Fourth Circuit Court of Appeals Affirms District Court's Denial to Enforce Arbitration Agreements

The Federal Arbitration Act (FAA) adopted a liberal federal policy favoring arbitration agreements.  The FAA recognizes that arbitration is an expeditious way to resolve disputes and conserve judicial resources.  It accordingly requires that courts stay any suit or proceeding pending arbitration of any issue referable to arbitration under an agreement in writing for such arbitration.  Pursuant to this directive, courts generally respect contractual agreements to settle disputes via arbitration.  

However, the policy undergirding the FAA is not without limits.  A litigant may waive its right to invoke the FAA by so substantially utilizing the litigation machinery that to subsequently permit arbitration would prejudice the party opposing the stay.  This is because arbitration laws are passed to expedite and facilitate the settlement of disputes and avoid the delay caused by litigation, not to provide a means of furthering and extending delays.  Two factors specifically inform a court's inquiry into actual prejudice: (1) the amount of the delay; and (2) the extent of the moving party's trial-oriented activity.

In Degidio v. Crazy Horse Saloon & Rest., Inc., No. 17-1145, 2018 BL 16442 (4th Cir. Jan. 18, 2018), Plaintiff Degidio filed a class and collective action alleging 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). Degidio also claimed that Crazy Horse violated the South Carolina Payment of Wages Act (SCPWA), by failing to pay the appropriate minimum wages, improperly denying overtime wages, and inappropriately withholding 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.

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. The Fourth Circuit Court of Appeals held that this conduct could not be more at odds with the FAA's goal of facilitating the expeditious settlement of disputes.

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.

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.

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 Fourth Circuit Court of Appeals held that the district court was right to describe the circumstances here as distinct and disturbing, and was correct in denying enforcement of these sham agreements.

 

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