WILLIAM D. QUARLES, JR., District Judge.
Headley Rose, Bryan Harrison, Thomas Zwirecki, Ryan George, John Hamilton, Sean Stuart, Carmen Aumendo, and Chad Schneider (collectively "the plaintiffs") sued New Day Financial, LLC ("New
Rose, Harrison, Zwirecki, George, Hamilton, Aumendo, and Schneider are Maryland residents and former "Account Executives" for New Day, a Maryland corporation with offices in Maryland and Pennsylvania. Compl. ¶¶ 2-6, 8, 9, 16, 17. Stuart, a New York resident, was also an Account Executive for New Day. Id. ¶ 7. The Plaintiffs allege that New Day required them to work at least 65 hours per week, but did not pay them overtime. Id. ¶¶ 19, 20.
As a condition of employment, each Account Executive was required to sign an "Arbitration Agreement" either in mid-2005 if they had worked for New Day before that time, or soon after they began employment. Pls.' Mem. in Op. 9; id. Ex. 1. New Day did not inform any of the plaintiffs about the arbitration agreement before they were required to sign it, and provided about five minutes for each plaintiff to sign the agreement, or 40 minutes to sign a collection of forms including the agreement. Id.
Zwirecki asked if he could take the agreement home to review or redact portions that he did not understand. Id. at 11. New Day denied his requests and told Zwirecki that if he did not sign the agreement he would not be permitted to work for New Day. Id. Each plaintiff signed. Id. Although several plaintiffs requested and were promised copies of the agreement, none received a copy. Id.
The arbitration agreement states that New Day and the employee:
Defs.' Mem. in Supp. Ex. 1. The agreement states that "this agreement to arbitrate shall . . . includ[e] the applicability of this arbitration agreement and the validity of the entire agreement." Id.
The agreement prohibits the parties from participating in "a class action in court or in arbitration, . . . including claims arising under the Federal Fair Labor Standards Act, 29 U.S.C. § 201 et seq.," and from "join[ing] or consolidat[ing] claims with any other claims asserted by any other person." Defs.' Mot. to Compel Ex. 1. It excepts either party's use of judicial "remedies in aid of arbitration. . . [or for] bankruptcy, replevin, judicial foreclosure, injunction, or any other pre-judgment or provisional remedy." Id.
The agreement states:
Defs.' Mem. in Supp. Ex. 1.
The agreement states that it is governed by the Federal Arbitration Act ("FAA"). Id. A paragraph above the signature line states:
Id.
In 2009, nine former employees sued New Day in Pennsylvania,
Applying Pennsylvania common law,
On October 5, 2010, the plaintiffs sued the defendants in this Court for violating the FLSA and the Maryland Wage and Hour Law. ECF No. 1. On November 9, 2010, the defendants moved to dismiss and compel arbitration. ECF No. 8.
Motions to compel arbitration in which the parties dispute the validity of the arbitration agreement are treated as motions for summary judgment. Shaffer v. ACS Gov't Servs., Inc., 321 F.Supp.2d 682, 683-84, 684 n. 1 (D.Md.2004).
The Court must "view the evidence in the light most favorable to ... the nonmovant, and draw all reasonable inferences in h[is] favor," Dennis v. Columbia Colleton Med. Ctr., Inc., 290 F.3d 639, 645 (4th Cir.2002), but it also must abide by the "affirmative obligation of the trial judge to prevent factually unsupported claims and defenses from proceeding to trial," Bouchat v. Balt. Ravens Football Club, Inc., 346 F.3d 514, 526 (4th Cir.2003) (citations and internal quotation marks omitted).
New Day has moved to dismiss and compel arbitration. The plaintiffs argue that New Day's Motion should be denied because the arbitration agreements are unconscionable. To compel arbitration, the movant must show:
Adkins v. Labor Ready, Inc., 303 F.3d 496, 500-01 (4th Cir.2002); see also Hightower v. GMRI, Inc., 272 F.3d 239, 242 (4th Cir.2001). Only the second element is disputed. Pls.' Resp. 2.
Arbitration agreements governed by the FAA are "valid, irrevocable, and enforceable, save upon such grounds as exist at law or equity for the revocation of any contract." 9 U.S.C. § 3 (2006). The validity of an arbitration agreement is determined under state contract formation law. AT & T Mobility, LLC v. Concepcion, ___ U.S. ___, ___ _ ___, 131 S.Ct. 1740, 1745-46, 179 L.Ed.2d 742 (2011); Hill v. PeopleSoft USA, Inc., 412 F.3d 540 (4th Cir.2005).
Under the FAA, the Court must apply the "federal substantive law of arbitrability," which directs the Court to rely on "ordinary state-law principles that govern the formation of contracts" to determine whether the parties agreed to arbitrate. Hill, 412 F.3d at 543 (internal citations and quotation marks omitted); see also AT & T Mobility, LLC, 131 S.Ct. at 1745-46.
Neither party has addressed Schneider's statement that he signed the arbitration agreement in Pennsylvania, Id. Ex. 1, and Hamilton, Aumendo, and Harrison, have not indicated where they signed the agreements. Pls.' Mem. in Op. Ex. 1. Thus, for at least Schneider, this Court must look to Pennsylvania's law, including its choice of law rules to determine the governing law.
Although the Pennsylvania Supreme Court has not expressly rejected the traditional rule of lex locus contractus, the Third Circuit has predicted that the Pennsylvania Supreme Court would reject it and apply the law of the state with (1) the greatest interest in having its law applied and (2) most contacts with the case.
Under this analysis, the Court must first determine whether the laws of Pennsylvania and Maryland conflict. If they do not, no choice of law analysis is necessary and the Court may apply the common rule. Hammersmith, 480 F.3d at 230. If the laws have "relevant differences," the Court must determine whether either state's interests would be harmed by applying the other state's law. Id. If only one state's interests would be harmed, the Court applies the law of that state. Id. If neither state's interests would be harmed, the Court uses the lex locus contractus rule. Id. at 230 n. 9. If both states' interests would be harmed, the Court will apply the law of the state with the greater interest in the application of its law. Id. at 231.
The parties dispute whether the arbitration agreement is void as unconscionable because, among other things, it bars collective action. Defs.' Mem. in Supp. 4-6; Pls.' Mem. in Op. 17-23. Accordingly, the Court must compare Maryland and Pennsylvania's standards for contract unconscionability.
In Maryland, a contract is unconscionable if it is procedurally unconscionable, evidencing "one party's lack of meaningful choice" in making the contract, and substantively unconscionable, containing terms that "unreasonably favor" the more powerful party. Walther v. Sovereign Bank, 386 Md. 412, 426, 872 A.2d 735, 744 (2005).
In Pennsylvania, the test is whether "there was a lack of meaningful choice in the acceptance of the challenged provision" and "the provision unreasonably favors" the contract's proponent. Salley v. Option One Mortg. Corp., 592 Pa. 323, 331, 925 A.2d 115, 119 (2007).
However, the states differ about whether class action bars in arbitration agreements are unconscionable. In Maryland an express waiver of the right to collective action will be enforced, even if it increases the expense of pursuing a claim.
After determining that the laws of the states differ, the Court asks whether either state's interests would be harmed by applying the other state's law. Hammersmith, 480 F.3d at 230. The Court considers the kind of entity each state's law protects. See id. at 232.
Pennsylvania's law is more protective of, and favors, individuals with lesser bargaining power: it resists enforcement of the class-action bans. See Quilloin, 763 F.Supp.2d at 727. Pennsylvania also protects individuals by encouraging class action litigation when individual suits would be impracticable. Thibodeau, 912 A.2d at 885-86.
Maryland's law favors the drafter by rigorously enforcing arbitration agreements. See Walther, 386 Md. at 438, 872 A.2d at 750. Maryland courts "cannot ignore the strong policy, made clear in both federal and Maryland law, that favors the enforcement of arbitration provisions." Id., 386 Md. at 438, 872 A.2d at 751.
Here, no plaintiffs are citizens of Pennsylvania. Compl. ¶¶ 2-9. Thus, Pennsylvania's aversion to class-action bars will not be harmed if the bar is enforced. See Hammersmith, 480 F.3d at 232. New Day, the drafter of the agreement, is a Maryland corporation. Compl. ¶ 10. Maryland law favors the drafters, and the state has an interest in applying its law in this case. See Hammersmith, 480 F.3d at 232. Maryland also has a substantial relationship to the case, as most of the plaintiffs, and the defendants, are Maryland citizens and the plaintiffs worked primarily in Maryland. Compl. ¶¶ 2-10.
The plaintiffs argue that the Defendants are collaterally estopped from relying on the arbitration agreement because of Hopkins. Pls.' Resp. 1-2.
Collateral estoppel bars relitigation of an issue determined in an earlier proceeding when:
Sedlack v. Braswell Svc's Group, Inc., 134 F.3d 219, 224 (4th Cir.1998).
The defendants argue that the issues in this case differ from Hopkins because (1) there was a mixed verdict, (2) the nature of the Pennsylvania legal market was disputed there, and (3) the Hopkins court applied Pennsylvania law. Defs.' Reply 8-9.
Issues are not identical if the governing laws differ.
Collateral estoppel does not bar Rodriguez's suit. A party has had a
A non-party is also bound if she (1) agrees to be bound, (2) had a pre-existing "substantive legal relationship" with a party,
Rodriguez was not a party in Hopkins. See 643 F.Supp.2d at 708 (listing the defendants). However, she is an officer of New Day, a Hopkins party. If New Day had been barred from relitigating, Rodriguez would also be barred.
Because the issues are identical, the Defendants are not barred from litigating the unconscionability of the agreement.
Under Maryland law, an unconscionable contract is void. See Walther v. Sovereign Bank, 386 Md. 412, 426, 872 A.2d 735, 743 (2005). Maryland courts require that a showing of procedural unconscionability—"one party's lack of meaningful choice" in making the contract—and substantive unconscionability—contract terms that "unreasonably favor" the more powerful party—to void the contract. Id., 386 Md. at 426, 872 A.2d at 744.
The plaintiffs argue that the arbitration agreement is procedurally unconscionable because they were given little time to review the terms, were not permitted to consult with others about the meaning of the agreement, and were told that they would lose their jobs if they did not sign it. Pls.' Mem. in Op. 18-19. They contend that the agreement was an adhesion contract, and the defendants intended to avoid explaining its terms to them. Pls.' Mem. in Op. 19-21.
In Maryland, "`the law presumes that a person knows the contents of a document that he executes and understands at least the literal meaning of its terms.'" Walther, 386 Md. at 429, 872 A.2d at 745 (quoting Merit Music Serv., Inc. v. Sonneborn, 245 Md. 213, 221-22, 225 A.2d 470, 474 (1967)).
However, contracts of adhesion-those "offered on a take-it-or-leave-it basis,
The plaintiffs argue that the arbitration agreement is a contract of adhesion because New Day presented the agreements to them on a take-it-or-leave-it basis, with no chance to negotiate the terms. Id., 386 Md. at 430, 872 A.2d at 746. The plaintiffs have presented evidence that they were given the agreement in final form and had no part in drafting it. Pls.' Mem. in Op. 18-19. Further, when Zwirecki asked if he could cross out clauses he did not understand, New Day "told [him] that the documents had to be signed as is, without any cross-outs." Pls.' Mem. in Op. Ex. 1 (emphasis added). Accordingly, a reasonable fact finder could conclude that the arbitration agreements are procedurally unconscionable contracts of adhesion. See Shaffer, 321 F.Supp.2d at 683-84, 684 n. 1.
The plaintiffs argue that the arbitration agreements are substantively unconscionable because they (1) contain a class action waiver, (2) contain an illusionary promise, and (3) grant unequal access to the courts. Pls.' Mem. in Op. 23-25.
The plaintiffs argue that the right to collective action is substantive and may only be knowingly waived. Pls.' Mem. in Op. 23. In support, the plaintiffs rely on Federal cases—decided under Pennsylvania law—which held that when a party signs away substantive rights without reading or understanding what he is signing, his waiver is not knowing or enforceable. Id. (citing Hopkins, 643 F.Supp.2d at 719; Ellis v. Edward D. Jones & Co., L.P., 527 F.Supp.2d 439 (W.D.Pa.2007)).
These cases conflict with Maryland law. First, as discussed above, Maryland law presumes that parties read and understand the contracts they sign. Walther, 386 Md. at 429, 872 A.2d at 745. Here, the class action ban is contained in the main text of the agreement for the employees to read. Defs.' Mem. in Supp. Ex. 1. It is no
Further, the Court of Appeals of Maryland has determined that collective action waivers in arbitration agreements are valid if the agreement is "freely-signed." Walther, 872 A.2d at 750, 386 Md. at 438. The Court of Appeals "would be averse to a holding" otherwise. Id. Maryland courts "cannot ignore the strong policy, made clear in both federal and Maryland law, that favors the enforcement of arbitration provisions." Id., 386 Md. at 438, 872 A.2d at 751.
The plaintiffs also argue that the agreement, by its own terms, cannot take away the right to collective action because the agreement states that both parties would "retain all substantive legal rights and remedies." Pls.' Mem. in Op. 24. As discussed above, the plaintiffs argue that the limitation on collective actions restrains a substantive legal right, and thus conflicts with this clause. Id.
Any internal inconsistency of the agreement is a matter for the arbitrator to consider. See Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) (holding that all issues other than arbitrability, such as fraud in the inducement, are for the arbitrator to decide after a court has determined that the arbitration agreement is valid). An internal inconsistency does not destroy the enforceability of the agreement, and is not relevant to New Day's motion to compel. Id.
Finally, the plaintiffs argue that the agreement unreasonably favors New Day because of the lack of mutuality in court access. Pls.' Mem. in Op. 25. They contend that the agreement allows New Day
Mutuality "does not require an exactly even exchange of identical rights and obligations" between the parties. Walther, 386 Md. at 433, 872 A.2d at 748.
The plaintiffs argue Walther is not determinative because the exception was narrower there. Pls.' Mem. in Op. 26. However, arbitration agreements that more frequently bind the employee than the employer are valid despite the differences in the parties' rights. See Adkins, 303 F.3d at 501-503.
The FAA mandates that "courts cannot treat arbitration in general as an inferior or less reliable means of vindicating important substantive rights." Id. at 502 (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 628, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985)). That an agreement restricts a party's access to a court does not make it unfair; the arbitration is not inferior to the courtroom. Id.
Because there is no genuine dispute of material fact that the arbitration agreement is substantively unreasonable, it will be enforced, and New Day's motion will be granted.
For the reasons stated above, the defendants' motion to dismiss and compel arbitration will be granted.
The plaintiffs argue that Walther is also distinguishable because the underlying claim in that case did not involve "any statutory or substantive right to bring a collective action or join in a collective action," as, they claim, the FLSA creates. Pl. Mem. in Op. 25-26. The plaintiffs rely on 29 U.S.C. § 216(b) for the right to bring a collective action or join in a collective action. Id. However, the Fourth Circuit has determined that the FLSA's right to collective action can be waived in contracts of adhesion such as employment arbitration agreements. See Adkins v. Labor Ready, Inc., 303 F.3d 496, 503 (4th Cir.2002). As in Adkins, that the plaintiffs were not aware of their right to class action does not render the agreement substantively unconscionable. See id.
Assuming, arguendo, that the retention of legal rights clause is an illusionary promise, this fact does not render the agreement substantively unconscionable because that clause does not form the consideration for the agreement. In arbitration agreements, the exchanged promises to arbitrate constitute the consideration that forms the basis of the agreement. See Dieng, 2009 WL 2096076 at *3.
