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Santich v. VCG Holding Corp.

United States District Court, D. Colorado

September 26, 2017

GEORGINA SANTICH, JANEL ANDERSON, JESSICA SAULTERS ARCHULETTA, ADRIANNE AXELSON, EMILY BACHELDER, ALENA BAILEY, RACHEL BERRY, NICOLE BUJOK, BRANDI CAMPBELL, TALITA CATTO, MELISSA CHAVEZ, ARIEL CLINE, MEGAN FITZGERALD, AMANDA GABRIEL, AMY GLINES, JOHANNA GRISSOM, AMANDA LIVINGSTON, ARIELLE MANSFIELD, CHADA MANTOOTH, KARLA MARTINEZ, CHRISTINA MASSARO, ALEXIS NAGLE, LAPORTIA OAKLEY, GALE RAFFAELE, AMRICA TERRELL, PENNY WATKINS, CASANDRA WINDECKER, MELANIE TRACY, PORSCHA GREEN, AMANDA SHAFER, ASHLEY WOZNEAK, REBECCA RAIL, ANDREA ABBOTT, and KIMBERY HALE, all individually and on behalf of all others similarly situated, Plaintiffs,
v.
VCG HOLDING CORP., LOWRIE MANAGEMENT, LLLP, TROY LOWRIE, MICHAEL OCELLO, DENVER RESTAURANT CONCEPTS LP d/b/a PTs Showclub, KENKEV II, INC. d/b/a PTs Showclub Portland, INDY RESTAURANT CONCEPTS, INC. d/b/a PTs Showclub Indy, GLENARM RESTAURANT, LLC d/b/a Diamond Cabaret, GLENDALE RESTAURANT CONCEPTS, LP d/b/a The Penthouse Club, STOUT RESTAURANT CONCEPTS, INC. d/b/a La Boheme, and VCG RESTAURANTS DENVER, INC. d/b/a PT's All Nude, Defendants.

          RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE

          Michael E. Hegarty United States Magistrate Judge

         Defendants seek to compel Plaintiffs to arbitrate this Fair Labor Standards Act (“FLSA”) collective action case. Mot. to Compel Arbitration, ECF No. 74. According to Defendants, every Plaintiff signed binding arbitration agreements containing class-action waivers. Although Plaintiffs do not dispute this, they contend the arbitration agreements are unconscionable and invalid under two federal statutes. Because Plaintiffs' unenforceability arguments do not specifically challenge the clause delegating questions of validity to the arbitrator, the Court agrees with Defendants that the arbitrator must decide whether the parties' arbitration provision is unconscionable and invalid based on federal statutes. Furthermore, although the Court recommends holding that the fee-shifting and cost-sharing provisions in the parties' agreement effectively preclude Plaintiffs from asserting their claims, these provisions are severable from the agreement as a whole. Lastly, the Court recommends holding that the two Defendants who did not sign the arbitration agreements may nevertheless enforce them.

         In light of the Court's recommendation on Defendants' motion to compel arbitration, the Court recommends denying as moot Plaintiffs' motion for conditional certification.

         BACKGROUND

         Plaintiffs-thirty-four exotic dancers-initiated this FLSA collective action on March 10, 2017. Compl., ECF No. 1. In an Amended Complaint, Plaintiffs assert that Defendants-adult entertainment clubs and entities that own the clubs-required them to sign contracts, called “leases, ” that improperly classified them as independent contractors. Am. Compl. ¶¶ 125-94, ECF No. 65. As independent contractors, Plaintiffs did not receive a wage, but instead paid Defendants a fee ranging from $120.00 to $200.00 each time they worked. Id. at ¶¶ 23-24. Further, Defendants allegedly required Plaintiffs to pay them a portion of the tips and other income Plaintiffs received. Id. at ¶ 28. Because Plaintiffs believe they are employees under the FLSA and various state wage acts, they seek “unpaid wages, fees, fines, tips, [and] interest . . . .” Id. at ¶ 141.

         Defendants responded to the Amended Complaint by filing the present Motion to Compel Arbitration, which contends that each Plaintiff signed valid arbitration agreements containing collective action waivers. Mot. to Compel Arbitration 2, ECF No. 74. On June 19, 2017, Plaintiffs submitted their Response to Defendants' Motion to Compel Arbitration, ECF No. 105. Plaintiffs first argue that Defendants VCG Holding Corp and Lowrie Management cannot compel them to arbitration, because these Defendants are not parties to the leases. Id. at 4-6. Next, Plaintiffs assert the arbitration provision is unenforceable, because it is procedurally and substantively unconscionable. Id. at 8-19. In support of their procedural unconscionability argument, Plaintiffs attach their own affidavits, which discuss the conditions surrounding their assent to the leases. See ECF Nos. 106-1-106-12. Regarding substantive unconscionability, Plaintiffs assert the fee-shifting and cost-sharing provisions preclude them from pursuing their claims. Id. at 14-19. Importantly, Plaintiffs argue the Court, not the arbitrator, must decide whether the arbitration provision is unconscionable. Id. at 7-8. Plaintiffs then assert the Court cannot sever the unconscionable provisions, because the arbitration provision “is plainly part of Defendants' scheme to violate the FLSA and other wage laws and to discourage Plaintiffs from enforcing their rights.” Id. at 24. Finally, Plaintiffs contend the class-action waiver is illegal under the National Labor Relations Act (“NLRA”) and the Fair Labor Standards Act (“FLSA”). Id. at 24-29. Although Plaintiffs contend this case undisputedly belongs in federal court, they seek a jury trial under 9 U.S.C. § 4 in the event they have only shown a disputed issue of material fact as to the making of the agreement. Id. at 30.

         On July 10, 2017, Defendants filed their Reply in Support of their Motion to Compel Arbitration, ECF No. 120. Defendants first argue that the arbitrator must decide the validity of the leases, because the arbitration provision contains a clause delegating issues of arbitrability to the arbitrator. Id. at 2-4. Next, assuming the Court disagrees with its delegation argument, Defendants contend that many Plaintiffs have not submitted evidence challenging the validity of their leases, and regardless, the arbitration provision is not unconscionable. Id. at 5-18. Defendants then argue that VCG and Lowrie can compel Plaintiffs to arbitration, because the Amended Complaint relies on the leases and alleges interconnected misconduct between the signatory and nonsignatory Defendants. Id. at 21. Finally, Defendants argue the NLRA and FLSA do not conflict with the leases' class-action waivers. Id. at 21-25.

         Plaintiffs filed a Motion for Leave to File Surreply on July 21, 2017, ECF No. 131. This Court denied Plaintiffs' motion in an August 10, 2018 order. ECF No. 139. The Court held that each of the arguments in Defendants' reply directly rebuts the contentions Plaintiffs asserted in their response. Id. at 4-5. Additionally, although Defendants submitted reply declarations in support of their arguments, those statements directly refuted the statements Plaintiffs made in response. Id. at 5. Plaintiffs subsequently objected to this Court's order denying them leave to file a surreply. ECF No. 142. On September 25, 2017, the Honorable Raymond P. Moore overruled Plaintiffs' objections and affirmed this Court's order. ECF No. 148.

         LEGAL STANDARD

         Issues of arbitrability are governed by the Federal Arbitration Act (“FAA”). Belnap v. Iasis Healthcare, 844 F.3d 1272, 1279 (10th Cir. 2017). Under the FAA, when parties agree to settle a controversy by arbitration, courts must enforce that agreement “save upon grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Such grounds include “generally applicable contract defenses, such as fraud, duress, or unconscionability.” Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 68 (2010) (quoting Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)). Importantly, if a contract contains an arbitration provision, the party opposing arbitration must assert his validity challenges against the arbitration provision, not the contract as a whole. See, e.g., Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 405 (1967) (holding that the arbitrator must decide whether the defendant fraudulently induced the plaintiff to enter into the contract, because the plaintiff did not argue that the defendant fraudulently induced it to agree to the arbitration provision). This is because, if the party opposing arbitration does not contest the validity of the arbitration provision, the agreement to arbitrate “is severable from the remainder of the contract.” Rent-A-Center, W., Inc., 561 U.S. at 70-71.

         Just as parties can agree to arbitrate the merits of a dispute, they can agree to arbitrate arbitrability-i.e. the validity and scope of an arbitration provision. Id. at 69 (“An agreement to arbitrate a gateway issue is simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce, and the FAA operates on this additional arbitration agreement just as it does on any other.”). If the parties' contract delegates issues of arbitrability, the party opposing arbitration must specifically dispute the validity of the delegation clause. Id. at 72. Otherwise, the delegation clause is severable from the arbitration provision as a whole, and the arbitrator must decide arbitrability disputes. Id.

         When analyzing whether the parties agreed to submit a specific dispute to arbitration, “[a]ll ‘doubts are to be resolved in favor of arbitrability.'” Coors Brewing Co. v. Molson Breweries, 51 F.3d 1511, 1514 (10th Cir. 1995) (quoting Oil, Chem., & Atomic Workers Int'l Union, Local 2-124 v. Am. Oil Co., 528 F.2d 252, 254 (10th Cir. 1976)). However, the law reverses the presumption when determining whether parties agreed to arbitrate arbitrability. See, e.g., First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 945 (1995) (“[T]he law treats silence or ambiguity about the question ‘who (primarily) should decide arbitrability' differently from the way it treats silence or ambiguity about the question ‘whether a particular merits-related dispute is arbitrable because it is within the scope of a valid arbitration agreement.”). Upon reviewing the parties' arguments and being satisfied that the making of the agreement to arbitrate (or the agreement to delegate arbitrability) is not in issue, “the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.” 9 U.S.C. § 4.

         ANALYSIS

         Because the question of who should decide arbitrability is a threshold issue, the Court will address it first. Commc'n Workers of Am. v. Avaya, Inc., 693 F.3d 1295, 1303 (10th Cir. 2012) (“The Court should have begun its analysis by asking whether the parties did or said anything to rebut the presumption that questions about the arbitrability of an arbitration dispute will be resolved by the courts.”). The Court recommends reserving Plaintiffs' unconscionability and statutory validity arguments for the arbitrator. The Court will then analyze whether the agreements' fee-shifting clause thwarts Plaintiffs' ability to pursue their FLSA claims. Although the Court finds that shifting fees in the event Defendants prevail would prevent Plaintiffs from pursuing their claims, the Court recommends holding that the invalid provision is severable from the agreement. Finally, the Court recommends permitting the nonsignatory Defendants to compel Plaintiffs to arbitration.

         I. The Arbitrator Must Decide Arbitrability.

         Plaintiffs contend the Court should decide arbitrability, because they “challenge the enforceability of the entire Arbitration Clause, including the ‘delegation' provision.” Resp. to Mot. to Compel Arbitration 7, ECF No. 105. Defendants respond that by relying on the circumstances surrounding the signing of the leases, Plaintiffs' unconscionability arguments challenge the entire agreement, not just the delegation clause. Reply in Support of Mot. to Compel Arbitration 3, ECF No. 120. As such, Defendants assert the arbitrator, not the Court, must decide the validity of the leases. Id. at 4.

         Courts have identified two subissues when analyzing whether an arbitration agreement properly delegates arbitrability disputes. First, the parties must clearly and unmistakably demonstrate their intent to delegate validity disputes to the arbitrator. First Options of Chi. v. Kaplan, 514 U.S. 938, 944 (1995) (“Courts should not assume that the parties agreed to arbitrate arbitrability unless there is ‘clear and unmistakable' evidence that they did so.” (quoting AT&T Techs., Inc. v. Commc'ns Workers, 475 U.S. 643, 649 (1986))). The parties can demonstrate such intent through express language or a course of conduct. Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 79-80 (2010) (Stevens, J., dissenting) (citing First Options of Chi., 514 U.S. at 946).

         Second, courts must analyze whether the party opposing arbitration contests the validity of the agreement as a whole or the arbitration and delegation provisions specifically. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403 (1967) (holding that a court may consider claims for fraudulent inducement as to the arbitration provision itself, but not “claims of fraud in the inducement of the contract generally”); Rent-A-Center, W., Inc., 561 U.S. at 72 (holding that courts may not determine challenges to an arbitration provision when the party opposing arbitration failed to specifically dispute the validity of the clause delegating arbitrability issues to the arbitrator). Challenges to the contract as a whole (or to the arbitration provision as a whole when the provision contains a delegation clause) are for the arbitrator to decide. If the party resisting arbitration does not specifically dispute the validity of the delegation clause, the court must sever that clause and allow the arbitrator to determine the validity of the arbitration provision. Rent-A-Center, W., Inc., 561 U.S. at 72 (“[U]nless [the plaintiff] challenged the delegation provision specifically, [the court] must treat it as valid under § 2, and must enforce it under §§ 3 and 4, leaving any challenge to the validity of the Agreement as a whole to the arbitrator.”).

         The Court first finds the leases clearly and unmistakably agree to arbitrate issues of arbitrability. Then, the Court holds that Plaintiffs' challenges to the leases attack either the agreements as a whole or separate provisions of the agreements. They do not specifically challenge the delegation clause. As such, the Court recommends permitting the arbitrator to determine the validity of the arbitration agreements.

         A. Clear and Unmistakable Intent to Delegate Arbitrability to the Arbitrator

         The parties clearly and unmistakably demonstrate their intent to delegate questions of validity to the arbitrator. Indeed, Plaintiffs do not argue to the contrary. Of the thirty-four plaintiffs in this lawsuit, twenty-seven signed leases containing identical express delegation clauses.[1] These clauses provide: “THE ARBITRATOR SHALL HAVE EXCLUSIVE AUTHORITY TO RESOLVE ANY DISPUTES OVER THE FORMATION, VALIDITY, INTERPRETATION, AND/OR ENFORCEABILITY OF ANY PART OF THIS LEASE, INCLUDING THESE ARBITRATION PROVISIONS.[2] See, e.g., ECF No. 74-13, at 15.

         The remaining seven Plaintiffs' operative leases include provisions incorporating the American Arbitration Association (“AAA”) rules, which permit the arbitrator to determine issues of his own jurisdiction.[3]See Belnap v. Iasis Healthcare, 844 F.3d 1272, 1283 (10th Cir. 2017) (holding that incorporation of the JAMS rules, which are “substantially identical” to the AAA rules, demonstrated clear and unmistakable evidence of intent to arbitrate arbitrability); Dish Network LLC v. Ray, 226 F.Supp.3d 1168, 1173 (D. Colo. 2016) (holding that the parties' “incorporation of the AAA rules constitutes clear and unmistakable evidence of their intent to delegate questions of arbitrability to the ...


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