Care Staffing, a summary order issued on March 7. When Vidal arrived in the United States to work for defendant as a nurse, he signed an arbitration agreement, which contains a "loser pays" provision that says the prevailing party in the arbitration is entitled to arbitral costs and attorneys' fees. When Vidal quit his job, his former employer commenced an arbitration proceeding against him, claiming Vidal had breached the contract. 

As the Court of Appeals (Calabresi, Lohier and Cabranes) sees it, under the "loser pays" provision, if Vidal loses the arbitration, the costs and fees will "effectively preclude him from pursuing his claims and would be prohibitively expensive." At the preliminary injunction stage of the case in the district court, Vidal produced his financial record to prove that his monthly income was far below the potential arbitral costs and attorneys' fees in the event the defendant were to prevail at the arbitration.

Other Circuits have also held that fee-shifting provisions in arbitration clauses may deter certain plaintiffs who want to vindicate their statutory rights in arbitration. "Whether the 'loser pays' provision undermines Vidal's ability to vindicate his rights here as a matter of substantive federal law or state law presents a serious question of law and fact that requires more detailed findings about Vidal's finances, the potential costs of arbitration, and the possibility that Vidal will incur such costs." 

The case is therefore remanded to the district court for defendant to present additional evidence supporting its arguments opposing Vidal's demand for a permanent injunction. So it looks like the case is not yet over. But this ruling is a powerful argument in Vidal's favor that the arbitration should not proceed.