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Sketchy post-litigation arbitration agreement can’t be used for a second bite at the defense apple

By Lisa Milam-Perez, J.D.

A district court properly denied a strip club’s motion to compel arbitration of a class and collective action minimum wage suit brought by exotic dancers who alleged they were misclassified as independent contractors under the FLSA and state law. The club sought to enforce an arbitration agreement executed more than a year after the litigation began, and only after multiple summary judgment motions and other procedural maneuvers. But the district court wouldn’t have it, and denied the motion to compel arbitration. Rightly so, the Fourth Circuit affirmed, observing that the club only asked the court to compel arbitration after the court resolved several legal issues on the merits. The employer was simply looking to use arbitration as an insurance policy in case it was unable to stem the action in litigation—conduct that “could not be more at odds with the FAA’s goal of facilitating the expeditious settlement of disputes,” the appeals court said (Degidio v. Crazy Horse Saloon and Restaurant Inc. dba Thee New Dollhouse, January 18, 2018, Wilkinson, J.).

“Maneuvers.” An exotic dancer at a gentlemen’s club filed a putative class and collective action wage suit alleging the club misclassified dancers as independent contractors under the FLSA and the South Carolina Payment of Wages Act (SCPWA), thereby denying them proper minimum wage and overtime pay. From the outset, the club was “disdainful of orderly judicial process,” according to the appeals court, having carried out its litigation “maneuvers” from the moment it answered the complaint.

At the very end of the discovery period, the club began entering into arbitration agreements with its dancers (via an arbitration provision in its “lease” of the facilities) as a condition of their performing at the club. The club did not inform the court that it was communicating with potential class members about the litigation pending before it before executing the agreements. The club then filed a motion for summary judgment, contending the dancers were independent contractors and thus not covered under the FLSA and SCPWA. But it failed to mention the arbitration agreements and did not move to compel arbitration. The next day, the named plaintiff moved to certify a Rule 23 class and to conditionally certify an FLSA class. Only in opposing certification did the club, for the first time, raise the arbitration agreements, and move the court to compel arbitration as to those dancers who had signed the agreements. The court entertained the summary judgment motion, dismissing two of the dancers’ three state-law claims. But it found the dancers were employees for purposes of the FLSA, and therefore conditionally certified their FLSA collective action.

Shortly after notice was sent to potential class members, the club filed another summary judgment motion on the remaining state-law claim. Again, it did not mention arbitration. Subsequently, more than a dozen more dancers joined the case. Nine of them had signed arbitration agreements. Regardless, the club began to serve written discovery on the opt-in plaintiffs, including those who had signed arbitration agreements—discovery that went to the merits, such as documents related to the dancers’ income, work history, and number of hours worked, but unrelated to the question of arbitrability.

When their motion for summary judgment was denied, the club moved to certify several questions to the South Carolina Supreme Court, which the district court denied, having already ruled on the exact question the club would have the state high court weigh in on. While the club’s second motion to certify the wage question to the state high court was pending—and three years now into the litigation—the club filed another summary judgment motion. Now it sought to compel arbitration as to the nine plaintiffs who had signed arbitration agreements. The court denied the motion, finding the club obtained the agreements through “a unilateral, unsupervised, and misleading pattern of communication with absent class members initiated more than a year after the pendency of this case.” (The court also denied the motion to certify state-law questions to the state high court, and conditionally certify the FLSA claims.).

Not what the FAA intended. The club had pursued an aggressive litigation strategy for three years—with multiple summary judgment motions, motions to certify questions to the state supreme court, and active participation in merits discovery—and it did so to the detriment of the plaintiffs, who were forced to spend time and resources on issues that would, if the club got its way, have to be reargued before an arbitrator. As such, the appeals court found the district court properly denied the club’s late-stage bid to enforce the arbitration agreements. Instead of moving early to compel arbitration, the club engaged in “litigation activity aimed at obtaining a favorable ruling on the merits.” In fact, it did obtain dismissal of several claims.

No need to wait. The club argued that it had to wait to file a motion to compel arbitration because it could not move to compel arbitration against parties who had yet to join the suit. (The named plaintiff had not signed an arbitration agreement, it reasoned, so there was no one whom it could have compelled arbitration until the signatories opted in. The appeals court found this argument “misguided.” First, the club didn’t have to wait to tell the court about its arbitration strategy until signatories joined the case; it could have told the court it intended to compel arbitration as to any dancers who had signed arbitration agreements then sought to join the suit. Then the court could have decided to hold off on ruling on the merits until the arbitration question was resolved, reserving legal questions that an arbitrator might have to “rehash.” Instead, it forged ahead with its merits-based litigation strategy, including discovery, with no inkling that it would look to have the matter resolved in an arbitral proceeding.

“Perverse incentive.” Second, to allow the club to delay its motion to compel arbitration until after the court conditionally certified a class would create a “perverse incentive” for defendants to wait as long as possible to compel arbitration. Usually, arbitration agreements precede litigation. When they are executed during the pendency of litigation, “there is an increased risk that arbitration will operate not to expedite the resolution of disputes, but to prolong the entire process and to give defendants a second opportunity to contest unfavorable judgments.” That was precisely what the club was up to in this case, the appeals court concluded. It wasn’t looking to resolve the dispute before a neutral arbiter in lieu of litigation, it was seeking “two bites at the apple.”

“It is hard to escape the impression that defendants knew exactly what they were up to, and the district court was quite right to put a stop to it,” the appeals court wrote. “By treating arbitration as a backstop and as a last resort rather than as a substitute for judicial proceedings, [the club] pushed this case further and further from the FAA’s mandate of helping parties resolve disputes expeditiously.”

Agreements were misleading. Moreover, the “lease” agreements in question here misrepresented the dancers’ “legal posture.” They indicated that the dancers would not be able to keep tips and set their own performance schedule unless they were designated as independent contractors—and that their independent contractor status would be at risk if they opted in to the suit, and if they did not sign the arbitration agreements.

Procedurally sketchy. Finally, the agreements were presented to the dancers “in a furtive manner,” the appeals court added. Courts overseeing FLSA collective actions are required to supervise contacts with potential plaintiffs with respect to opt-in procedures, in particular, so as to ensure that potential class members are not misled about the consequences of joining a suit. But in this case, the agreements were executed without the court’s knowledge, obtained after dancers met with the club’s CFO or attorney in a setting that was “ripe for duress.” These circumstances, combined with the misleading substance of the agreements, rendered the club’s conduct here “indefensible from the get-go,” the appeals court said. Or “distinct and disturbing,” as the court below described it, refusing to enforce the “sham agreements.” The appeals court affirmed the court’s decision and remanded for further proceedings.