## Facts

- Countrywide entities employed the plaintiffs and required them, as a condition of employment, to sign arbitration agreements covering disputes arising from employment.
- The arbitration agreements included a fee-splitting provision allocating arbitration costs between the employee and Countrywide, and a severability clause.
- The plaintiffs brought a collective action seeking unpaid overtime under the Fair Labor Standards Act (FLSA).
- Countrywide moved to compel arbitration under the signed agreements.
- The plaintiffs conceded they signed the agreements but argued they were unenforceable because (1) FLSA claims are not arbitrable, (2) the agreements are unconscionable under Texas law, (3) the agreements impair substantive FLSA rights, and (4) fee splitting would impose prohibitive costs.
- The district court compelled arbitration, rejected the first three challenges, severed the fee-splitting provision, and ordered Countrywide to pay arbitration costs.
- The plaintiffs appealed the order compelling arbitration.

## Issues

1. Whether FLSA overtime claims may be required to proceed in arbitration under the Federal Arbitration Act absent a contrary congressional command.
2. Whether the employment arbitration agreements were unenforceable as unconscionable under Texas contract law.
3. Whether the agreements impermissibly waived or impaired substantive rights provided by the FLSA.
4. Whether a fee-splitting clause rendered arbitration prohibitively expensive, and if so, whether severance of the clause was an appropriate remedy.

## Decision

- The Fifth Circuit affirmed the order compelling arbitration.
- The court held that FLSA claims are arbitrable and the plaintiffs identified no congressional intent to exempt FLSA claims from arbitration.
- Applying Texas contract principles, the court held the plaintiffs did not meet their burden to show procedural or substantive unconscionability; requiring arbitration as a condition of employment was not unconscionable by itself.
- The court held the agreements did not unlawfully infringe substantive FLSA rights so long as statutory remedies could be pursued in the arbitral forum.
- The court approved severance of the fee-splitting provision; with Countrywide agreeing to pay arbitration costs, the prohibitive-cost concern no longer justified invalidating the arbitration agreements.

## Legal Principles

- Federal statutory employment claims, including FLSA claims, are subject to arbitration under the Federal Arbitration Act absent a contrary congressional command.
- Courts assess the validity of arbitration agreements using ordinary state-law contract rules, including state unconscionability doctrine.
- Under Texas law, unconscionability requires proof of procedural and/or substantive unfairness, and adhesive presentation alone does not establish unconscionability.
- Arbitration agreements may alter forum and procedure without impermissibly waiving substantive statutory rights, provided the claimant can effectively pursue statutory remedies.
- Where an arbitration agreement contains a severability clause, an unenforceable cost-allocation term may be severed while preserving the parties’ agreement to arbitrate.

## Conclusion

The Fifth Circuit enforced Countrywide’s employment arbitration agreements for FLSA overtime claims, rejected challenges based on nonarbitrability, unconscionability, and impairment of FLSA rights, and permitted severance of the fee-splitting clause while compelling arbitration with Countrywide paying arbitration costs.


Carter v. Countrywide Credit Indus., Inc., 362 F.3d 294 (5th Cir. 2004)