By R. David Gallo
Synopsis
The Georgia Court of Appeals recently issued its decision in Omnitech Institute, Inc., et al. v. Norwood, 2021 WL 2643909 (June 28, 2021). The case was on appeal from the Superior Court of Fulton County, which had denied Omnitech’s motion to compel arbitration against Norwood. Norwood, a former Omnitech employee, had filed suit in state court alleging sexual harassment, retaliation, and other claims in connection with her tenure at Omnitech. Her employment contract contained an American Arbitration Association (“AAA”) arbitration clause and Omnitech asked the Fulton County court to compel arbitration. Norwood opposed, arguing that she could not afford the fees she would likely incur in arbitration. The trial court agreed with Norwood. In a split decision, the Court of Appeals reversed and compelled the parties to arbitrate on the basis that Norwood had failed to demonstrate with enough certainty that she would be required to pay the arbitration fees.
The majority’s opinion explained that the inability to afford arbitration fees is a Supreme Court-created defense to the enforcement of an otherwise-valid agreement to arbitrate. See Green Tree Financial Corp.-Ala. v. Randolph, 531 U. S. 79 (2000). Under certain circumstances, courts will protect a party if the costs of arbitration prohibit the party from effectively vindicating its rights. The Omnitech majority held, however, that this “effective vindication” defense requires more than speculation regarding both the costs of arbitration and the inability to pay those costs. The majority’s decision to compel arbitration in Omnitech was driven in large part by the fact that the AAA Arbitration Rules provide that “[t]he AAA may, in the event of extreme hardship on the part of any party, defer or reduce the administrative fees.” The potential burden that arbitration would place upon Norwood, the majority reasoned, was therefore neither concrete nor ripe.
There was also a lengthy dissent that argued, among other things, that the majority: (1) gave insufficient deference to the trial court’s findings of fact, (2) gave too much weight to non-binding and inapposite federal court decisions, and (3) failed to appreciate the practical consequences of its decision.
Discussion
As discussed, the Omnitech majority focused on the AAA Rule that provides that the AAA may, in the event of extreme hardship, defer or reduce a party’s fees. The majority also noted that the AAA Rules (like many sets of rules promulgated by arbitral institutions), allow for the arbitrator, in the award, to apportion more than 50% of the arbitration’s fees and costs to one of the parties. Because these provisions could result in Norwood paying reduced fees, the court found Norwood’s concerns about the fees to be too speculative. The Omnitech decision essentially holds that, when parties select the AAA or similar rules, the “effective vindication” defense will be too speculative before a party submits to arbitration and, perhaps, too speculative before the arbitrator issues the final arbitration award.
For the reasons identified by the majority, Norwood’s concerns were somewhat speculative. But the majority did not fully examine the consequences of requiring more certainty. While AAA Rule 53 provides that the AAA may reduce or defer a party’s fees, AAA Rule 57 states that non-payment of fees can result in heavy sanctions, including “limiting a party’s ability to assert or pursue their claim.” So, after Omnitech, a party may need to initiate an arbitration it cannot afford, run the risk of sanctions, and hope for leniency on fees. In many cases (putting aside the indigent and affluent), parties will not have enough information to make an accurate prediction about whether sanctions or leniency is more likely.
Additionally, as the dissent explains, the majority incorrectly “suggest[s] there may be some future point in the proceedings when Norwood would be better positioned to invoke the effective vindication doctrine.” For a variety of reasons, the most logical time to raise this doctrine is when Norwood raised it—in opposition to a motion to compel arbitration. There are additional legal and practical barriers to waiting until the middle of arbitration, or until after the final award, to seek a court’s protection from high arbitration fees. For example, it may be difficult for a party to oppose the enforcement of an arbitration award on the basis that the arbitration fees were too high. The statutory grounds for opposing enforcement of arbitration awards are few, and none are a great fit for this issue.
Conclusion
There are valid critiques of the “effective vindication” defense. For one, it is hard to situate this defense within the Supreme Court’s broader pro-arbitration case law. And, in practice, it may not make economic sense for a party to argue that arbitration is too expensive. Sure, arbitration initiation fees are usually larger than court filing fees, but the costs of litigating in the courts may quickly catch up if there is voluminous discovery or if there are other costs and delays that are less likely in arbitration. Which forum is more cost effective will likely depend on the nature and size of the of the dispute.
But as long as we have the “effective vindication” defense, it should be a coherent tool for the party that seeks to invoke it in good faith. Unfortunately, Omnitech fails to consider the realities of arbitration. As a result, the extent of the protections offered by this defense in Georgia is not clear.
About the author:
R. David Gallo specializes in business litigation and arbitration. Prior to moving to Atlanta, David studied under leading arbitration practitioners and scholars at Columbia Law School, practiced litigation and arbitration at two AmLaw 100 firms in New York, and taught arbitration at Fordham Law School.
***
Scroll down to meet additional attorneys at Krevolin & Horst with extensive arbitration experience.
About the Arbitration Blog
This blog is a user-friendly resource for businesses and individuals who find themselves faced with issues involving arbitration. Perhaps you want to include an arbitration clause in your contract, or you are being asked to sign a contract with an arbitration clause. Maybe a dispute has arisen and you want to begin arbitration proceedings but you are not sure whether your arbitration clause covers the dispute (hint: it usually does). Perhaps you received a subpoena for documents in connection with an arbitration in which you are not otherwise involved. This blog provides you with answers to simple questions and will help you ask the right questions when confronted with more complex issues.
Among other topics, we cover how to draft an arbitration clause and what to expect in arbitration proceedings. We discuss the differences and similarities among arbitrations governed by Georgia law, federal law, and international law. We explore—in layman’s terms, whenever possible—the Georgia Arbitration Code, the Federal Arbitration Act, transnational law, and decisions from Georgia’s state courts, Georgia’s federal district courts, the U.S. Court of Appeals for the Eleventh Circuit, the U.S. Supreme Court, and foreign tribunals. We provide toolkits and checklists you can use to navigate everyday arbitration issues. We discuss the various contexts and industries in which we have handled arbitration issues for our clients, including:
- Breach of Contract
- Closely Held Company Shareholder Disputes
- Communications
- Construction
- Earn Out Disputes
- Employment
- Executive Separation/Severance
- Franchise Disputes
- Gaming
- International
- Mergers and Acquisitions
- Pharmaceuticals
- Real Estate
- Securities
- Trusts and Estates
- Vendor/Supplier Disputes
- Technology
- Trusts and Estates
We are available and eager to discuss your arbitration issues with you.
***
Attorneys at Krevolin & Horst with extensive arbitration experience:
