A federal district court in Illinois has invalidated an arbitration agreement that limits an employee's individual arbitration demand costs to equal or less than a court filing fee, but imposes "prohibitively expensive" costs, without any limit, on demands for class arbitration.

In Gonzalez v. Menard, Inc., No. 07 C 2507, 2008 WL 199877 (N.D. Ill. Jan. 25, 2008), employee Gonzalez filed a court action against employer Menard. Menard moved to compel class arbitration of Gonzalez's representative, in accordance with an underlying arbitration agreement. Gonzalez challenged the motion, claiming that class arbitration under the controlling American Arbitration Association (AAA) Rules was prohibitively expensive, and its costs rendered the agreement unenforceable.

While the arbitration agreement stated that an employee's "demand for arbitration will not exceed the costs of filing a civil complaint in federal court," the Court noted that the agreement invoked the cost provisions within the controlling AAA Employment Arbitration Rules. Those rules, modified by supplemental AAA rules governing class arbitration, would impose a $3,250 preliminary filing fee on Gonzalez as a class representative, and require an additional supplementary filing fee of $14,000 for the claim to proceed.

The Court asked Menard to apply the same fee cap to class action arbitration demands as was applied to individual arbitration demands in the agreement – costs equal or less to a federal court filing fee. Menard refused, which led the Court to equate Menard's response "to an in terrorem effort to discourage this or any other proposed class action."

Without any limitation, the Court found Gonzalez would have to bear prohibitively expensive costs "substantially above the cost of a federal lawsuit," and this arrangement would force Gonzalez "to gamble on being successful in obtaining class certification, a highly unfair risk to impose on persons of such modest means." This, to the Court, justified invalidating the entire unitary arbitration agreement.