Severability of Unenforceable Cost-Shifting Provisions in Arbitration Agreements

Introduction

In Jamie Gavin et al. v. Lady Jane’s Haircuts for Men Holding Co., LLC et al., the Sixth Circuit confronted a dispute over whether an arbitration clause that required stylists to split the costs of arbitration under the American Arbitration Association’s Commercial Arbitration Rules could be enforced in light of its potentially prohibitive expense. The plaintiffs were a group of hair stylists who claimed they had been misclassified as independent contractors in order to evade the minimum‐wage and overtime requirements of the Fair Labor Standards Act (FLSA) and various state laws. The defendant, Lady Jane’s Haircuts for Men, relied on an arbitration agreement to compel arbitration of the wage claims. The district court found the cost-shifting provision unconscionable, severed it under the contract’s severability clause, and enforced arbitration under the AAA’s employment rules. On appeal, the Sixth Circuit affirmed, establishing a clear rule on severance of unenforceable arbitration provisions under Michigan contract law and the Federal Arbitration Act (FAA).

Summary of the Judgment

The Sixth Circuit held that:

Under the FAA, arbitration agreements are to be enforced according to state contract principles. Here, Michigan law governs severability.
The arbitration agreement included a broad severability clause stating that if any provision were void or unenforceable, the remainder of the agreement would continue in full force.
The stylist plaintiffs conceded that the cost-shifting obligation was unenforceable but argued the entire arbitration section should fall. The court disagreed, finding that a “provision” refers to a discrete clause, not an entire section.
Striking only the cost-shifting clause did not require judicial reformation or wholesale rewriting of the agreement; it simply removed an unenforceable term and left a workable default (AAA employment rules) in place.
Consequently, arbitration could proceed under the default, less burdensome rules, and the district court’s dismissal in favor of arbitration was affirmed.

Analysis

Precedents Cited

Lamps Plus, Inc. v. Varela (587 U.S. 176 (2019)): Affirmed that FAA agreements are interpreted like other contracts under state law.
Morrison v. Circuit City Stores, Inc. (317 F.3d 646 (6th Cir. 2003)): Established that severability under state law governs enforcement of remaining arbitration clauses when one provision is unenforceable.
Samuel D. Begola Services, Inc. v. Wild Bros. (534 N.W.2d 217 (Mich. Ct. App. 1995)): Outlined Michigan’s intent-focused approach to severability clauses.
Shotts v. OP Winter Haven, Inc. (86 So. 3d 456 (Fla. 2011)): Held that severance of an arbitration‐rule selection clause was improper when severance would force wholesale rewriting of the agreement—distinguished here.
Whitesell Corp. v. Whirlpool Corp. (2009 WL 3672753 (W.D. Mich. 2009)): Interpreted “clause” as a discrete stipulation rather than any sub-sentence, supporting narrow severance.

Legal Reasoning

The court’s reasoning proceeded in three steps:

FAA and State Law Framework: The Federal Arbitration Act mandates that arbitration agreements are enforced under ordinary contract-law principles, including state doctrines of severability. Michigan law applies here.
Construction of “Provision” and Severability Clause: The contract’s severability clause commanded that “if any provision” is void, the remainder survives. Drawing on dictionary definitions and Michigan precedents, the court interpreted “provision” to mean a discrete clause or stipulation, not an entire section.
Application to Cost-Shifting Term: The specific cost-shifting provision—requiring stylists to split arbitration fees under the AAA’s Commercial Rules—was held unenforceable as it imposed prohibitive costs. However, severing just that clause left intact a default to the AAA’s employment rules. This approach preserved the overall arbitration agreement without rewriting it, avoiding reformation (which would require mutual mistake) and fulfilling the parties’ intent to arbitrate.

Impact

This decision provides important guidance to courts and contracting parties:

Clarity on Severance: When an arbitration agreement includes a severability clause, courts should narrowly excise only unenforceable clauses—especially cost allocations—and leave the remainder of the agreement intact.
Cost-Shifting Provisions: Employers or contract drafters who include fee-splitting or cost-shifting provisions face a substantial risk that courts will strike those clauses as unconscionable, particularly when costs exceed claimants’ resources.
Default Arbitration Rules: Severance may trigger default rules (e.g., AAA employment rules) that are more favorable to claimants, encouraging parties to negotiate fair cost-allocation provisions upfront.
Uniform Application: Other circuits may look to this decision for its detailed dictionary-and-context analysis of “provision” versus “section,” promoting uniformity in FAA jurisprudence on severability.

Complex Concepts Simplified

Federal Arbitration Act (FAA): A federal law that generally requires courts to enforce arbitration agreements as they are written, subject to state contract law.
Severability Clause: A contract term stating that if any part is invalid, the rest remains effective.
Cost-Shifting Provision: A clause requiring parties to share or allocate administrative fees and arbitrator costs, potentially rendering claims economically unviable if costs are high.
Reformation vs. Severance: Reformation rewrites a contract to correct a mutual mistake; severance merely removes an unenforceable clause without altering the rest of the text.

Conclusion

The Sixth Circuit’s decision in Gavin v. Lady Jane’s Haircuts for Men confirms that courts will enforce arbitration agreements but will excise only the unconscionable components—like onerous cost-shifting provisions—under a severability clause. By interpreting “provision” as a distinct clause, rather than an entire section, the court preserved the parties’ core agreement to arbitrate under fairer default rules. This ruling reinforces the FAA’s mandate to uphold arbitration while respecting state contract doctrines and ensures that arbitration remains accessible to low-wage workers.