Colorado Supreme Court Looks at Equitable Estoppel in Arbitration Context

Question sprung up in class employment claims brought by exotic dancers

The Colorado Supreme Court has decided class-action employment claims against several corporate parent companies can go forward in federal district court instead of arbitration. 

In Santich v. VCG Holding Corp., a group of exotic dancers represented by Killmer Lane & Newman brought state and federal wage claims against several adult clubs and parent companies. They claim they have been misclassified by the clubs as independent contractors rather than employees, and the clubs have used that classification to avoid paying the dancers a minimum wage, making them share the tips they earn and requiring them to pay stage fees. 

The lawsuit challenged the validity of the agreements the clubs require dancers to sign, which include a mandatory arbitration clause. The clubs’ parent companies named in the case are not parties to the agreements but have also sought to compel arbitration for the dancers’ claims against them. 

The Supreme Court didn’t look at the dancers’ employment classification. Instead, it certified a question from the U.S. District Court for the District of Colorado to analyze when a nonsignatory to an arbitration agreement is entitled to equitable estoppel can compel arbitration for claims against them anyway.

The court ruled the requirements aren’t any different in the arbitration context than any other context. Among those requirements, the nonsignatory has to show detrimental reliance, said the Supreme Court. 

According to the opinion, the club owner defendants have successfully enforced the arbitration clause. 

“The corporate-parent defendants seek to do the same, but because they were not parties to the agreements or to any other written contract with the dancers, they have to find a different hook to compel the dancers into arbitration,” wrote Justice Melissa Hart in the opinion.

The parent companies argued they are entitled to equitable estoppel against the dancers litigating their claims, since the dancers are in compelled arbitration for the same claims against the clubs. Under Colorado law, the concept comes up when a party detrimentally, but reasonably, relied on another party’s actions and as a result changed position. 

According the state Supreme Court precedent, equitable estoppel requires four elements:

• the opposite party has to know the relevant facts;

• that party has to intend for its conduct to be acted on or lead the other party to that belief;

• the party claiming estoppel has to be ignorant of true facts; and

• the party claiming estoppel has to detrimentally rely on the other party’s conduct.

According to the opinion, a magistrate on the U.S. District Court for the District of Colorado made a recommendation that the district court accept the parent companies’ arguments and enforce the arbitration clause for the dancers’ claims against the corporate-parent defendants.

But the magistrate based the recommendation at least in part on a prediction that the Supreme Court would adopt analysis from a 2015 Court of Appeals decision, Meister v. Stout, according to the Supreme Court. 

That case ruled a signatory to a contract that has an arbitration clause brings a contract claim against a nonsignatory defendant, the defendant can claim estoppel against litigating the claims.

But the federal court also noted the Meister case didn’t address whether detrimental reliance is required under Colorado law for equitable estoppel against litigation and certified that question to the state Supreme Court to answer. In its opinion, the Supreme Court noted the Meister decision is an outlier in state law. 

Hart wrote the Court of Appeals’ justification for adopting a new theory of equitable estoppel based on Colorado’s “strong policy favoring arbitration agreements” isn’t enough to support creating the new theory “unmoored from the basic premise of the doctrine.”

In an email, Killmer Lane & Newman attorney Mari Newman confirmed that based on the Supreme Court’s ruling, the dancers’ claims against the parent companies can go forward in district court. 

Rudy Verner, a partner at Berg Hill Greenleaf + Ruscitti who argued for the defendants, hadn’t responded to a request for comment by press time.

On the case’s broader impact, Newman said, “The constitutional right to a jury trial is a pillar of our legal system, but we are being systematically stripped of this fundamental right by large corporations that force workers and consumers to arbitrate their legal claims. This Colorado Supreme Court decision places limits on the ability of these corporations to deprive workers and consumers of their right to a day in court.”

Sarah Parady of Lowery Parady and Joan Bechtold of Sweeney & Bechtold submitted an amicus brief on behalf of state and national trial lawyer associations discussing what the organizations see as harmful impacts on workers’ rights of the wide use of arbitration agreements. 

Employers “have used their ‘superior bargaining power to define the parameters of the dispute resolution process,’ typically through the drafting of class action waivers,” reads the brief. “Courts have allowed such waivers to quash collective participation in the FLSA context.” 

Class-based legal action is seen as a tool for individual people to pursue claims when they otherwise have limited resources or small claims that aren’t economically viable for lawyers to take. Criticism of mandatory arbitration clauses has also sprung up in consumer contexts such as banking and telecommunications.

— Julia Cardi

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