The recent decision of the U.S. Court of Appeals for the Third Circuit in Quilloin v. Tenet Healthsystem, No. 11-1393, 2012 U.S. App. 5353 (3d Cir. March 14, 2012), comes at the intersection of the proliferation of wage-and-hour claims under the Fair Labor Standards Act and the continued use of arbitration agreements for individual employees. That is, the Third Circuit addressed whether the arbitration agreement signed by the plaintiff required her (as class representative) to arbitrate the potential FLSA class action.

Arbitration Agreement Signed

According to the opinion, Janice Quilloin, a registered nurse with an associate’s degree, began working at Hahnemann University Hospital (owned by Tenet) in October 2006. She resigned in February 2008 to take another job but returned to Hahnemann in December 2008. Around the time she commenced both terms of employment, Quilloin signed an “Employee Acknowledgment” form, acknowledging receipt of Tenet’s mandatory arbitration process, called the “Fair Treatment Process.” The FTP provided, in part, that “final and binding arbitration will be the sole and exclusive remedy for any … claim or dispute against Tenet (related in any way to my employment).”

The FTP brochure set forth an internal grievance process and, significantly, provided that “any request for arbitration … must be made within one year after the event giving rise to the dispute” unless a longer limitations period is provided by statute, according to the opinion. Additionally, the FTP provided that each party would be responsible for its own attorney fees, although an arbitrator had authority “to award any remedy that would have been available” had the matter been litigated in court.

Class Action Filed

In December 2009, shortly after resigning her employment for the second time, Quilloin filed a collection action against Tenet under the FLSA in the U.S. District Court for the Eastern District of Pennsylvania. Tenet asserted the existence of an arbitration agreement as an affirmative defense and subsequently filed a motion to compel compliance with the agreement to arbitrate.

The district court denied the motion to compel arbitration, finding there to be genuine issues of material fact as to whether the arbitration agreement was enforceable. Tenet appealed.

After initially determining that the fact that Quilloin did not challenge any specific clause of the FTP did not preclude her overall challenge to the FTP’s validity, the court turned to the substantive determination as to whether the FTP raised genuine issues of unconscionability.

No Substantive Unconscionability

Initially, the court noted that state contract principles guide a determination as to whether an arbitration agreement is unconscionable, to the extent that state law is not displaced by the Federal Arbitration Act. In this regard, the court said, “to prove unconscionability under Pennsylvania law, a party must show that the contract was both substantively and procedurally unconscionable.”

The district court found that the FTP was substantively unconscionable on three grounds. First, it found that the FTP contained a potential prohibition against recovery of attorney fees and costs. Secondly, it found that the FTP potentially included a class action waiver and, finally, the FTP permitted the possibility that Tenet could “run out the clock” on an individual’s statute of limitations. The Third Circuit disagreed with all three parts of the district court’s decision regarding substantive unconscionability.

Initially, the court found the FTP to be ambiguous as to whether a prevailing plaintiff could recovery attorney fees. “The Supreme Court has clearly established that ambiguities in arbitration agreements must be interpreted by the arbitrator,” the Third Circuit opinion said. As such, the district court erred in addressing this issue, rather than allowing it to be preliminarily decided by the arbitrator.

Secondly, the appellate court found that the arbitration agreement does not contain an “express class action waiver.” Rather, the court said, under Supreme Court precedent, “the actual determination as whether a class action is prohibited [by an arbitration provision] is a question of interpretation and procedure for the arbitrator,” citing Stolt-Nielsen S.A. v. AnimalFeeds Int’l , 130 S.Ct. 1758, 1775 (2010). The Third Circuit found that because this was an issue of contract interpretation, “the district court erred in addressing the hypothetical situation that might or might not arise depending on the arbitrator’s interpretation of the arbitration agreement.”

The court continued, however, by finding that “even if the agreement explicitly waived Quilloin’s right to pursue class actions, the Pennsylvania law prohibiting class action waivers is surely pre-empted by the FAA.” Specifically, under the Supreme Court’s recent decision in AT&T Mobility LLC v. Concepcion , 131 S.Ct. 1740 (2011), the court found that the Pennsylvania law was inconsistent with the FAA’s purpose “because it is exactly the type of law that singles out the provisions of arbitration agreements and derives its meaning from the fact that an agreement to arbitrate is at issue.” As such, the court observed that even if the district court had properly addressed whether the FTP complied with Pennsylvania law, the law, itself, could not bar the arbitration of class actions.

Finally, Quilloin argued that the arbitration agreement was substantively unconscionable because it would permit Tenet to “run out the clock” on the FLSA’s statute of limitations. Specifically, because the FTP had only approximate time limits for Tenet to act, Quilloin argued, and the district court agreed that this allowed for the possibility that Tenet could delay its response such that a potential plaintiff’s claim would be untimely under the FLSA. The Third Circuit rejected this argument based primarily on the ground that Quilloin could always move to compel arbitration so as to preserve her claims in a timely manner under the act.

No Procedural Unconscionability

The Third Circuit then addressed Quilloin’s arguments of procedural unconscionability. “A contract is procedurally unconscionable [under Pennsylvania law] where there was a lack of meaningful choice in the acceptance of the challenged provision,” the court said. The court observed that this generally takes the form of a contract of adhesion, which is a “standard-form contract prepared by one party, to be signed by the party in a weaker position, usually a consumer, who adheres to the contract with little choice about the terms.”

While recognizing that there was a disparity in the bargaining power between Quilloin and Tenet, the court said that “contracts cannot be deemed unconscionable simply because of a disparity in bargaining power.” In this case, because Quilloin was more than “minimally educated” and because she clearly had other employment options (having resigned from Tenet previously for another job), the court found that she “did not lack a meaningful choice.” As such, there was no procedural unconscionability either.

Quilloin is a significant decision in potentially protecting all employers, but most significantly those in health care, from the type of FLSA litigation that has become so prevalent in recent years. While many employers choose not to use arbitration agreements, for various reasons, their usefulness in diminishing the impact of wage-and-hour class actions may increase their use in the future. •

Sid Steinberg is a partner in Post & Schell’s business law and litigation department. He concentrates his national litigation and consulting practice in the field of employment and employee relations law. Steinberg has lectured extensively on all aspects of employment law, including Title VII, the FMLA and the ADA.