The U.S. District Court for the Northern District of California recently held that an arbitration agreement in the “Performer Contracts” of exotic dancers was both procedurally and substantively unconscionable and denied a motion to compel arbitration brought by their employer nightclub operator, SFBSC Management, LLC (“BSC”). See Roe v. SFBSC Management, LLC, No. 14-cv-03616-LB (N.D. Cal. March 2, 2015) (slip opinion available here).
While the Federal Arbitration Act (“FAA”) incorporates a strong federal policy of enforcing arbitration agreements, it “does not confer a right to compel arbitration of any dispute at any time.” Volt Info. Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468, 474 (1989). Under the FAA, federal courts may refuse to enforce an arbitration agreement based on generally applicable state-law contract defenses, such as fraud, duress, or unconscionability. In particular, contractual unconscionability includes both a procedural and substantive component, analyzed by courts on a sliding scale wherein the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required and vice versa.
In Roe, the plaintiff exotic dancers had brought a collective and class action complaint alleging various state and federal wage-and-hour law violations, contending that BSC had misclassified them as independent contractors, rather than employees. BSC sought to compel these claims to arbitration pursuant to the agreement within the dancers’ Performer Contracts requiring that all disputes be decided by binding arbitration. Slip op. at 2.
The plaintiffs argued that the arbitration agreement was unconscionable, in part because of the coercive circumstances surrounding the signing of the agreements. Specifically, the plaintiffs presented evidence that the clubs’ management presented them with the contracts when they were “mostly naked” and then rushed them to sign. The dancers were told that they could not take the contracts home to review and believed they could not review prior to signing them. Id. at 4-5. The plaintiffs also contended that the option given on some of the contracts to “accept or reject” the terms was a sham, alleging that the club would purposely “lose” the agreement if a performer checked the “reject” checkbox and would present the performer with a new agreement to fill out “correctly,” or else management would find a reason not to hire the performer. Id. at 5. Management even presented the contracts for signing when performers were intoxicated, according to the plaintiffs. Based on these facts, Magistrate Judge Laurel Beeler found procedural unconscionability, which focuses on the circumstances surrounding the negotiation of the contract and arises from surprise or oppression.
Further, the court also found several terms of the agreement to be substantively unconscionable, focusing on the harshness and one-sidedness of the contract’s terms. The court found that the “one-way ban” on collective actions, barring the plaintiffs from consolidating claims, lacked mutuality as consolidation was forbidden only for the plaintiffs’ claims—even though defendants are also able to certify classes under Federal Rule of Civil Procedure 23. The court also found substantively unconscionable the cost-shifting and cost-sharing provisions of the arbitration agreement, which required, among other things, that the “costs of arbitration shall be borne equally by performer and owner unless the arbitrator concludes that a different allocation is required by law.” Id. at 16. The court noted that the Ninth Circuit has time and again rejected such cost-allocation terms requiring employees to split arbitrator’s fees–which can be exorbitantly high–with the employer. Id. at 16.
The court ultimately declined to sever the problematic provisions from the contract and deemed the entire arbitration agreement unenforceable. As a result, BSC’s motion to compel arbitration of the exotic dancers’ claims was denied. With this ruling, the court found it was “keeping in mind the ‘overarching’ concern to do justice, and the fact that arbitration, however valuable and strongly preferred, is meant only to provide an alternative forum to litigation, not to overstuff one party’s quiver.” Id. at 17.
BSC plans to appeal this decision to the Ninth Circuit Court of Appeals.
Liana Carter, Senior Counsel
CAPSTONE LAW APC