By Gregory J. Wartman
A Pennsylvania federal court recently ruled that an arbitration agreement that a strip club forced an exotic dancer to sign was unenforceable because it imposed an involuntary, unknowing loss of collective action and class action rights under the Fair Labor Standards Act (FLSA).
Jessica Herzfeld began working as an exotic dancer at the Gold Club in Philadelphia in 2006, and she continued to work at the club until 2014. In 2014, she filed a federal lawsuit against her former employer alleging violations of the FLSA.
She sought to recover (1) unpaid minimum wages, (2) unpaid overtime wages for hours worked over 40 in a workweek, and (3) liquidated damages. She also filed a class action on behalf of the club’s Pennsylvania dancers for violations of the Pennsylvania Minimum Wage Act and the Pennsylvania Wage Payment and Collection Law.
The Gold Club filed a motion to force Herzfeld to arbitrate her claims. It contended that she signed an arbitration agreement when she began work and that the agreement was destroyed in a flood. Alternatively, the club argued that she signed a new arbitration agreement in 2013 and that the agreement applied retroactively to the beginning of her employment.
The court denied the club’s motion to force Herzfeld to arbitrate her claims and allowed the case to proceed.
There was insufficient evidence of a lost arbitration agreement. First, the court analyzed the club’s argument that the 2006 arbitration agreement applied to Herzfeld’s employment until she signed the new arbitration agreement in 2013. The court found there was insufficient evidence that the parties entered into an enforceable arbitration agreement.
Under Pennsylvania law, a party seeking to enforce a lost document (e.g., an arbitration agreement allegedly destroyed in a flood) must prove by clear and convincing evidence that (1) the document was lost, (2) the party conducted a bona fide search for the document, and (3) the existence, execution, delivery, and contents of the document.
The court ruled that although the club produced evidence that it lost the 2006 arbitration agreement, it did not “provide evidence [that] Herzfeld signed an arbitration agreement in 2006 other than ambiguous testimony [that] she may have signed one document concerning independent contractor status.” Further, the court noted that no one saw her sign the agreement, and she testified that she did not remember signing the agreement. Therefore, the court rejected the club’s argument.
The new arbitration agreement did not apply retroactively. The court also rejected the club’s contention that the 2013 arbitration agreement applied retroactively. The agreement stated, “If any dispute arises out of this agreement[,] it shall be settled by arbitration.” The contract did not define “this agreement” to extend to Herzfeld’s employment relationship with the club before the date it was signed. The court found the agreement’s “limiting language insufficient to warrant retroactive application.”
The new arbitration agreement was unconscionable. Next, the court was faced with the question of whether Herzfeld’s claims related to the period after she signed the 2013 arbitration agreement must be arbitrated. The court agreed with the club’s argument that Herzfeld’s claims arose out of the agreement, finding that such “arising out of” language is typically interpreted broadly.
The court then examined whether the new arbitration agreement was unconscionable. The court focused on the fact that under the 2013 arbitration agreement, collective action arbitration was unavailable.
That provision was contrary to the language of the FLSA, which provides that “an action to recover the liability prescribed . . . may be maintained against any employer . . . in any federal or state court of competent jurisdiction by any one or more employees for and on behalf of [herself] or themselves and other employees similarly situated.”
The court ruled that an arbitration agreement imposing an “involuntary, unknowing loss of FLSA collective action and class action rights is substantively unconscionable.” While unconscionable provisions may be taken out of arbitration agreements in some circumstances to allow for the arbitration of claims, the court refused to do so in this case.
The court stated, “Severing Herzfeld’s state law class action claims from her FLSA overtime claim and ordering piecemeal arbitration would only duplicate, rather than streamline, the parties’ effort to resolve these claims.”
Accordingly, the court denied the strip club’s motion to compel arbitration and allowed Herzfeld’s claims to proceed.
This case illustrates the importance of maintaining organized employment files and backing up the information electronically. Part of the Gold Club’s difficulty in enforcing the 2006 arbitration agreement was that its files had been destroyed in a flood. If Herzfeld had in fact signed an arbitration agreement in 2006 and the Gold Club had stored the agreement electronically, it likely would have been able to compel her to arbitrate.
The case is also significant for the court’s ruling that an arbitration agreement that eliminated an employee’s right of collective action under the FLSA is unconscionable. Employers should monitor how other courts decide this issue to know ahead of time whether their arbitration agreements with similar restrictions are likely to be enforced.