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Fourth Circuit Affirms Denial of Arbitration after Employer Misleads Plaintiffs

The Fourth Circuit recently affirmed a district court’s ruling denying the employer’s motion to compel arbitration, on the grounds that the employer had waived arbitration through vigorously participating in litigation, including multiple dispositive motions and even seeking certification of a state law issue. More troubling was that the employer had misled several potential plaintiffs into signing arbitration agreements by falsely telling them that they would lose certain rights if they participated in litigation.

Some excerpts follow – emphasis added:

Degido, et al. v. Crazy Horse Saloon & Restaurant, Inc., No. 17-1145 (4th Cir. Jan. 18, 2018)

Before WILKINSON, KING, and FLOYD, Circuit Judges.

Affirmed and remanded by published opinion.

ARGUED: James Leon Holt, Jr., JACKSON, SHIELDS, YEISER & HOLT, Cordova, Tennessee, for Appellant. Jamisen A. Etzel, CARLSON LYNCH SWEET KILPELA & CARPENTER, LLP, Pittsburgh, Pennsylvania, for Appellee.

ON BRIEF: Gary Lynch, CARLSON LYNCH SWEET KILPELA & CARPENTER, LLP, Pittsburgh, Pennsylvania, for Appellee.

WILKINSON, Circuit Judge:

Plaintiff-appellee Alexis Degidio filed a putative collective and class action against defendant-appellant Crazy Horse Saloon and Restaurant, Inc. (Crazy Horse). This appeal concerns the enforceability of arbitration agreements that were executed more than a year after this litigation began.

Arbitration is a valuable means of resolving disputes expeditiously, but this case shows that it can sometimes be abused to prolong litigation, exploit the judicial process, and give defendants two opportunities to prevail on the merits. The district court denied Crazy Horse’s motion to compel arbitration. For the reasons that follow, we affirm its judgment and remand for further proceedings consistent with this opinion. . . .

. . . . Degidio performed as an exotic dancer at Crazy Horse’s gentlemen’s club in 2012 and 2013. Crazy Horse classified entertainers who performed at its club as “independent contractors.” The entertainers were not paid by Crazy Horse, but were instead compensated through customer tips.

Degidio filed this class and collective action on August 8, 2013. Degidio alleged that Crazy Horse misclassified her and other putative class members as independent contractors and that it further violated the minimum wage and overtime provisions of the Fair Labor Standards Act (FLSA), 29 U.S.C. § 201 et seq. Degidio also claimed that Crazy Horse violated the South Carolina Payment of Wages Act (SCPWA), S.C. Code § 41-10-10 et seq., by failing to pay entertainers the appropriate minimum wages, improperly denying them overtime wages, and inappropriately withholding the entertainers’ tips.

Over the course of litigation, Crazy Horse adopted three distinct strategies to defeat Degidio’s claim. First, Crazy Horse attempted to win the judicial action on the merits by filing multiple motions for summary judgment. Second, it repeatedly asked the district court to certify questions of state law to the South Carolina Supreme Court. And third, it sought to compel arbitration on agreements executed after the commencement of this suit. Only after the district court had resolved on the merits a number of legal issues did Crazy Horse ask the court to enforce the arbitration agreements.

As the ensuing chronology makes clear, Crazy Horse was disdainful of orderly judicial process and lacking in the respect that opposing parties in an adversary proceeding are due. Crazy Horse began its maneuvers when it answered Degidio’s complaint on October 8, 2013, but did not move to compel arbitration. The parties then participated in discovery until November 2014.

In November and December 2014, at the very end of the discovery period, Crazy Horse began entering arbitration agreements with entertainers who had worked at the club. The arbitration provision was contained in a lease that Crazy Horse distributed to entertainers who used its facilities. Crazy Horse told entertainers that they were required to sign the lease as a condition of performing at the club. The agreement waived the signatory’s right to participate in any class action against Crazy Horse, including any class that might be certified in this case. Prior to executing the agreements, Crazy Horse did not inform the district court that it was communicating with potential class members about pending litigation. . . .

. . . . Crazy Horse employed judicial proceedings to pursue a litigation strategy for over three years, and it did so to the detriment of plaintiffs in this case. Instead of filing a motion to compel arbitration at an early stage in the litigation process, Crazy Horse filed multiple motions for summary judgment, served discovery, and twice asked the district court to certify questions of state law to the South Carolina Supreme Court. This was litigation activity aimed at obtaining a favorable ruling on the merits of the case. In fact, Crazy Horse had already obtained favorable rulings from the district court to the effect that Degidio’s claims for minimum wages and overtime under the SCPWA were preempted.

In pursuing this merits-based strategy for three years, Crazy Horse actively sought to obtain a favorable legal judgment. In doing so, it forced plaintiffs and the district court to spend unnecessary time and resources on issues that might have had to be reargued before an arbitrator. This conduct could not be more at odds with the FAA’s goal of facilitating the expeditious settlement of disputes.

Of course, if the district court had granted any of Crazy Horse’s motions for summary judgment, then arbitration would have been unnecessary: the district court would already have resolved the dispute and arbitration would serve no purpose. The only possible purpose of the arbitration agreements, then, was to give Crazy Horse an option to revisit the case in the event that the district court issued an unfavorable opinion . In other words, Crazy Horse did not seek to use arbitration as an efficient alternative to litigation; it instead used arbitration as an insurance policy in an attempt to give itself a second opportunity to evade liability . . . .

. . . . There is a second reason to reject Crazy Horse’s contention that it could not file a motion to compel arbitration until after the district court had conditionally certified an FLSA class. Such a ruling would give defendants a perverse incentive to wait as long as possible to compel arbitration. Generally, arbitration agreements are signed before the commencement of any litigation. When such agreements 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.

This all turns the arbitral process on its head. Instead of giving the parties to an arbitration agreement one neutral arbiter, it grants defendant 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. By treating arbitration as a backstop and as a last resort rather than as a substitute for judicial proceedings, Crazy Horse pushed this case further and further from the FAA’s mandate of helping parties resolve disputes expeditiously.

Moreover, the arbitration agreements that Crazy Horse presented to potential plaintiffs painted a false picture of the entertainers’ legal posture. Specifically, the agreements suggested that the entertainers’ ability to keep tips and set their own schedules was a result of their designation as independent contractors, and that this designation would be imperiled if the entertainers joined Degidio’s suit. . . .

. . . . The agreements in this case were all obtained after potential plaintiffs met with Crazy Horse’s CFO or counsel. The setting here was ripe for duress: Not only were arbitration agreements executed without knowledge of the court and in the context of an employment relationship in which the employer alone could profess the requisite legal expertise. They falsely suggested that participation in the lawsuit would deprive potential plaintiffs of important professional rights. The combination of these circumstances rendered defendant’s conduct indefensible from the get-go. The district court was right to describe the “circumstances here” as “distinct and disturbing,” J.A. 911, and it correctly denied enforcement of these sham agreements. We respect the admirable care and patience of that court in the face of obviously trying circumstances.

The judgment of the district court is affirmed and the case remanded for further proceedings consistent with this opinion.