In connection with a Fair Labor Standards Act (FLSA) collective action filed by an exotic dancer for unpaid wages, a federal district court recently found that an arbitration agreement between the dancer and defendant nightclub was unconscionable. Herzfeld v. 1416 Chancellor, Inc., No. 14–4966 (E.D. Pa. July 22, 2015) (click here for a copy of the decision). The nightclub and dancer entered into a “Stage Rental License Agreement” containing a broad arbitration clause requiring all disputes related to the agreement to be settled by arbitration. The arbitration clause did not mention class proceedings or contain a class waiver, and the arbitration clause provided that each party would bear its own attorney’s fees.
The district court first found that courts, not arbitrators, generally decide whether an agreement permits class arbitration. Next, analyzing the agreement, the court held that the agreement did not permit or authorize class or collective proceedings.
Turning to the issue of unconscionability, the court then found that the fee provision in the agreement was unconscionable because the arbitration clause in effect prohibited the plaintiff from recovering attorney’s fees from the defendant, but the FLSA provides for the recovery of attorney’s fees.
The most significant part of the decision focuses on the plaintiff’s inability to proceed collectively. The court first explained that the FLSA permits collective actions. Next, the court reasoned that there was no evidence of a “clear and unequivocal surrender” of the plaintiff’s statutory right to a collective action. The court held that an “arbitration provision imposing an involuntary unknowing loss of FLSA collective action and class action rights is substantively unconscionable.” The court therefore denied the nightclub’s motion to compel arbitration. The court also distinguished the Supreme Court’s Concepcion decision because Concepcion involved an explicit class waiver, but this case did not involve an explicit class waiver. The clause at issue was “silent” regarding class proceedings.
The court also made an interesting analogy: The FLSA provides for fee-shifting and collective actions, and just like the loss of fee-shifting is unconscionable, the loss of the ability to proceed collectively is equally, if not more, unconscionable. This analogy reminded me of a disparity or tension I see in arbitration law: from time to time, I’ll see courts strike down arbitration clauses for not permitting adequate discovery, shortening the statute of limitations, or for lack of mutuality. But most courts, following the Supreme Court’s lead from cases like American Express and Concepcion, will compel arbitration even if the plaintiff loses the right to proceed collectively. In other words, looking at the majority of court decisions today involving arbitration, certain rights (like the ability to engage in discovery and having non-waivable statutes of limitations) appear to be valued more highly than the right to proceed collectively. However, the Supreme Court in Concepcion suggested that the difference between individual proceedings and collective proceedings was fundamental. Therefore, wouldn’t the loss of the ability to proceed collectively be unconscionable? Isn’t the loss of the ability to proceed collectively just as important, or even more important than the ability to engage in discovery, or the ability to fee-shift in an individual case?
Finally, the court’s reasoning was not limited to FLSA collective actions. The plaintiff’s underlying claims also involved state statutory and common law claims, and the plaintiff was attempting to bring a class action in connection with such claims. The court found that the unknowing or involuntary waiver of class action rights was substantively unconscionable. This case is a great victory for employees, and I hope more courts follow this lead.