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Court declines to compel enforcement of arbitration agreement rolled out in attempt to short circuit overtime pay lawsuit filed by store managers

June 26th, 2013  |  Ron Miller

The old adage “there’s no use closing the barn door after the horse has gotten away” proved true in the case of retailer’s attempt to rollout arbitration agreements to its store managers aimed at short circuiting a wage suit. Store managers at Citi Trends filed a collective action under the FLSA in which they alleged that the retailer improperly designated them as exempt employees and denied overtime compensation.

In Billingsley v Citi Trends, Inc, a federal district court in Alabama declined to compel arbitration of the store managers’ claims where the retailer rolled out the arbitration agreement after litigation commenced and which specifically targeted only potential class members with the goal of undercutting the collective action. Here, the court determined that the suspicious timing of the roll-out, as well as other factors, supported its finding that the roll-out was a hurried reaction specifically targeted at curtailing this litigation.

The court observed that this motion concerned a very discrete moment in time when Citi Trends required all of its then-employed store managers to sign an arbitration agreement. In this instance, Citi Trends devised and implemented a new alternative dispute resolution (ADR) policy shortly after it was served with the complaint, and after the court had set a scheduling conference. Just a couple of weeks following the scheduling conference, Citi Trends began the process of rolling out its ADR plan. Here, the court examined the agreement for procedural and substantive unconscionability to determine its validity.

Procedural unconscionability. In terms of procedural unconscionability, the court noted that the store managers had absolutely no bargaining power. While the court concluded that the key components of the arbitration agreement were clear and comprehensible, the agreement was mandatory and the store managers reasonably understood that if they did not comply with the required policy they would be terminated. Moreover, Citi Trends did not disclose to the store managers that it had decided to defer until after resolution of the lawsuit any decision about the effect on a store manager’s employment if he or she refused to sign the agreement. Without that disclosure, the reasonable and logical conclusion for a store manager was that he or she would be terminated if they refused to sign the agreement.

The court observed that the terms of the agreement were not any more oppressive that other such arbitration agreements. However, it concluded that the agreement cannot be taken out of the context in which it was executed. Here, the store managers were ordered by their superiors to attend a meeting with a human resource representative in a private two-on-one setting. The setting was the kind of private meeting generally used in an interrogation or investigation of an employee. As a consequence, the presentation of a mandatory arbitration agreement by a HR representative in a small room normally reserved for interrogation infused the entire process with oppressiveness.

The arbitration agreement also gave the store managers no meaningful choice. Language in the agreement clearly stated that it was a condition of employment. Moreover, there was no dispute that the employer never told the employees that they did not have to sign the agreement. Rather, a reasonable reading of the documents presented to the store managers would lead them to conclude that their continued employment was conditioned on signing the agreement. Finally, the court determined that the context in which the agreements were procured from the store managers was highly coercive. Another aspect of the context surrounding the signing of the agreement that supported a finding of procedural unconscionability was the fact that the ADR plan was rolled out just four months after Citi Trends was served with this lawsuit, and HR employees testified that they had not heard of the ADR policy until an updated employee handbook had virtually been completed.

Substantive unconscionability. On its face, the court found that the terms of the agreement were reasonable. On the other hand, the documents presented to the store managers reflected that the purpose and effect of the terms of the arbitration agreement were designed to protect Citi Trends in this lawsuit. The rollout of the ADR plan just months after this suit commenced, and the rushed nature of the distribution of photocopied handbooks only to store managers supported a finding that the handbook itself was a pretext for presenting the agreement to the managers to derail their participation in this lawsuit.

Next, the court considered the allocation of risk between the parties. Here, it noted that the agreement was specifically designed to benefit Citi Trends, and its timing was calculated to reduce or eliminate the number of collective action opt-in plaintiffs in the case. Thus, the risk to Citi Trends was de minimis. On the other hand, the store managers had to choose between signing the agreement and keeping their jobs or refusing to sign, participating in the lawsuit and being terminated. Thus, the benefit to the store managers of signing the agreement was de minimis.

In this instance, the court concluded that public policy concerns were the most critical factor in determining whether the agreement was substantively unconscionable. The court noted that meetings with the store managers took place four months after the lawsuit was filed, and around the time the plaintiffs were preparing to file their motion for conditional certification of the class. Documents were presented to the store managers in a manner that could be perceived as intimidating and coercive. Here, the court’s biggest public policy concern was the effects of Citi Trends’ actions on the purpose of an FLSA collective action.

Noting that Congress passed the FLSA during the Great Depression to protect workers from overbearing practices of employers with greatly unequal bargaining power over them, here the court found that the goals of the Act would be defeated if it approved the actions taken by Citi Trends, that were designed and used to prevent employees from vindicating their rights in an FLSA collective action. In this instance, the court found that the agreement at issue reeked of both procedural and substantive unconscionability in the context in which it was presented and obtained. Thus, the court denied Citi Trends’ motion to compel arbitration of the employees’ wage claims.