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July 13, 2018

Post-Litigation Arbitration Agreement Held Unenforceable

By Raven Villegas

Earlier this year, the Fourth Circuit held that the arbitration provision in a lease agreement between the Crazy Horse Saloon and Restaurant and the exotic dancers it employed was unenforceable. Degidio v. Crazy Horse Saloon & Rest. Inc, 880 F.3d 135, 137 (4th Cir. 2018). The arbitration agreement was executed more than a year after the commencement of litigation between the parties, and the court viewed it as a delay tactic.

The plaintiff Alexis Degidio performed as an exotic dancer at the Crazy Horse Saloon and Restaurant. Crazy Horse classified its entertainers as “independent contractors” and did not pay them. Instead, the entertainers were compensated through customer tips. Degidio filed a class action in August 2013, alleging that Crazy Horse misclassified her and other putative class members as independent contractors. She also alleged that the establishment violated the minimum wage and overtime provisions of the Fair Labor Standards Act as well as certain provisions of South Carolina employment law. Crazy Horse adopted a three-point strategy to defeat Degidio’s claims. First, Crazy Horse filed multiple motions for summary judgment. Second, Crazy Horse repeatedly asked the district court to certify questions of state law to the South Carolina Supreme Court. Third, Crazy Horse sought to compel arbitration on agreements executed long after the lawsuit was commenced.

In November and December 2014, more than a year after the lawsuit commenced, Crazy Horse began requiring its entertainers to sign a lease agreement as a condition of performing at the club. The lease contained an arbitration agreement, which waived the signatory’s right to participate in a class action suit against Crazy Horse. Crazy Horse did not inform the district court that it was communicating with potential class members.

In October 2016, Crazy Horse filed a motion to compel the plaintiff to arbitrate her claims. The district court rejected Crazy Horse’s motion finding that Crazy Horse had obtained the arbitration agreements through a unilateral, unsupervised, and misleading pattern of communication with absent class members. Crazy Horse appealed.

The Fourth Circuit held that the arbitration provision in the lease agreements between the club and its entertainers was unenforceable. The court found that Crazy Horse was disdainful of an orderly judicial process and did not provide the opposing parties with the respect they were due. According to the court “this conduct could not be more at odds with the Federal Arbitration Act’s goal of facilitating the expeditious settlement of disputes.” The court stated that the only possible purpose of the arbitration agreements was to give Crazy Horse an option to revisit the case in the event that the district court issued an unfavorable opinion. Said differently, Crazy Horse attempted to utilize arbitration as an insurance policy instead of an alternative to litigation.

By upholding the decision of the district court, the Fourth Circuit affirmed that the arbitration agreements obtained by Crazy Horse ran counter to the purpose of the Federal Arbitration Act. Forcing employees to sign an arbitration agreement after they brought suit as a litigation delay tactic was ineffective.

Raven Villegas is a 2019 J.D. candidate at DePaul University College of Law in Chicago, Illinois.