In the past year, if I wrote about “FLSA” and “arbitration” in the same post, it likely meant that another federal court had found employers can include class action waivers in their employment contracts without violating the Fair Labor Standards Act. Today, however, is different. The Eleventh Circuit last week found that it was the FLSA that gave the district court sufficient “managerial responsibility” over workers’ collective actions to override an employer’s coercive, post-lawsuit rollout of a new arbitration agreement. Billingsley v. Citi Trends, Inc., 2014 1199501 (11th Cir. March 25, 2014).
The collective action is made up of store managers at a clothing retailer, who allege the retailer systematically failed to compensate them for overtime. The putative class action was filed in February of 2012. By June of 2012 there was a preliminary scheduling order. Under Eleventh Circuit precedent, the plaintiff would start the process of notifying similarly-situated store managers 60 days after the scheduling order. In response, the retailer asked for extensions and then presented the court with new arbitration agreements executed by “several dozen” store managers. The store argued that these managers were now subject to arbitration and unable to join the court action. The plaintiffs objected and requested “corrective actions” (i.e., sanctions).
After a two-day evidentiary hearing, the district court in Alabama made its findings and conclusions. It found that after the scheduling order in the case came out, the retailer got busy instituting a new ADR policy. The new policy called for binding arbitration that could only proceed on an individual basis. And, instead of being handed out in a group setting like the retailer’s usual handbook changes, the new policy was delivered individually to store managers in small rooms at the back of the store, “the same places where the store interrogated or investigated its employees.” H.R. representatives asked the store managers to sign the new arbitration agreement along with a fill-in-the-blank declaration about their job duties. The store managers testified they understood they would be fired if they did not consent.
The district court found the timing of the rollout “was calculated to reduce or eliminate the number of collective action opt-in Plaintiffs in this case” and was designed to be “intimidating and coercive.” Therefore, and in response to the retailer’s motion to compel arbitration against the managers who signed the new arbitration agreements, the district court concluded the arbitration agreements were unconscionable and unenforceable. Furthermore, the district court exercised its managerial responsibility to oversee collective actions under the FLSA and refused to enforce the arbitration agreements for that second, independent basis.
The Eleventh Circuit affirmed. Interestingly, it did not analyze whether the new arbitration agreements were unconscionable. Instead, the opinion consists entirely of the appellate court applying the “abuse of discretion” standard to the district court’s use of its “managerial responsibility” under the FLSA. The opinion described a district court’s responsibility for overseeing FLSA actions broadly — including governing the conduct of the counsel and parties in order to avoid confusion and unfairness (especially ex parte contact with potential class members), as well as ensuring an orderly process. Given that expansive authority, the court concluded the district court did not abuse its discretion in determining the retailer’s conduct “undermined the court’s authority to manage the collective action” and therefore putative plaintiffs could join the lawsuit notwithstanding their signature on the new arbitration agreements.
Not many employers will attempt to rollout a new ADR policy in a “blitzkrieg fashion” like this retailer. So, what’s the significance of this case? It shows that in the current era of the strong federal policy in favor of arbitration, courts who believe arbitration agreements are unenforceable are searching for some basis other than the usual state law contract defenses. That is because those contract defenses could be preempted by the Federal Arbitration Act and the allowable bases for “substantive unconscionability” narrow each year. This case essentially re-frames the case from one about enforcing arbitration agreements to one about whether district courts have the ability to manage their cases and not get manipulated. I believe the Eleventh Circuit saw that as less likely to be reviewed and reversed.