Court Opinion

ID: 4237562
Source: CourtListenerOpinion
Date Created: 2018-01-18 20:00:23.905542+00
Date Added: 2024-06-11T14:15:41.139950
License: Public Domain

PUBLISHED

                       UNITED STATES COURT OF APPEALS
                           FOR THE FOURTH CIRCUIT

                                       No. 17-1145

ALEXIS DEGIDIO, individually and on behalf of all others similarly situated,

             Plaintiff - Appellee,

v.

CRAZY HORSE SALOON AND RESTAURANT INC, d/b/a Thee New
Dollhouse,

             Defendant - Appellant,

and

JOSEPH B. HARGADON,

             Third Party Defendant.

Appeal from the United States District Court for the District of South Carolina, at
Florence. Bruce H. Hendricks, District Judge. (4:13-cv-02136-BHH)

Argued: December 5, 2017                                       Decided: January 18, 2018

Before WILKINSON, KING, and FLOYD, Circuit Judges.

Affirmed and remanded by published opinion. Judge Wilkinson wrote the opinion, in
which Judge King and Judge Floyd joined.
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.

                                     2
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. 1

       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 also argues on appeal that because the National Labor Relations Act

(NLRA) protects employees’ right to “engage in . . . concerted activities for . . . mutual

aid or protection,” 29 U.S.C. § 157, it invalidates arbitration agreements that prevent

employees from bringing class or collective actions against employers. This question is

currently before the Supreme Court. See Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th

Cir. 2016), cert. granted, 137 S. Ct. 809 (Jan. 13, 2017) (No. 16-285). Since we find the

       1
         A collective action under the Fair Labor Standards Act (FLSA) differs from a
class action under Federal Rule of Civil Procedure 23 because potential plaintiffs can join
an FLSA collective action only by affirmatively giving consent in writing to become a
party. 29 U.S.C. § 216(b). In a class action, by contrast, plaintiffs are presumed to be
members of a class unless they affirmatively opt out of the class proceeding. Fed. R. Civ.
P. 23(b)(3).

                                             3
arbitration agreements infirm for reasons quite independent of the question raised in Epic

Systems, we have no need to address that issue.

                                            I.

       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. 2

       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

       2
           Crazy Horse began to operate under the name “Thee New Dollhouse” on March
1, 2012.

                                            4
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.

       In December 2014, Crazy Horse moved for summary judgment on all claims.

Crazy Horse’s motion for summary judgment relied on evidence obtained in discovery,

including deposition testimony, to argue that its entertainers were legally classified as

independent contractors and thus not entitled to the protections of the FLSA. Crazy Horse

did not mention arbitration in this motion for summary judgment. The next day, Degidio

                                             5
moved for Rule 23 class certification for the state law claims and conditional certification

of a collective action under the FLSA.

       On January 19, 2015, Crazy Horse opposed Degidio’s motions for FLSA

conditional certification and Rule 23 class certification and—for the first time in the

litigation—argued that the district court should compel arbitration against any

entertainers who had signed arbitration agreements.

       In support of its motion to compel arbitration, Crazy Horse submitted signed

declarations in which entertainers explained why they chose to sign the agreement. All of

the entertainers stated that they preferred to be independent contractors because they

enjoyed having the freedom to work at other clubs, set their own work schedules, and

keep the money they received in tips. Crazy Horse also filed an affidavit from its CFO

Laura Watson explaining that Crazy Horse had begun entering arbitration agreements

with entertainers in November 2014.

       On September 30, 2015, the district court granted in part and denied in part Crazy

Horse’s motion for summary judgment. Specifically, the district court dismissed two of

Degidio’s three SCPWA claims, those for minimum wages and overtime pay. The court

found, however, that entertainers who performed at Crazy Horse were employees for

purposes of the FLSA. Based on this finding, the district court granted Degidio’s motion

for conditional certification of an FLSA collective action and authorized Degidio’s

counsel to send notice to putative plaintiffs. The district court also “question[ed] the

enforceability of the arbitration agreements as they pertain to this action.” J.A. 478–81

(citing Billingsley v. Citi Trends, Inc., 560 Fed. Appx. 914, 919 (11th Cir. 2014)). The

                                             6
district court expressed concern “that potential class members have been misled about the

nature of the plaintiff’s claims, the implications of being classified as an employee, and

what an employee would need to show to recover under the FLSA.” J.A. 480.

       Shortly after notice had been sent to potential class members informing them of

their right to opt into Degidio’s FLSA collective action, on October 26, 2015, Crazy

Horse filed another motion for summary judgment. In the motion, Crazy Horse argued

only that it was entitled to summary judgment on Degidio’s remaining SCPWA claim. It

again did not mention arbitration.

       After Crazy Horse filed that summary judgment motion, between November 2015

and January 2016, more than a dozen new plaintiffs joined this litigation. Nine of those

plaintiffs had signed the arbitration agreements Crazy Horse is trying to enforce in this

appeal.

       Moreover, on November 30, 2015, only a month after it had filed a motion for

summary judgment on Degidio’s SCPWA claims, Crazy Horse began serving written

discovery on the opt-ins, including each opt-in who signed an arbitration agreement.

Crazy Horse asked the opt-ins to produce documents relating to their sources of income,

their work history, the number of hours they worked, and the remuneration they received

from defendants. See, e.g., Miller Interrogatories, J.A. 874-76. All of these questions

probe merits issues that are relevant to Degidio’s SCPWA and FLSA claims, but are

unrelated to the question of arbitrability.

       The district court denied Crazy Horse’s motion for summary judgment on June 3,

2016. Seven days later, Crazy Horse moved to certify several questions of South Carolina

                                              7
law to the South Carolina Supreme Court. The district court properly denied the motion

because it had earlier ruled on the exact same questions at Crazy Horse’s request. 3

Undeterred, Crazy Horse filed a second motion to certify the wages issue to the South

Carolina Supreme Court on August 11, 2016.

        Before the district court had ruled on Crazy Horse’s second motion to certify state

law questions to the South Carolina Supreme Court, on October 31, 2016, Crazy Horse

filed another motion for summary judgment. The case had now been ongoing for more

than three years, and more than nine months had passed since the latest opt-in had joined

the FLSA collective action. This time, Crazy Horse sought to compel arbitration against

the nine plaintiffs who had signed arbitration agreements in November and December

2014.

        On January 26, 2017, the district court entered an omnibus order denying Crazy

Horse’s second motion to certify questions of state law, rejecting the motion to compel

arbitration, and granting Degidio’s motion for conditional class certification. As to

arbitration, the court found that Crazy Horse had obtained the arbitration 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. J.A. 909. It thus

declined to enforce the arbitration agreements. Crazy Horse now appeals this decision.

        3
         Specifically, Crazy Horse argued that it was unclear whether “tips” qualified as
“wages” for purposes of South Carolina law, and that the South Carolina Supreme Court
should be given an opportunity to weigh in on this question. Crazy Horse had asked the
district court to resolve this exact same question in an earlier motion for summary
judgment. The district court did so seven days before Crazy Horse filed this motion.

                                             8
                                             II.

       The Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-16, adopted “a liberal federal

policy favoring arbitration agreements.” Moses H. Cone Mem’l Hosp. v. Mercury Constr.

Corp., 460 U.S. 1, 24 (1983). The FAA recognizes that arbitration is an expeditious way

to resolve disputes and conserve judicial resources. Hightower v. GMRI, Inc., 272 F.3d
239, 242 (4th Cir. 2001). 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.” 9 U.S.C. § 3. Pursuant to this directive, courts generally respect

contractual agreements to settle disputes via arbitration. See AT&T Mobility LLC v.

Concepcion, 563 U.S. 333, 341 (2011) (“[C]ourts must place arbitration agreements on

an equal footing with other contracts.”).

       However, the policy undergirding the FAA is not without limits. “A litigant may

waive its right to invoke the Federal Arbitration Act by so substantially utilizing the

litigation machinery that to subsequently permit arbitration would prejudice the party

opposing the stay.” Fraser v. Merrill Lynch Pierce, Fenner & Smith, Inc., 817 F.2d 250,

252 (4th Cir. 1987) (quoting Maxum Foundations, Inc. v. Salus Corp., 779 F.2d 974, 981

(4th Cir. 1985)). This is because “[a]rbitration 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.” Radiator Specialty Co. v. Cannon Mills, 97
F.2d 318, 319 (4th Cir. 1938). “Two factors specifically inform our inquiry into actual

prejudice: (1) the amount of the delay; and (2) the extent of the moving party’s trial-

oriented activity.” Stedor Enters., Ltd. v. Armtex, Inc., 947 F.2d 727, 730 (4th Cir. 1991).

                                             9
       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.

                                             10
       Crazy Horse claims that it filed its motion to compel arbitration as quickly as

possible. According to the club, it did not delay because it could not move to compel

arbitration against parties who had yet to join Degidio’s suit. And, because Degidio did

not herself sign an arbitration agreement, Crazy Horse argues that there was no party

against whom it could have moved to compel arbitration until after signatories had opted

to join the action. This argument is doubly misguided.

       The first difficulty with this argument is that it misrepresents the procedural

history of the case. Crazy Horse began executing the arbitration agreements in November

2014. Crazy Horse did not need to wait to inform the district court about its arbitration

strategy until entertainers who had signed arbitration agreements joined the case. It could

instead have told the district court that it intended to compel arbitration with respect to

any entertainers who elected to sign arbitration agreements and then proceeded to join

Degidio’s lawsuit. The fact that the arbitration agreements expressly mentioned this

lawsuit suggests that Crazy Horse was well aware that the agreements were relevant to

the ongoing litigation. Had Crazy Horse informed the district court of its intention to

compel arbitration at this earlier stage of litigation, the trial judge would have been able

to monitor communications between Crazy Horse and potential plaintiffs. As a practical

matter, the district court could have waited to issue merits judgments until the prior

arbitration question had been settled. In this way, the district court would not have had to

decide legal questions that might ultimately be rehashed by the arbitrator.

       As we have noted, however, rather than moving for arbitration, Crazy Horse

proceeded to make a number of legal arguments before the district court over a period of

                                            11
three years. For example, in December 2014, a few weeks after it began executing

arbitration agreements, Crazy Horse filed a summary judgment motion asking the court

to decide the case on the merits. Then, after Crazy Horse informed the court in January

2015 that many potential plaintiffs had signed arbitration agreements, the club filed two

more merits-based summary judgment motions and asked the trial judge to certify

questions of law to the South Carolina Supreme Court. Even after the opt-ins had joined

the class, Crazy Horse continued to pursue a merits-based litigation strategy before

asking the court to compel arbitration. For instance, Crazy Horse asked the district court

to reconsider its order on Degidio’s SCPWA claim and to again certify questions of law

to the South Carolina Supreme Court. In addition, Crazy Horse served discovery on all of

the opt-ins who had signed arbitration agreements. But rather than limit discovery to

questions of arbitrability, Crazy Horse included interrogatories and requests for

production on numerous details of the opt-ins’ employment history and income. In doing

so, Crazy Horse continued to act as though all of the claims would be disposed of in

litigation—not in an arbitral proceeding.

       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

                                            12
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 proposed arbitration agreements were quite clear that entertainers would be

able to enjoy important remunerative and scheduling benefits only if they worked as

independent contractors. For example, Paragraph 7.C of the agreement, which

summarized the benefits of being an independent contractor, specified that an

entertainer’s ability to “choose the days or evenings to appear and perform at the club”

was contingent on the entertainer retaining her status as an independent contractor and

                                             13
signing the arbitration agreement. 4 J.A. 78. Paragraph 7.B further emphasized that if the

entertainers were found to be employees, then Crazy Horse “would be required to collect,

and would retain, all Performance Fees paid by guests to Performer.” 5 Id.

      In their declarations, the entertainers appear to have been operating under the

misunderstanding that they would be able to keep their tips and flexible work schedule

only if they were independent contractors, and that they would be able to assure

themselves of that status only by signing the arbitration agreements. See J.A. 85-98. But

the benefits that seemingly led the entertainers to sign arbitration agreements are

available to both employees and independent contractors alike. See Tony & Susan Alamo

Found. v. Sec’y of Labor, 471 U.S. 290, 301-02 (1985). The FLSA requires that

      4
         Paragraph 7.C stated in full: “Performer is a skilled entertainer and the Club is
not responsible for providing training or instruction on performances. Since Performer
understands that for all purposes under this Agreement, Performer will operate as an
independent contractor Performer, Performer retains full independence in exercising
judgment as to the time and manner in performing at the Club. For example, Performer
shall have the sole and exclusive right to choose the days or evenings to appear and
perform at the Club, and individual choice over his/her costumes, props, or any other
equipment used during performance. Performer is solely responsible for the development
of any performances, number of hours spent performing, and the final control over any
aspect of the presentation of any performances.” J.A. 79.
      5
         Paragraph 7.B stated in full: “The Club and Performer acknowledge and
represent that if the relationship between them was that of employer and employee, the
Club would be required to collect, and would retain, all Performance Fees paid by guests
to Performer. Performer acknowledges and agrees that if the relationship were one of
employer/employee, all Performance Fees would be the property of the Club. THE
PARTIES ACKNOWLEDGE AND REPRESENT THAT PERFORMER’S RIGHT TO
OBTAIN AND KEEP PERFORMANCE FEES PURSUANT TO THIS LICENSE IS
SPECIFICALLY CONTINGENT UPON THE BUSINESS RELATIONSHIP OF THE
PARTIES BEING THAT OF THE CLUB BEING A LICENSOR AND TEMPORARY
SPACE LESSOR AND PERFORMER BEING AN INDEPENDENT PERFORMER
LICENSEE AND TEMPORARY SPACE LESSEE.” J.A. 79.

                                            14
employers pay a minimum wage and overtime rates to their employees. 29 U.S.C. §§

206-07. It does not prevent parties—whether they be businesses, employees, or

independent contractors—from getting together to settle most questions of wages and

scheduling to their mutual satisfaction. See Roland Elec. Co. v. Walling, 326 U.S. 657,

668 (1946). In other words, while the parties cannot circumvent the FLSA with a simple

contractual declaration, see Tony & Susan Alamo Found., 471 U.S. at 302, they remain

free to determine most features of their relationship. Insofar as the entertainers signed the

arbitration agreements because they thought that employment status would deprive them

of any say-so over the conditions of their employment, the agreements are misleading.

       As a final matter, the agreements were all presented to plaintiffs in a furtive

manner. When it comes to FLSA collective actions, the mechanism by which parties join

an ongoing lawsuit reposes in district courts the responsibility to supervise and manage

contacts with potential plaintiffs. To join an FLSA class, each potential plaintiff must

consent in writing to become a party in the case. 29 U.S.C. § 216(b). This mechanism has

come to be known as the “opt-in” requirement.

       The FLSA’s opt-in requirement was enacted in response “to excessive litigation

spawned by plaintiffs lacking a personal interest in the outcome.” Hoffmann-La Roche,

Inc. v. Sperling, 493 U.S. 165, 173 (1989). The requirement seeks to balance employees’

interest in pooling resources to bring collective actions and employers’ interest in

reducing baseless lawsuits. In order to strike this balance, district courts must be able to

supervise contacts between the parties and their respective counsel to ensure that

potential plaintiffs are not misled about the consequences of joining a class in an ongoing

                                             15
employment dispute. The district court’s supervisory role helps to ensure that “employees

receiv[e] accurate and timely notice . . . so that they can make informed decisions about

whether to participate.” Hoffmann-La Roche, 493 U.S. at 170; see also Kleiner v. First

Nat’l Bank of Atlanta, 751 F.2d 1193, 1201-03 (11th Cir. 1985) (“Because trial court

involvement in the notice process is inevitable in cases with numerous plaintiffs where

written consent is required by statute, it lies within the discretion of a district court to

begin its involvement early, at the point of the initial notice, rather than at some later

time.”).

       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.

                                                           AFFIRMED AND REMANDED

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