Reproduced with permission from Daily Labor Report, 86 DLR A-9 (May 5, 2015). 
Copyright 2015 by The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com

"Cosmetology School Waived Right to Arbitrate Students' Wage & Hour Claims, Court Rules" (link to PDF)

Bloomberg BNA, Daily Labor Report, May 5, 2015

By Lisa Nagel-Piazza

Cosmetology School Waived Right to Arbitrate Students' Wage & Hour Claims, Court Rules Aproposed class of cosmetology students in California may proceed in court with their claims that they were required to provide salon services to paying customers without compensation in violation of the Fair Labor Standards Act and state law, despite having signed arbitration agreements at the time of enrollment, a federal judge ruled April 29 (Ford v. Yasuda, C.D. Cal., No. 5:13-cv-01961, 4/29/15).

Denying a motion to compel arbitration filed by the Amarillo College of Hairdressing Inc.—doing business as the Milan Institute of Cosmetology—and owner Gary Yasuda, the U.S. District Court for the Central District of California found that the school waived its right to arbitrate because it actively litigated the case for 17 months before filing the motion.

''Tellingly, Defendants requested the dismissal of Plaintiffs' second amended complaint without mentioning the issue of arbitration, and instead chose to test their theories that Plaintiffs were not employees and that Yasuda was not individually liable,'' Judge Philip S. Gutierrez wrote.

Milan's delay was undue because it ''faced no barrier to moving to compel at the outset of this action,'' Gutierrez said. Furthermore, because the court partially ruled in the students' favor on Milan's motion to dismiss, compelling arbitration would prejudice the students by requiring them to relitigate matters already decided by the court, Gutierrez added.

''The case challenges the business model used by cosmetology schools relying on unpaid student labor,'' Bryan Schwartz, an attorney for the students told Bloomberg BNA in an e-mail April 30. ''We will continue to prosecute our claims vigorously and challenge their arbitration agreements where they seek to use them unfairly.''

An attorney for Milan, Michael Hensley of AlvaradoSmith P.C. in Santa Ana, Calif., told Bloomberg BNA May 5 that the ruling was surprising. Milan's actions should not have resulted in a waiver, Hensley said, and the school plans to appeal the decision to the U.S. Court of Appeals for the Ninth Circuit.

Students Provided Services Without Pay. Milan provides career training in cosmetology to enrolled students, as well as salon services to paying clients, the court said.

The students filed an initial complaint in October 2013 seeking minimum wage and overtime payments in accordance with federal and state law. They claimed that after they were charged to enroll in the school's training programs, Milan required them to provide service to paying clients without compensating them for
their work.

In June 2014, Milan filed a motion to dismiss, asserting that the students were not ''employees'' within the meaning of the applicable laws. The court denied the motion in part and granted it in part with leave to amend.

Milan raised the issue of arbitration for the first time as an affirmative defense in a September 2014 answer to the students' second amended complaint, the court said. The school filed the motion to compel arbitration six months later in March 2015.

Right to Arbitrate Constructively Waived. According to the court, the right to arbitrate is subject to constructive waiver in the Ninth Circuit if three conditions are met: the waiving party has knowledge of the right to compel arbitration, the party acts inconsistently with that right and prejudice results from the waiving party's inconsistent acts.

In the present case, Milan knew of its right to compel arbitration because it drafted the agreement, the court said. Milan acted inconsistently with that right by its ''protracted silence regarding arbitration,'' its delay in moving to compel arbitration, and its ''decision to take active part in 17 months of litigation,'' the court said. Compelling arbitration would result in prejudice by requiring the students to relitigate the matters already decided by the court in its ruling on the motion to dismiss, the court said. Furthermore, a ''party's 'belated attempt to use arbitration as a method of forum shopping is prejudicial' to its opponent,'' the court said.

Contact the reporter on this story:
Lisa Nagele-Piazza in Washington at lnagele@bna.com

Contact the editor responsible for this story: 
Susan J. McGolrick at smcgolrick@bna.com

Text of the order is available at:
http://www.bloomberglaw.com/public/document/Maria_Ford_et_al_v_Gary_Yasuda_et_al_Docket_No_513cv01961_CD_Cal_