## Facts

- Lillian Pebbles Morrison worked as a manager at a Circuit City store in Cincinnati, Ohio.
- As a condition of employment, she signed a dispute resolution agreement requiring arbitration of all employment-related disputes.
- The agreement required Circuit City to advance arbitration costs initially but imposed post-award cost shifting:
  - costs could be split at the conclusion of arbitration;
  - the arbitrator could require the losing party to pay all costs;
  - payment was due within 90 days of the award;
  - if the employee could pay fully and timely, her share was capped at $500 or 3% of annual compensation (whichever was greater);
  - if the employee could not pay, she could owe the full amount, and Circuit City reserved the right to recoup via paycheck deductions.
- After termination, Morrison filed a federal employment discrimination action; Circuit City moved to stay the case and compel arbitration under the Federal Arbitration Act (FAA).
- The district court granted the motion and stayed the litigation pending arbitration.
- Morrison appealed, arguing the cost-splitting structure created a substantial risk of prohibitive fees that would deter pursuit of statutory rights.

## Issues

1. Whether the arbitration agreement’s cost-splitting and cost-shifting provisions are unenforceable because they create a significant risk of deterring employees from vindicating federal statutory rights in arbitration.
2. If those provisions are unenforceable, whether they are severable so the remainder of the arbitration agreement can still be enforced.

## Decision

- The Sixth Circuit (en banc) held the agreement’s cost-splitting/cost-shifting terms unenforceable because they posed a significant risk that an employee could be assessed prohibitive arbitration costs, deterring assertion of statutory claims.
- The court rejected categorical rules and applied a case-specific inquiry focused on deterrence risk in light of the agreement’s terms and the employee’s likely financial circumstances.
- The court held the invalid cost provisions were severable under state contract law and did not defeat the core agreement to arbitrate.
- The case was remanded for arbitration to proceed without enforcement of the invalid cost-splitting term.

## Legal Principles

- The FAA favors enforcement of arbitration agreements, but arbitration terms are unenforceable if they prevent effective vindication of federal statutory rights.
- Arbitration cost provisions are evaluated case by case; the question is whether the likely magnitude and allocation of fees would deter a reasonable employee in the claimant’s position from bringing statutory claims.
- Provisions allowing substantial fee shifting to an employee, short payment deadlines, and employer wage-recoupment mechanisms can create a substantial deterrent effect inconsistent with enforcing statutory rights in the arbitral forum.
- Unenforceable arbitration terms may be severed when they are collateral to the agreement’s central promise to arbitrate, permitting enforcement of the remainder of the arbitration contract.

## Conclusion

The en banc Sixth Circuit invalidated Circuit City’s arbitration cost-splitting provisions because they created a substantial risk of prohibitive expenses that would deter employees from pursuing statutory discrimination claims, but severed those terms and enforced the remaining agreement, requiring arbitration to proceed without the unlawful cost allocation.


Morrison v. Circuit City Stores, Inc., 317 F.3d 646 (6th Cir. 2003) (en banc)