Sakyi v. Este Lauder Cos.

Citation: 308 F. Supp. 3d 366Docket: Civil Action No. 17–1863 (BAH)

Court: Court of Appeals for the D.C. Circuit; April 25, 2018; Federal Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Princess Sakyi, a former cosmetology student at the Aveda Institute in Washington, D.C., has filed a three-count complaint against Beauty Basics, Inc. (BBI), Estée Lauder Companies, Inc., and Aveda Corporation, claiming unlawful and deceptive trade practices, failure to pay minimum wages, and failure to pay wages timely, alleging the use of students as unpaid employees. The defendants have moved to dismiss the complaint and compel arbitration based on an Arbitration Agreement signed by Sakyi during her enrollment on March 9, 2016. This agreement mandates that disputes be resolved through binding arbitration conducted by the American Arbitration Association in Washington, D.C., and prohibits any lawsuits or class actions. The agreement specifies the governing law as that of the District of Columbia and includes a severability clause. Sakyi paid approximately $5,000 out of pocket and $21,000 through student loans for her education at BBI, which is a nationally accredited institution receiving federal student financial aid. The court has granted the defendants' motions to compel arbitration.

Student enrollees at the Aveda Institute provide cosmetology services as part of their curriculum, which is purportedly supervised by licensed educators. However, the plaintiff alleges that students were exploited, often performing simple, repetitive tasks for clients without proper supervision and instead of receiving the promised hands-on training. They were subject to strict requirements set by the Defendants, including grading and potential termination based on performance. The plaintiff claims that the hours of work required significantly exceeded the state licensure requirements, citing an example where 180 hours of nail work were mandated instead of the 50 hours required for licensure. 

Additionally, students were compelled to sell Aveda-branded products post-service, fill retail roles unrelated to their training, and personally finance iPads that were misrepresented as included in tuition. The excessive time spent in the salon allegedly hindered students from receiving adequate coursework for state board exam preparation. Following complaints about these issues, the Defendants provided additional coursework only after the program ended, which delayed students’ entry into the cosmetology workforce.

On July 30, 2017, the plaintiff filed a class action lawsuit against Aveda Institute, Inc. and Estée Lauder Companies, alleging deceptive trade practices under the District of Columbia Consumer Protection Procedures Act, failure to pay minimum wage under the Minimum Wage Revision Act, and violation of the Wage Payment and Collection Act. The lawsuit represents all cosmetology students at the Aveda Institute in Washington, D.C., focusing on misrepresentation of the program and the legal obligation for wage payment for the work performed.

The plaintiff is seeking damages and an injunction requiring defendants to compensate students for work done at the Aveda salon and to modify marketing practices to accurately represent the cosmetology program's work. The defendants removed the case to federal court on September 12, 2017, and AII subsequently filed a motion to dismiss due to lack of personal jurisdiction, asserting it neither manages nor owns the Aveda Institute in Washington, D.C., and operates only in New York and Minnesota. AII claimed the plaintiff had sued the incorrect entity. The plaintiff later amended the complaint to substitute Aveda Corporation for AII and added BBI as a defendant, leaving the allegations unchanged, resulting in AII’s motion being deemed moot. In February 2018, the plaintiff obtained an extension for class certification despite the defendants' objections. The next day, BBI requested arbitration of the claims, which the plaintiff refused. BBI then moved to compel arbitration based on an Arbitration Agreement signed by the plaintiff. ELC and Aveda Corporation also sought to compel arbitration, arguing the agreement applied to the plaintiff's claims against them despite their non-signatory status. The Federal Arbitration Act (FAA) establishes a strong federal policy favoring arbitration, stating that arbitration agreements must be treated like other contracts and are enforceable unless valid grounds for revocation exist. The FAA requires that any doubts about arbitrable issues be resolved in favor of arbitration. While the FAA does not specify an evidentiary standard for avoiding arbitration, the D.C. Circuit has determined that the validity of an unambiguous arbitration agreement is a legal question for the court, subject to summary judgment standards. The party seeking to compel arbitration must demonstrate that an agreement exists, without needing to show its enforceability upfront, and the resisting party must prove that the claims are unsuitable for arbitration, with evidence viewed in the light most favorable to them.

In addressing a motion to compel arbitration, the court's focus is strictly on the arbitrability of the dispute rather than its merits. The primary question is whether the parties agreed to arbitrate the issues at hand. The defendants aim to compel arbitration based on an Arbitration Agreement with the plaintiff, who argues that the inclusion of a class arbitration waiver renders the agreement unenforceable. However, this waiver's validity is a gateway question of arbitrability that the parties agreed would be resolved by an arbitrator, not the court, necessitating arbitration for the plaintiff's claims against defendant BBI.

Furthermore, because the plaintiff's claims against ELC and Aveda are closely linked to those against BBI, she is required to arbitrate these claims as well and is equitably estopped from refusing arbitration. The court emphasizes that arbitration is a contractual matter, guided by the federal substantive law of arbitrability and ordinary state law principles. The law of the District of Columbia governs this case, where consent is central to arbitration.

The plaintiff concedes that she and BBI agreed to arbitrate but contends that the class arbitration waiver is unlawful under federal law. This issue, classified as a question of arbitrability, falls within the scope of arbitration as established by the incorporated rules of the AAA. Thus, the court grants BBI's motion to compel arbitration, affirming that the parties have clearly and unmistakably agreed to arbitrate gateway issues of arbitrability, which is enforceable under the FAA.

Courts should not assume that parties agreed to arbitrate arbitrability without clear evidence. The Arbitration Agreement mandates arbitration of any disputes against Aveda Institute and its affiliates, indicating a clear intention to arbitrate all issues, including arbitrability. Additionally, the agreement incorporates the American Arbitration Association (AAA) rules, particularly Rule 14, which gives arbitrators the authority to rule on their own jurisdiction and the validity of the arbitration agreement. 

The plaintiff challenges the agreement's validity due to a class arbitration waiver, asserting that this is a gateway question of arbitrability, which must be decided by an arbitrator. Even if the waiver is deemed invalid, the arbitration agreement includes a severability clause. 

Furthermore, the determination of whether the plaintiff qualifies as an "employee" under the National Labor Relations Act (NLRA) and the National Labor Relations Board (NLA) is also a gateway question for the arbitrator. The parties have demonstrated intent to arbitrate all arbitrability questions.

Despite ELC and Aveda Corporation not being signatories to the Arbitration Agreement, traditional state law principles allow enforcement against nonparties through various doctrines such as assumption and equitable estoppel. ELC and Aveda claim to be third-party beneficiaries of the agreement and argue that the intertwined nature of claims against them and BBI warrants arbitration. The plaintiff disputes this and claims that ELC and Aveda have conceded to district court jurisdiction. Nonetheless, the court finds that the plaintiff's claims against ELC and Aveda must be arbitrated. 

Finally, ELC and Aveda have not waived their rights to compel arbitration, as they initiated their request at the earliest opportunity, consistent with legal precedent.

A party that actively participates in litigation or behaves inconsistently with an intent to arbitrate waives the right to arbitration, as established by case law. Waiver may occur when a party engages in litigation in a manner that contradicts an intent to arbitrate, such as delaying a request for arbitration, which can impose costs on the opposing party and the court. In the case discussed, ELC and Aveda moved to compel arbitration approximately three months and one month, respectively, after answering the amended complaint. These delays did not prejudice the plaintiff or the court, and the plaintiff did not contest this point. ELC and Aveda had not previously known of the Arbitration Agreement until notified by BBI's motion to compel arbitration. Upon learning of the agreement, they acted promptly, filing their motion two weeks later. Consequently, they have not waived or forfeited their right to compel arbitration.

Additionally, under District of Columbia law, for a third party to enforce contract provisions, the original contracting parties must have intended for that third party to benefit, which can be shown through express or implied intent.

The excerpt addresses the criteria for determining whether a third party can be considered a beneficiary of a contract, referencing case law to underscore that the absence of a third party's name in a contract does not preclude them from being a beneficiary. The court must find evidence that the third party's identity is ascertainable from the contract's terms or the circumstances of its creation. The agreement's intent, whether for the benefit of the third party or merely incidental, is determined by examining the contract as a whole. In this instance, the Arbitration Agreement does not explicitly mention ELC or Aveda Corporation, making their interests not plainly ascertainable. The agreement bears the header "AVEDA INSTITUTE" but lacks mention of Aveda Corporation, which is relevant to the case. The plaintiff initially sued AII, mistakenly believing it was the correct defendant due to the logo on the Arbitration Agreement; AII clarified it has no jurisdiction in D.C. and operates under a licensing agreement with Aveda Corporation. The excerpt notes that the outcome may differ if the relationship between BBI and Aveda Corporation were evident, as BBI being a subsidiary or licensee would affirm Aveda Corporation and ELC as third-party beneficiaries of the Arbitration Agreement.

BBI's corporate disclosure states it has no parent companies, subsidiaries, or affiliates with public securities, leaving the relationship between BBI, ELC, and Aveda unclear from the contract. However, ELC and Aveda can still enforce the Arbitration Agreement through equitable estoppel, allowing a non-signatory to compel arbitration with a signatory when their issues are interrelated. The doctrine emphasizes that a signatory cannot refuse arbitration with a non-signatory if their claims are closely tied to the contract. The application of equitable estoppel requires a factual and legal inquiry into the intertwined nature of the parties' issues. In this case, the plaintiff's claims against ELC and Aveda are sufficiently intertwined with those against BBI, justifying the use of equitable estoppel to compel arbitration.

The plaintiff asserts identical claims against three defendants based on the same underlying facts, failing to specify which claims pertain to each defendant. The claims allege violations of the Washington D.C. Consumer Protection Procedures Act (CPPA) and wage theft, with the plaintiff arguing that the defendants profited from unpaid work performed by students at a cosmetology school, misrepresenting the nature of the training provided. The plaintiff contends that the defendants did not pay minimum wage or timely wages for work that primarily benefited the defendants' business.

The claims against BBI cannot be separated from those against ELC and Aveda, as they are legally identical. The plaintiff is bound by an arbitration agreement covering disputes with BBI and its affiliates, which encompasses the claims raised, despite the plaintiff arguing they arise from statutory rather than contractual grounds. The intertwined nature of the claims necessitates arbitration for BBI, as litigation against ELC and Aveda would require involving BBI to clarify the applicability of claims. Moreover, if arbitration is required for BBI while allowing litigation against ELC and Aveda, it would undermine BBI's rights under the arbitration agreement.

The potential for duplicative depositions in both arbitration and litigation would increase costs for all parties involved. Thus, ELC and Aveda can invoke the arbitration agreement through equitable estoppel due to the significant overlap of claims. Lastly, a Seventh Circuit case cited by the plaintiff does not hold binding authority in this jurisdiction and does not support the plaintiff's position.

A minor initiated a putative class action against Credit One Bank under the Telephone Consumer Protection Act, claiming harassment through debt collection calls to her cell phone for a debt she did not owe. The minor's mother had opened the credit card account with Credit One and signed an arbitration agreement. Credit One's caller-identification system linked the minor's cell phone to the mother's account. When Credit One sought to compel arbitration, the minor contested that she was not a signatory to the agreement, and the Seventh Circuit ruled in her favor, asserting she had no contractual relationship with Credit One and derived no benefit from the agreement.

The plaintiff in the current case argues that, similar to the minor in A.D., the defendants, Estee Lauder and Aveda Corporation, are non-signatories to the arbitration agreement and cannot compel arbitration. However, unlike the minor, the plaintiff has signed the arbitration agreement, which fundamentally alters the situation. The case is likened to Khan v. Parsons Global Services Ltd., where a plaintiff was compelled to arbitrate disputes due to the intertwined nature of claims with the signed arbitration agreement, despite corporate affiliates of the employer being non-signatories. The court applied equitable estoppel, allowing non-signatories to enforce the arbitration clause when claims are related to the agreement. The plaintiff's references to all defendants in her complaint imply a relationship with them, thereby permitting Estee Lauder and Aveda to enforce the arbitration agreement based on equitable estoppel principles.

The document concludes that the case will be dismissed in favor of arbitration, noting a circuit split on whether cases should be stayed or dismissed when a motion to compel arbitration is granted.

The parties involved in this case agreed in their Arbitration Agreement that neither would file lawsuits against the other in court, stipulating that any such lawsuit would be dismissed in favor of arbitration. Consequently, the plaintiff's claims are directed to arbitration, leading to the dismissal of the case without prejudice. The defendant, BBI, a Louisiana corporation operating as "Aveda Institutes South," has no publicly traded parent companies or affiliates. The relationship between BBI and Aveda Corporation, which is wholly owned by ELC, lacks a licensing agreement. BBI operates multiple campuses across various states, unlike AII's two schools.

The validity of class arbitration waivers is currently under review by the D.C. Circuit, pending the Supreme Court's decision on related matters. While the plaintiff contests the class arbitration waiver's validity, she does not challenge the delegation provision that assigns dispute resolution to an arbitrator. As such, the court must treat this provision as valid and enforceable, leaving broader challenges to the arbitration agreement for the arbitrator to decide. Most circuits have upheld the enforceability of arbitration agreements that include class waivers.

The legal analysis indicates that establishing an individual's status as an employee is heavily fact-dependent. It references several cases where vocational-school students, particularly cosmetology students, were determined not to be employees under both the National Labor Relations Act (NLRA) and the Fair Labor Standards Act (FLSA). Key cases include Towne Chevrolet, which clarified that vocational students are not employees, and Benjamin v. B. H Educ. Inc., where it was concluded that students primarily benefit from their educational experiences, thus negating employee status. Additional cases, such as Hollins v. Regency Corp. and Jochim v. Jean Madeline Educ. Ctr., further supported this by emphasizing the students' role as learners in educational settings rather than as employees. The plaintiff's argument against being classified as a trainee is noted, asserting that students are economically integrated into the salon's operations and controlled by the same policies. However, it is highlighted that the defendant contends that the plaintiff has not provided sufficient evidence to establish her claim of employee status under labor laws. The discussion also touches on procedural matters regarding arbitration, stating that if all claims are subject to arbitration, dismissal of the case may be appropriate, as supported by multiple circuit court rulings.

A district court has discretion to dismiss a lawsuit if all claims are deemed arbitrable, despite the plaintiff's argument that 9 U.S.C. § 3 mandates a stay pending arbitration rather than dismissal. Previous cases, including *Ozormoor v. T-Mobile USA, Inc.* and *Choice Hotels Int'l, Inc. v. BSR Tropicana Resort, Inc.*, indicate that dismissal is permissible when all issues must go to arbitration. However, at least three circuits advocate for staying the proceedings instead of outright dismissal. The district court should have granted a stay when ordering arbitration, as indicated by *Adair Bus Sales, Inc. v. Blue Bird Corp.* The defendants requested a dismissal "with prejudice" but did not justify this over a dismissal without prejudice. The arbitrator will determine key questions of arbitrability, suggesting that a dismissal with prejudice could unjustly deprive the plaintiff of legal recourse. Therefore, the court concludes that a stay is appropriate in cases where the arbitrability of claims is disputed and needs resolution through arbitration.