Kenneth Johnson, et al. v. Carmax, Inc., et al.

Filing 29

MEMORANDUM OPINION. It is so ORDERED. Signed by District Judge James R. Spencer on 07/14/2010. (walk, )

]IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA RICHMOND DIVISION KENNETH JOHNSON and CERONE MCTAVOUS, individually and on behalf of all persons similarly situated, v. Plaintiffs, Action No. 3:10­CV­213

CARMAX, INC. and CARMAX AUTO SUPERSTORES, INC., Defendants. MEMORANDUM OPINION THIS MATTER is before the Court on Defendants' Motion to Dismiss or Alternatively to Stay Pursuant to the Federal Arbitration Act (Dock. No. 14). For the reasons stated below, the Court will GRANT the Motion to Dismiss. Plaintiffs' Motion to Defer Ruling on Defendants' Motion to Dismiss (Dock. No. 24) will be DENIED. I. BACKGROUND P l a i n t i f f K e n n e t h J o h n s o n w o r k e d on automobiles as detailer for D e f e n d a n t C a r M a x Auto Superstores, Inc. ("CarMax") in Irving, Texas from July 2007 to December 2009.1 Plaintiff Cerone McTavous has worked as a detailer at a CarMax store in Orlando, Florida since 2003. T o b e c o n s i d e r e d f o r a p o s i t i o n a t C a r M a x , P l a i n t i f f s h a d t o s i gn a Dispute Resolution

Plaintiffs also assert their claims against Defendant CarMax, Inc. In its memorandum in support of its motion to dismiss, CarMax Auto Superstores, Inc. n o t e s t h a t C a r m a x , I n c . i s a holding company that does not employ any associates. (CarMax M emo. 1 n.1.) 1

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Agreement. The Agreement mandates that both CarMax and the applicant settle "any and all previously unasserted claims, disputes, or controversies ar i s i n g o u t o f o r r e l a t i n g t o [ t h i s ] a p p l i c a t i o n o r c a n d i d a c y f or employment and employment a n d / o r c e s s a t i o n o f employment with CarMax, exclusiv e l y b y f i n a l a n d b i n d i n g a r b i t r a t i o n b e f o r e a n e u t r a l Arbitrator." (CarMax Memo., Ex. 1.)2 The Agreement further states that any arbitration will be conducted in accordance w ith the "CarMax Dispute Resolu t i o n R u l e s a n d Procedures." The Rules and Procedures are not part of the sixpage Agreement, but by signing the Agreement, the applicant agrees that he has "read t h i s A g r e e m e n t a n d u n d e r s t a n d [ s ] t h a t [ h e ] s h o u l d r ead the Dispute Resolution Rule s a n d P r o c e d u r e s p r i o r t o a c c e p t i n g a n o f f e r o f e m p l o y m e n t with CarMax." (CarMax Memo., Ex. 1.) McTavous signed the Agreement on March 18, 2003. Johnson signed the Agreement on July 19, 2007. Both were eventually hired by CarMax. Rule 2 of the Rules and Procedures controls the scope of the ar b i t r a t i o n a g r e e m e n t . It requires that "any and all employmentrelated legal disputes . . . arising out of . . . an Associate's . . . employment with . . . CarMax . . . shall be s e t t l e d e x c l u s i v e l y b y f i n a l a n d binding arbitration . . . ." The Rule goes on to expressly sta te that an example of a claim covered by the arbitration agreement is a claim arising under the Fair Labor Standards Act. The Rules also control the arbitration process itself. Rule 7 states that both parties have the right to be represented by counsel of their choosing. Rule 9 prohibits the

There are some differences between the Agreements signed by the Plaintiffs, however, none appear to be relevant to thi s dispute. Whether there are di f f e r e n c e s b e t w e e n t h e Rules referenced in the Agreements signed by the Plaintiffs is unknown at this point. CarMax has only provided one ver sion of the Rules. Plaintiffs have not made any objection on this point. 2

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arbitrator from consolidating claims of different individuals i nto one proceeding and f u r t h e r s t a t e s t h a t t h e a r b i t r a t o r m a y n o t h e a r a n a r b i t r a t i o n as a class action. The Rules r e q u i r e t h e a r b i t r a t o r t o a p p l y the substantive law applicable t o t h e c l a i m s a t i s s u e a n d s p e c i f i c a l l y a l l o w s t h e a s s o c i a t e t o s e e k a n y a v a i l a b l e r e m e d y under that law. Rule 6 specifies that the arbitration should occur in the city nearest to where the employee was employed. Under the Rules, CarMax must pay certain costs of th e arbitration, such as the filing and administrative fees, hourly charges by the arbitrato r, and room rental fees. I n M a r c h 2 0 1 0 , P l a i n t i f f s f i l e d t h e i r C o m p l a i n t , a s s e r t i n g t h a t by failing to pay P l a i n t i f f s o v e r t i m e p r e m i u m p a y calculated at one and onehalf t i m e s t h e i r r e g u l a r r a t e o f pay for all hours worked over forty hours during a workweek, Ca r M a x h a d v i o l a t e d t h e F a i r Labor Standards Act ("FLSA"). The case is styled as a collecti v e a c t i o n , m e a n i n g t h a t o t h e r similarly situated individuals may "opt in" and join Johnson an d McTavous as a plaintiffs to the action. 29 U.S.C. § 216(b). Thus far, only these two indi v i d u a l s h a v e o p t e d i n . CarMax has now filed this Motion to Dismiss, or Alternatively t o S t a y , c o n t e n d i n g that the claims must go to arbitration on an individual basis under the parties' arbitration a g r e e m e n t . P l a i n t i f f s o p p o s e t h e M o t i o n a n d a l s o m a i n t a i n t h a t at a minimum the Court should grant discovery to ascertain the circumstances surroundi n g C a r M a x ' s a d o p t i o n o f the consolidation prohibition in the arbitration Rules. II. DISCUSSION U n d e r t h e F e d e r a l A r b i t r a t i o n A c t , a w r i t t e n a r b i t r a t i o n a g r e e me n t " s h a l l b e v a l i d , i r r e v o c a b l e , a n d e n f o r c e a b l e , s a ve upon such grounds as exist a t l a w o r i n e q u i t y f o r t h e revocation of any contract." 9 U.S.C. § 2. The Supreme Court has long recognized and

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enforced a liberal federal policy favoring arbitration. Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24­25 (1983). However, "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." Steelworkers v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582 (1960). A party can compel arbitration if it establishes: "`(1) the existence of a dispute b e t w e e n t h e p a r t i e s , ( 2 ) a w r i t t e n a g r e e m e n t t h a t i n c l u d e s a n a rbitration provision which purports to cover the dispute, (3) the relationship of the transaction, which is evidenced by the agreement, to interstate or foreign commerce, and (4) the failure, neglect or refusal of the [opposing party] to arbitrate the dispute.'" Adkins v. Labor Ready, Inc., 303 F.3d 496, 50001 (4th Cir. 2002) (quoting Whiteside v. Teltech Corp., 940 F.2d 99, 102 (4th Cir. 1991)). Here, there is no debate that the parties have a dispute concerning overtime pay, that the parties' relationship touches interstate commerce, and that Plaintiffs are refusing to arbitrate the dispute. The parties disagree, however, on whether a valid written a g r e e m e n t e x i s t s t h a t i n c l u d e s a n a r b i t r a t i o n p r o v i s i o n w h i c h c overs the dispute. Whether a party agreed to arbitrate a particular dispute is a question of state law governing contract formation. First Options of Chicago, Inc. v. Kaplan , 514 U.S. 938, 944 (1995). To decide which state's law to apply, the Court must first deci de which conflicts rules to apply. Although Plaintiffs' suit arises under federal law, the federal statute in this c a s e i n c o r p o r a t e s a m a t t e r w h i c h is the subject of state law. I n a s i m i l a r s i t u a t i o n , t h e Fourth Circuit held that a federal court facing a federal question that incorporates a state law issue should apply the conflicts rules of the state in which it sits absent a compelling

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f e d e r a l i n t e r e s t d i c t a t i n g o t h e r w i s e . S e e I n r e M e r r i t t D r e d g i n g C o ., 839 F.2d 203, 206 (4th Cir. 1988); see also Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). Here, no "overwhelming" federal interest readily comes to mind; moreover, it would actually be m o r e o f a n a n o m a l y t o i n t e r p r e t t h e A g r e e m e n t s i n t h i s c a s e u s i n g a d i f f e r e n t s t a t e ' s l a w depending on whether the claim was a federal question claim or a state law contract claim brought under the diversity statute. See In re Merritt Dredging Co., 839 F.2d at 206. As a result, Virginia's conflicts rules apply, which mandate that the law of the place where the contract was made governs questions of interpretation, validity, and enforceability of a contract.3 Johnson v. MPR Assocs., Inc., 894 F. Supp. 255, 258 n.1 (E.D. Va. 1994). Hence, as to Johnson's contract the Court must apply Texas law and as to McTavous's contract the Court must apply Florida law. Under either Texas or Florida law, or most likely the law of ev e r y s t a t e f o r t h a t m a t t e r , t h e C o u r t ' s j o b i s t o g i ve e f f e c t t o t h e c o n t r a c t t h e p a r t i e s m a d e , w i t h a p r e f e r e n c e f o r a n i n t e r p r e t a t i o n t h a t r e c o n c i l e s a l l o f t h e t e r m s o f t h e a greement. Whitley v. Royal T r a i l s P r o p . O w n e r s ' A s s ' n , I n c ., 910 So.2d 381, 385 (Fla. Dist. Ct. App. 2005); Healthcare Cable Sys., Inc. v. Good Shepherd Hosp., Inc., 180 S.W.3d 787, 791 (Tex. App. 2005). Moreover, the contract's terms should be given their plain, ord i n a r y , a n d g e n e r a l l y a c c e p t e d m e a n i n g u n l e s s t h e i n s t rument shows that the parties u sed such terms in a technical or different sense. Equitable Life Assurance Soc. of U. S. v. Pinon, 344 So.2d 880,

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In any event, if the Court were to apply the federal common law of conflicts, which generally requires courts to appl y the law of the forum with the g r e a t e s t i n t e r e s t i n t h e litigation, see, e.g., In re Koreag, Controle et Revision S.A., 961 F.2d 341, 350 (2d Cir. 1992), the end result would not change for either Plaintiff. 5

882 (Fla. Dist. Ct. App. 1977); Healthcare Cable Sys. , 180 S.W.3d at 791. In this case, those principles lead the Court to find that Plaintiffs' claims are c overed by the arbitration provision in their Agreements. Plaintiffs and CarMax each agreed under the CarMax Dispute Resolution Rules and Procedures, which were incorporated into their Agreement, that "any and all employmentrelated legal disputes . . . arising out of . . . an Associate's . . . e m p l o y m e n t w i t h . . . C a r M a x . . . shall be settled exclusively b y f i n a l a n d b i n d i n g a r b i t r a t i o n . . . ." The Rules expressly stat e t h a t a n " e m p l o y m e n t r e l a t e d legal dispute," includes a claim a r i s i n g u n d e r t h e F a i r L a b o r S t a n d a r d s A c t . A d d i t i o n a l l y , t h e Rules mandate that the arbitration should be conducted on an individual, not collective basis. The Rules state the "Arbitrator shall not consolidate claims of different Associates into one proceeding . . . ." R u l e 6 f u r t h e r s t a t e s t h a t a n y a rbitration that occurs shall be h e l d i n t h e c i t y n e a r e s t t h e location where the employee was employed with CarMax. The plai n l a n g u a g e o f t h e s e provisions clearly prohibits Pla i n t i f f s f r o m b r i n g i n g t h e i r c l a i m i n t h i s C o u r t a n d furthermore from pursuing this claim on a collective basis in any forum. Plaintiffs attempt to circumvent this result by asserting that the Rules do not m e n t i o n " c o l l e c t i v e a c t i o n s " u n d e r S e c t i o n 1 6 o f t h e F L S A . F o r s u p p o r t , t h e y c i t e s e v e r a l federal district court cases out of the Southern District of Florida which deal with the distinction between a class action under Federal Rule of Civil Procedure 23 and a collective action under Section 16(b) of the FLSA. Those cases, however, do not confront the a r b i t r a t i o n a g r e e m e n t b i n d i n g o n t h e p a r t i e s i n t h i s c a s e . A l t hough Plaintiffs correctly note that the FLSA permits collective actions in contrast to class a ctions, which are r e p r e s e n t a t i v e i n n a t u r e , P l a i n t i f f s c a n n o t e s c a p e t h a t t h e A g r eement covers FLSA claims

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whether those claims are brought individually or collectively or as a class. The parties' discussion of the recent Supreme Court case of StoltNielsen S.A. v. AnimalFeeds Int'l Corp., 130 S. Ct. 1758 (2010), which confronted whether a party could be forced to arbitrate claims as a class action when the arbitrati o n a g r e e m e n t w a s s i l e n t o n the issue, need not be addressed here, because the Agreement is not silent on the issue. Plaintiffs next argue that if the Agreements are interpreted to cover this dispute, t h e y a r e u n c o n s c i o n a b l e c o n t r a c t s o f a d h e s i o n t h a t c a n n o t b e e n forced. Under both Florida and Texas law, unconscionability requires two aspects: procedural and substantive unconscionability. La Torre v. BFS Retail & Commercial Operations, LLC, No. 0822046, 2008 WL 5156301, at *35 (S.D. Fla. Dec. 8, 2008); AutoNation USA Corp. v. Leroy, 105 S.W.3d 190, 198 (Tex. App. 2003). Procedural unconscionability focuses on the circumstances surrounding the creation of the arbitration provision; substantive u n c o n s c i o n a b i l i t y f o c u s e s o n t h e f a i r n e s s o f t h e a r b i t r a t i o n p ro v i s i o n i t s e l f . L a T o r r e , 2 0 0 8 WL 5156301, at *35; AutoNation, 105 S.W.3d at 198. Plaintiffs assert the Agreements are procedurally unconscionable because the unequal bargaining power of the parties and the fact that they were unemployed when they entered into the contracts made the Agreements contracts of adhesion. The A g r e e m e n t s a r e s u b s t a n t i v e l y u n c o n s c i o n a b l e , P l a i n t i f f s s a y , b e cause barring collective actions would provide CarMax wit h a s i g n i f i c a n t a d v a n t a g e d u e t o the economic realities of prosecuting individual FLSA claims. Plaintiffs also note they did not read the Agreements before signing them. Lastly, Plaintiffs suggest that if the Court is unwilling to find the Agreements unconscionable, then they should be granted leave to take limited discovery to

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request information from CarMax on whether it viewed the Agreements at issue as applying to collective actions. These arguments are unpersuasive. The Agreements, as interpret ed, are not unconscionable. The alleged unequal bargaining power in this case is insufficient to support procedural unconscionability. La Torre, 2008 WL 5156301, at *35; In re Halliburton Co., 80 S.W.3d 566, 572 (Tex. 2002). Prohibiting consolidated suits is not s u b s t a n t i v e l y u n c o n s c i o n a b l e e i t h e r . S e e L a T o r r e , 2 0 0 8 W L 5 1 5 6 3 0 1 , a t * 5 ( c o n c l u d i n g t h a t c l a s s a c t i o n w a i v e r i n a r b i t r a t i o n a g r e e m e n t n o t s u b s t a n t i vely unconscionable); Marsh v . F i r s t U S A B a n k , 103 F. Supp. 2d 909, 924 (N.D. Tex. 2000) (concluding that cl a s s a c t i o n waiver in arbitration agreement was enforceable). Requiring Plaintiffs to arbitrate their claims individually does not dimi n i s h e i t h e r t h e r e m e d i a l o r p r o t e c t i v e f u n c t i o n s o f t h e FLSA. See Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 227 (1987) (holding that a n a r b i t r a t i o n a g r e e m e n t m a y b e i n v a l i d a t e d i f p a r t y o p p o s i n g a rbitration shows that Congress intended another federal statute to preclude waiver of that statute's judicial remedy). Moreover, all of the r emedies available under the FLS A will be available in arbitration. Accordingly, Plaintiffs' statutory rights will be a d e q u a t e l y p r e s e r v e d i n arbitration, even in the absence of a collective action. Plaintiffs, in their opposition memorandum and a separate motion, request the opportunity to conduct discovery regarding the genesis of CarMax's arbitration agreement provisions, should the Court consider granting this Motion. However, neither Plaintiffs' f i l i n g s n o r a n y t h i n g e l s e i n t h e record present circumstances i n which additional discovery would change the Court's conclusion.

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The final issue the Court must resolve is whether this case should be dismissed or s t a y e d . A l t h o u g h s e c t i o n 3 o f t h e F A A p r o v i d e s f o r a s t a y o f an y l a w s u i t u n t i l a r b i t r a t i o n has been completed, this rule "was not intended to limit dismissal of a case in the proper circumstances." Alford v. Dean Witter Reynolds Inc., 975 F.2d 1161, 1164 (5th Cir. 1992). As a result, the Court will dismiss the case as all issues presented by Plaintiffs' Complaint are subject to the parties' arbi t r a t i o n a g r e e m e n t . R e t a i n i n g j u r i s d i c t i o n a n d s t a y i n g t h i s action will serve no purpose. Any postarbitration remedies sought by the parties will not entail renewed consideration and adjudication of the merits of the controversy, but would be circumscribed to a judicial review of the arbitrator's award in the limited manner prescribed by law. See 9 U.S.C. §§ 912. III. CONCLUSION For the foregoing reasons, the Court GRANTS the Motion to Dismiss. Let the Clerk send a copy of this Memorandum to all counsel of record. An appropriate order will issue. It is SO ORDERED. /s/ James R. Spencer Chief United States District Judge

ENTERED this 14th day of July 2010

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