Mandatory arbitration agreements can help employers avoid some of the costs and delays involved in litigation and eliminate the possibility of an uninformed or random jury decision. While courts generally favor agreements to arbitrate, a new decision from the Fourth Circuit Court of Appeals (which includes North Carolina and South Carolina) shows that employers cannot use these agreements as a tactic to deflect already pending litigation.

In Degidio v. Crazy Horse Saloon and Restaurant Inc., a dancer at a South Carolina strip club filed a collective action wage claim, alleging that dancers at the club had been misclassified as independent contractors. After filing a substantive response and beginning discovery, the defendant began signing arbitration agreements with a number of its dancers. Three years into the litigation, the defendant moved to compel arbitration for those dancers who had signed the agreements. The district court denied the motion, and the defendant appealed to the Fourth Circuit.

The Fourth Circuit affirmed the lower court’s ruling, admonishing the employer for what it viewed as a litigation tactic. It characterized the effort to collect arbitration agreements after litigation had begun as an insurance policy in case the litigation did not progress to the defendant’s satisfaction. The defendant had multiple opportunities to move to compel arbitration well before discovery had begun. Even if it had done so, the arbitration agreements in question appeared to have been gathered under duress, resulting in the Fourth Circuit describing them as “sham agreements.”

While mandatory arbitration agreements can provide employers with an alternative to litigation with employees, the decision to use such agreements needs to be made in the absence of pending or threatened litigation. As this case illustrates, courts will quickly see through any attempts to derail litigation already in progress through use of after-the-fact agreements.