One of the unintended consequences of arbitration is what to do when arbitration is invoked? Employment arbitrations typically start with an employment lawsuit. The employee often forgets s/he had even signed an arbitration agreement. So, the employee files the lawsuit, not anticipating a claim for arbitration. Then, the employer pulls out the arbitration agreement from dusty files. The employer invokes arbitration. What happens to the lawsuit? Many employers insist the employee dismiss the lawsuit outright.

But, the Fifth Circuit in Fonseca v. USG Insurance Services, Inc., found that to be error. In Fonseca, the employee dismissed her lawsuit when arbitration was invoked. But, later the employer failed to pay the arbitral fees. AAA then dismissed the arbitration, because the employer failed to pay the required fees. All this takes months to evolve. Months later when AAA dismissed Ms. Fonseca’s arbitration claim, the statute of limitations had passed for the plaintiff. It was too late for her to then re-file her former lawsuit. On appeal, the plaintiff argued that the arbitration proceeding tolled the statute of limitations. That is, she argued that the time period was postponed while her claim languished with AAA.

No, said the Fifth Circuit. Prior caselaw states that a arbitrations do not toll the statute of limitations. Filing an arbitration claim does not stop the clock. She should have requested a stay of the original lawsuit, said the court. See court decision here. That is, the Fifth Court said she should have retained the lawsuit, not dismiss it, and simply ignore it while the arbitration claim proceeds. One wonders if USG deliberately failed to pay the arbitration fees hoping for this result.

The remarkable thing is that the employee is in arbitration only because the employer pulled some long-forgotten agreement from an old folder somewhere. Yet, when the employer fails to pay its fees, it suffers no repercussions. The central fallacy of arbitration is that it was never intended for typical consumers. It was intended for generally business savvy large corporations and labor unions. Employees and consumers are paying the price for this poorly designed private system of justice.