Skirchak v. Dynamics Research Corp.

Decision Date19 November 2007
Docket NumberNo. 06-2180.,No. 06-2136.,06-2136.,06-2180.
Citation508 F.3d 49
PartiesJoseph SKIRCHAK on behalf of himself and all others similarly situated; Barry L. Aldrich, on behalf of himself and all others similarly situated, Plaintiffs, Appellees/Cross-Appellants, v. DYNAMICS RESEARCH CORPORATION, Defendant, Appellant/Cross-Appellee.
CourtU.S. Court of Appeals — First Circuit

Martin J. Newhouse, Ben Robbins, and New England Legal Foundation on brief for New England Legal Foundation and Associated Industries of Massachusetts, amici curiae.

Shannon Liss-Riordan, with whom Hillary Schwab, Pyle, Rome, Lichten, Ehrenberg & Liss-Riordan, P.C., and Elayne N. Alanis were on brief, for Joseph Skirchak and Barry L. Aldrich.

John Roddy, Elizabeth Ryan, and Roddy, Klein & Ryan on brief for Public Justice, amicus curiae.

Before TORRUELLA, LYNCH, and HOWARD, Circuit Judges.

LYNCH, Circuit Judge.

At issue is the enforceability under Massachusetts law unconscionability doctrine of class action waivers (of Fair Labor Standards Act claims) contained in a company-imposed arbitration/dispute resolution program.

Two managers brought a class action suit against their former employer, Dynamics Research Corporation ("DRC"), for violations of the Fair Labor Standards Act ("FLSA"), 29 U.S.C. § 201 et seq., and the Massachusetts Minimum Fair Wage Law, Mass. Gen. Laws ch. 151, § 1 et seq.

The company moved to compel arbitration under its newly adopted Dispute Resolution Program ("Program") which contains language waiving class actions. The district court ordered arbitration and struck the class waiver provisions, finding them unconscionable and invalid as contrary to the policies animating the FLSA. Skirchak v. Dynamics Research Corp., 432 F.Supp.2d 175 (D.Mass.2006). The company has appealed the decision striking the class action waiver. The plaintiffs have agreed to arbitration but oppose waiver of their ability to pursue a class action in arbitration.

Based on the particular facts of this case, we uphold the striking of the class action waiver on grounds of unconscionability under state law and thus under the Federal Arbitration Act ("FAA"), 9 U.S.C §§ 1-16. Our ruling is narrow. We do not reach the argument that waivers of class actions themselves violate either the FLSA or public policy. The question of whether plaintiffs otherwise meet the requirements for a class action are for the arbitrator to decide.

I.
A. Procedural History

Plaintiffs Joseph Skirchak and Barry Aldrich were employed by DRC, a government contractor of technology services. Skirchak worked in the Human Resources Department as the Director of Compensation and Retirement Programs until his resignation in October 2004; Aldrich was the Vice President of Contracts until his resignation in November 2004.

Following a complaint by Skirchak, the U.S. Department of Labor conducted an investigation into alleged violations of the FLSA in the fall of 2004. As a result, DRC agreed to pay back approximately $75,000 to its employees and change its policies. The plaintiffs then filed a class action complaint in the District of Massachusetts in June 2005 alleging violations of the FLSA and the Massachusetts Minimum Fair Wage Law and seeking treble damages. The complaint alleged that DRC willfully failed to pay plaintiffs, and all other similarly situated employees categorized as "exempt," at time-and-a-half of their regular pay rate for time worked in excess of forty hours per week in violation of federal and state law. Specifically, plaintiffs alleged that up until October 1, 2004, DRC's payroll department made partial-day deductions from each employee's balance of paid leave and this violated the FLSA's salary basis test, resulting in underpayments that violated the FLSA and the Massachusetts Minimum Fair Wage Law. The plaintiffs' suit claimed damages beyond any relief obtained as a result of the Department of Labor investigation.

DRC never filed an answer, but instead moved to dismiss the complaint and compel arbitration in accordance with its 2003 Dispute Resolution Program, which, DRC contended, constituted an agreement between the parties to arbitrate all disputes. The Program, in certain clauses, required the plaintiffs to proceed in arbitration individually, as opposed to in a class action. The plaintiffs opposed the defendant's motion.

The district court, on April 6, 2006, issued an order compelling arbitration, but striking the part of the Program which barred class actions. Skirchak, 432 F.Supp.2d at 181. The court found the class action waiver unconscionable under Massachusetts state law, finding procedural defects in the way it was adopted, that it was so one-sided as to be oppressive, and that the waiver was contrary to the purpose of the FLSA. Id. at 180-181. Both parties appealed: the defendant appealed the striking of the class action waiver, and the plaintiffs initially appealed the order compelling arbitration. The plaintiffs now agree to arbitration and argue only that the class action waiver is unenforceable.

B. The Dispute Resolution Program

We describe the essential facts surrounding the Program and its adoption. Roughly a year before the plaintiffs left the company, on Tuesday, November 25, 2003, at 11:42am, two days before the Thanksgiving holiday, DRC sent a five-line e-mail to all of its employees asking them to read three attached documents describing the company's new "Dispute Resolution Program". [The third attachment is not in the record and apparently is not in dispute.] Nothing in the e-mail mentioned that the attachments constituted modifications to the employees' terms of employment or employment contract, nor that the documents restricted the employees' rights to a judicial forum, nor that they waived class actions. Further, no response to the e-mail was required, nor were employees asked to acknowledge reading the documents.

The initial attachment, which appeared first after the body of the e-mail, contained a two-page memorandum introducing the Program. That memorandum explained that the Program took effect on the following Monday, December 1, 2003, and applied to all work-related disputes between the company and its employees. The memorandum stated that the Program "expands upon" and "enhance[s]" DRC's previous problem resolution process by requiring mediation and arbitration, described as "two additional and more formal processes for resolving disputes between an employee and the company." The "enhanced" Program would "create improved, reasoned, predictable, and reliable processes" that would "provide the same resolution as can be obtained through the court system but with less cost and complications for all parties." Lastly, the memorandum reiterated that "[t]he program does not limit or change any substantive legal rights of our employees, but it does require that you seek resolution of such rights and complaints by following the procedures of the program." (Emphasis added.) This language is in some tension with later waiver language contained in the other attached documents. An employee who stopped after reading the descriptive memorandum would not know of the class action waiver.

A second attachment contained the actual text of the Program in four parts: a broadly-phrased, fifteen-page description of the Program, two appendices describing the Program's rules, and a third appendix containing relevant forms. The scope of the Program, by its terms, is broad and encompasses claims under federal and state employment statutes and matters of interpretation of the Program's rules. The Program applies to all "Disputes," defined as "any dispute for controversy including all legal and equitable claims, demands, and controversies, of whatever nature or kind, whether in contract, tort, under statute or regulation, or at law or in equity, between persons and entities bound by the Program ... including, but not limited to, any matters with respect to ... this Program...." The Program also covers claims premised on "allegations of[] discrimination based on race, sex, religion, national origin, or disability; sexual harassment; workers' compensation retaliation; [and] defamation...." The Program also instructs the arbitrator to construe the scope of the Program liberally: "The arbitrator shall interpret and apply these Rules to the greatest extent possible insofar as they relate to the arbitrator's powers and duties." There is also a severability clause. Should a section or a provision of the Program be invalidated, the Program provides: "The invalidity or unenforceability of any provision herein shall not affect the application of any other provision or any jurisdiction in which such a provision may be lawful."

The fifteen-page Program description, plus its three Appendices, constitutes a thirty-three-page document. An employee who read only the e-mail, the descriptive memorandum and the fifteen-page Program description would not know of the class action waiver.

The two class action waiver clauses are contained in the Appendices to the Program. The first is in Appendix A, entitled "Dynamics Research Corporation's Dispute Resolution Program Rules." Rule 12 is entitled "Authority" and states: "The Arbitrator shall have no authority to consider class claims or join different claimants or grant relief other than on an individual basis to the individual employee involved. The right of any party to pursue a class action for any Dispute subject to the Program shall be waived to the fullest extent permitted by law." (Emphasis added.) The language is some twenty pages into the thirty-three pages of the Program and the Appendices.

Later, in Appendix B, entitled "Dynamics Research Corporation's Dispute Resolution Program Arbitration Rules," there is a second waiver clause in Rule...

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