For many Pennsylvania employers, arbitration agreements have become an invaluable tool in controlling litigation expenses and avoiding federal courts and juries. For the past year, some arbitration agreements have come under fire by federal courts on public policy grounds. Recently, the Third Circuit Court of Appeals joined the fray in Blair v. Scott Specialty Gases.

In Blair, a woman brought suit in the United States District Court for the Eastern District of Pennsylvania against her former employer for sexual harassment, sex discrimination and constructive discharge, amongst other claims, under Title VII and the Pennsylvania Human Relations Act. The employer sought to have the case dismissed because the employee agreed to submit all claims relating to her employment to binding arbitration. The arbitration agreement was included in an employee handbook, which the employee acknowledged receiving in writing. The employee countered by arguing that the arbitration agreement was not binding because it was not validly formed and was unenforceable on public policy grounds because it required her to pay one-half of all arbitration fees. The District Court dismissed the case and the employee subsequently appealed.

On appeal, the Third Circuit found, as did the District Court, that the arbitration agreement was validly formed and could not be rendered unenforceable for that reason. However, the Third Circuit suggested that the arbitration agreement could be rendered unenforceable if its fee splitting provision proved to be prohibitively expensive such that it precluded the employee from vindicating her federal rights in an arbitral forum, and remanded the cases to the District Court on that basis. The Court reached this conclusion after an extensive review of other Circuit Court and Supreme Court decisions addressing the same issue. Some of those decisions called into question the propriety of compelling citizens to pay for an arbitrator's services and vindicating their federal rights where, but for an arbitration agreement, those same rights could be vindicated in federal court without paying a federal judge a cent. Other decisions, however, noted that there was nothing inherently wrong with fee splitting per se, so long as it did not result in a prohibitive expense to the employee.

The Third Circuit adopted the latter view, but in so doing constructed an evidentiary model to determine whether a fee splitting provision represented a prohibitive expense to the employee. The model places the initial burden on the employee to show the amount of the projected arbitration fees as well as evidence of her financial status and inability to pay such fees. The model contemplates that these issues could be developed via limited pre-arbitration discovery. Once the employee has fulfilled these requirements, the model shifts the burden to the employer to show that arbitration would not be prohibitively expensive. If the employer fails, it could nonetheless "save" the arbitration agreement from being found unenforceable and "force" the employee to arbitrate her claims by paying her arbitration fees. This essentially allows the employer to unilaterally modify the agreement without the employee's consent.

A close reading of the Blair case reveals that it does not significantly impair an employer's ability to compel arbitration in accordance with prospective or existing arbitration agreements; however, it does make the process more expensive. Most employees who are parties to fee splitting arbitration agreements will likely be able to prove that they cannot afford to hire a lawyer to prosecute their claims and pay an arbitrator to hear their claims. Under such circumstances, the employer has a choice: prove the employee is wrong or pay her arbitration fees. While, ultimately, the employer might have to incur the expense of paying the employee's fees to preserve the right to arbitrate employment claims, the employer has nonetheless won a key battle at the end of the day: avoiding federal courts and juries.