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Arbitration Class Action Defense Cases-Skirchak v. Dynamics Research: First Circuit Holds Class Action Waiver In Arbitration Clause Unconscionable And Thus Unenforceable In FLSA Class Action

Based on the Specific Facts Presented by this Class Action Case, the District Court Properly Compelled Arbitration of Plaintiffs’ Fair Labor Standards Act and State Law Equivalent Class Action Claims but Properly Found that the Class Action Waiver Clauses in the Employer’s Dispute Resolution Program were Unconscionable First Circuit Holds

Plaintiffs filed a class action lawsuit against their former employer, Dynamics Research, alleging violations of the federal Fair Labor Standards Act (FLSA) and the Massachusetts Minimum Fair Wage Law. Skirchak v. Dynamics Research Corp., ___ F. 3d ___, 2007 WL 4098823, *1 (1st Cir. November 19, 2007). The class action complaint followed a complaint by Skirchak with the U.S. Department of Labor that resulted in an agreement by the company to pay back $75,000 to employees and to change its practices, id. Plaintiffs’ class action alleged that Dynamics misclassified employees as exempt in order to avoid paying them overtime and improperly made partial-day deductions from employee paid leave balances, and sought damages beyond those recovered by the DOL. Id. Defense attorneys moved to dismiss the complaint and compel arbitration pursuant to the terms of a Dispute Resolution Program that required arbitration of all disputes and prohibited class action claims. Id., at *2. The district court granted the defense motion to compel arbitration, but held that class-wide relief could be pursued therein because the class action waiver was unconscionable under Massachusetts state law, id. Our prior article discussing the district court opinion may be found here. Both sides appealed: the defense challenged the striking of the class action waiver; plaintiffs challenged the order compelling arbitration. Id. Plaintiffs subsequently agreed to arbitration but insisted on the right to pursue a class action because the class action waiver was unenforceable, id. The First Circuit affirmed.

Preliminarily, it bears noting that the First Circuit “[did] not reach the argument that waivers of class actions themselves violate either the FLSA or public policy.” Skirchak, at *1. Further, whether plaintiffs will succeed in obtaining class action certification was left to the arbitrator, id. The Circuit Court addressed only (1) whether the arbitration clause was enforceable, and (2) whether the class action waiver was enforceable. The First Circuit began by summarizing the Dispute Resolution Program and the notice provided to employees of its terms. See id., at *2-*3. In pertinent part, the Circuit Court observed that if an employee “read only the e-mail, the descriptive memorandum and the fifteen-page Program description” concerning the Program, she “would not know of the class action waiver.” Id., at *3. The class action waiver clauses were contained only in the Appendices to the Program, id., but even if an employee found the class action waiver provisions he “would likely still be confused” because of apparent inconsistencies in the documentation, id., at *4. Finally, the First Circuit noted that the adopted and implemented by e-mail notification to employees sent shortly before a holiday that deemed employees to have consented to the class action waivers if they returned to work following the holiday. Id., at *5.

As the sole issue before the Circuit Court involved the enforceability of the class action waiver, and as the parties “have affirmatively stated their intention that the court decide the unconscionability and statutory invalidity questions” rather than the arbitrator, “the question of whether the Program…may be enforced under the FAA is for the court.” Skirchak, at *6. If the class action waiver is unconscionable, then it will not be enforced, id., at *6-*7, but the First Circuit also believed that the class action waiver raises concerns that “are akin to issues under the law of waiver of rights granted under federal employment statutes,” the law of which “focuses largely on whether the waiver was knowing and voluntary.” Id., at *7. Congress did not expressly protect class action litigation rights under the FLSA, so the Court “consider[ed] the issues of knowledge and voluntariness insofar as they are pertinent under the state law doctrine of unconscionability,” id.

The Circuit Court refused to consider whether the class action waiver was unconscionable under a “heightened” standard, considering the issue instead “under normal state law unconscionability standards” of Massachusetts law. Skirchak, at *8. Based on its analysis, the First Circuit held that the class action waiver “under these circumstances” is unconscionable and so unenforceable. Id., at *9 (italics in original). The Court stressed, however, that “It is the combination of a series of events which leads us to a conclusion of unconscionability; no single event alone bears the weight of this conclusion and no broader implications should be taken from this opinion.” Id. The Circuit Court summarized its conclusions at page *9 as follows:

The timing, the language, and the format of the presentation of the Program obscured, whether intentionally or not, the waiver of class rights. The waiver lacked both prominence and clarity…. [¶] There was nothing objectionable about the use of e-mail itself. But the content, the obscurity, and the timing of the e-mail and the failure to require a response raise unconscionability concerns.

Accordingly, the First Circuit affirmed the district court order compelling arbitration but striking the class action waiver clauses. Skirchak, at *12. We note, however, that the parties each advised the Circuit Court, at oral argument, that they would prefer to remain in arbitration even if the class action waiver clause is held unconscionable, id.

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