Arbitrability of an Arbitration Agreement

Case involving employment claims by exotic dancers moves toward Colorado Supreme Court

A lawsuit filed to challenge the employment classification of exotic dancers may be on its way to the Colorado Supreme Court. 

Judge Raymond Moore in the U.S. District Court for the District of Colorado certified a question for submission to the state’s high court in an order filed Aug. 20 in Santich, et al v. VCG Holding Corp, et al, concerning what circumstances allow a non-signatory to an arbitration agreement to enforce arbitration in claims against them by a signatory. 

The case is one of dozens that have been brought in varying jurisdictions across the U.S. challenging whether exotic dancers should be classified as employees or independent contractors. Dancers often are required to sign employment agreements with terms and conditions indicative of independent contractor status, such as not paying wages and charging them a house fee to perform. 

Binding arbitration clauses are receiving increasing scrutiny in other industries as well. Their use notably received attention in October 2017 when the U.S. Senate voted against a rule banning financial companies from using mandatory arbitration clauses.

Mari Newman, a partner at Killmer Lane & Newman representing the plaintiffs, did not respond to a request for comment. But she told Law Week in December 2017 the case only looks salacious because of the occupation at issue. In actuality, she said, the case involves basic employment claims of workers trying to get paid fairly for the work they do. 

A spokesperson for Jackson Lewis, the firm representing named defendants in the case, could not be reached for comment. Similar cases date back to at least 1987, with Jeffcoat v. State, Department of Labor in Alaska. Dozens of state and federal district courts, as well as the 4th and 5th Circuits, have found that dancers at adult entertainment clubs are employees according to wage laws.

According to Moore’s order, this underlying case challenges actions by the defendants – entities that own clubs across the U.S. – such as denying dancers minimum wages, overtime pay, and the full retention of their tips, as well as subjecting them to fines and charging them fees to work. The case challenges what Newman has said are unlawful arbitration agreements and has sought class certification. The claims fall under the Fair Labor Standards Act and labor laws in a handful of states, including Colorado, Maine and Indiana. 

Last week’s order denied the plaintiffs’ assertion that the court should decide the arbitrability of the claims. Moore affirmed a previous recommendation by a magistrate judge that an arbitrator decide arbitrability because each plaintiff had signed an agreement clearly delegating that authority, and because the plaintiffs’ claims of statutory validity and unconscionability did not specifically challenge the delegation clause. 

The plaintiffs have argued procedural unconscionability related to the agreements signed by the dancers because of the manner in which the defendants present them. As Newman explained to Law Week last year, they are given the agreements often after they have been drinking or are undressed. As a result, she said, they can’t legally agree to the contract terms. 

The plaintiffs have argued the arbitration agreements are unenforceable because the waiver of rights to bring a class action violates the National Labor Relations Act and Fair Labor Standards Act. 

Critics of arbitration have argued it goes against the right to sue “enshrined” in the Constitution.

In addition, the magistrate judge recommended although the arbitration agreements’ fee-shifting and cost-sharing provisions preclude the plaintiffs from effectively vindicating their claims, they are severable from the rest of the agreements. 

In determining severability, Moore cited the Colorado Supreme Court precedent Reilly v. Korholz. The case stated even in the case a portion of an agreement at issue were contrary to public policy, “it is severable and does not render the balance of the agreement void or contrary to public policy.”

And the magistrate judge recommended the non-signatory defendants to the arbitration agreements, VCG Holding Corp. and Lowrie Management, could enforce the agreements because claims against the signatory defendants are “interdependent with those against the nonsignatory defendants, and the claims are intertwined with duties and obligations in the leases.”

Moore did not reach whether the defendants’ motion to compel arbitration is dispositive or non-dispositive.

Until the Colorado Supreme Court rules on the question certified, Moore stayed the order to compel arbitration in favor of the signatory defendants and deferred the question of whether the nonsignatory defendants can enforce the arbitration agreements.

— Julia Cardi

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