22-2959 Brown v. Peregrine Enters., Inc.

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING TO A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

At a stated term of the United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the 20th day of December, two thousand twenty-three.

PRESENT:

JOHN M. WALKER, JR., REENA RAGGI, RICHARD J. SULLIVAN, Circuit Judges. _________________________________________

ANGELA BROWN, LAUREN FARANO, YANA TOYBER, SUSANA VARGAS, and ASHLEY VENECIA, individually and on behalf of all others similarly situated, and MARINA PAPADAKIS, individually,

Plaintiffs-Appellees,

v. No. 22-2959

PEREGRINE ENTERPRISES, INC., DBA RICK’S CABARET NEW YORK, RCI ENTERTAINMENT (NEW YORK) INC., RCI HOSPITALITY HOLDINGS, INC., FKA RICK’S CABARET INTERNATIONAL, INC., RCI MANAGEMENT SERVICES, ERIC LANGAN, and ED ANAKAR,

Defendants-Appellants.* ________________________________________

* The Clerk of Court is respectfully directed to amend the official case caption as set forth above. For Defendants-Appellants: JEFFREY A. KIMMEL (M. Adil Yaqoob, on the brief), Akerman LLP, New York, NY.

For Plaintiffs-Appellees: NEIL K. SAWHNEY (Jennifer Bennett, on the brief), Gupta Wessler PLLC, San Francisco, CA; John Kristensen, Carpenter & Zuckerman, Beverley Hills, CA (on the brief).

Appeal from an order of the United States District Court for the Southern

District of New York (Katherine Polk Failla, Judge).

UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,

ADJUDGED, AND DECREED that the November 3, 2022 order of the district

court is VACATED and the case is REMANDED.

Peregrine Enterprises, Inc. – which along with the other defendants

(collectively, “Peregrine”) operates a strip club in Manhattan known as Rick’s

Cabaret New York – appeals from an order of the district court granting plaintiffs’

motion to lift a stay of litigation pending arbitration and denying Peregrine’s

cross-motions to appoint a substitute arbitrator and to strike collective-action

claims from plaintiffs’ complaint. We assume the parties’ familiarity with the

underlying facts, procedural history, and issues on appeal.

On February 22, 2022, plaintiffs – a group of entertainers who previously

performed at Rick’s Cabaret – filed a complaint on behalf of a putative class

2 alleging violations of the Fair Labor Standards Act and New York Labor Law.

Consistent with an arbitration provision in the Entertainer License Agreements

(the “ELAs”) previously executed by the parties, plaintiffs and Peregrine

consented to arbitrate plaintiffs’ claims, and the district court stayed the federal

case pending arbitration. 1 Eighteen plaintiffs then filed individual demands with

the American Arbitration Association (the “AAA”).

Before opening the matters, the AAA applied its “Commercial Arbitration

Rules and Employment/Workplace Fee Schedule,” which provided that an

“individual’s portion of the filing fee” was “$300.00” and the

“company[’s] . . . share” was “$34,200.00 ($1900 x 18 cases)[.]” App’x at 72

(emphasis omitted). Plaintiffs paid the $300 per plaintiff filing fee requested by

the AAA. In a series of letters to the AAA, Peregrine represented that it was

“ready, willing, and able to proceed to arbitration on terms consistent with the

provisions set forth in the arbitration agreements entered into between each

[plaintiff] and [Peregrine].” Id. at 74; see also id. at 75, 89–90. But it “request[ed]

that the AAA . . . equalize the parties’ filing fees,” id. at 75, 90, since the arbitration

1Although there are slight variations among the ELAs that each of the plaintiffs executed with Peregrine, they are not material to the issues on appeal. Accordingly, all references to the ELAs, unless otherwise indicated, are based on the one executed by plaintiff Angela Brown. See App’x at 46–54. 3 provisions provided that the parties would equally share arbitration costs prior to

any final determination by the AAA, id. at 53. The AAA refused to depart from its

Fee Schedule to charge the filing fees equally to the parties, and noted that “any

further dispute[s] [could] be raised to the attention of the arbitrator once one ha[d]

been assigned” after “all the filing requirements ha[d] been met.” Id. at 86, 93. In

the end, Peregrine did not submit the filing fees that the AAA requested, and the

AAA “administratively closed [its] file in th[e] matter” and “decline[d] to

administer any future employment matter[s] involving [Peregrine].” Id. at 101.

Plaintiffs moved to lift the stay in the federal proceeding, which the district court

granted, while denying Peregrine’s cross-motions to appoint a substitute

arbitrator and to strike plaintiffs’ collective-action claims. Peregrine timely

appealed from this order.

We have jurisdiction under section 16 of the Federal Arbitration Act (the

“FAA”). See Moss v. First Premier Bank,

(2d Cir. 2016) (explaining

that an appellate court has jurisdiction to review an order lifting a stay of

arbitration, which is tantamount to “refusing a stay” under section 3 of the FAA

(quoting

(a)(1)(A))).

4 Peregrine first contends that the district court erred in lifting the litigation

stay based on its finding that the arbitrations “ha[d] been had in accordance with

the [ELAs]” under section 3 of the FAA. See App’x at 127 (citing

). We

review de novo a district court’s decision to lift a stay of a federal action pending

arbitration. See Moss,

. Section 3 of the FAA provides, in relevant

part, that courts must stay litigation “until . . . arbitration has been had in

accordance with the terms of the agreement.”

. This stay requirement

prevents litigation in federal court until a final arbitral award has been rendered;

after that, the stay can be lifted to allow for “a subsequent proceeding to confirm,

modify, or set aside the arbitration award.” Cortez Byrd Chips, Inc. v. Bill Harbert

Constr. Co.,

(2000) (citing 9 U.S.C. §§ 9–11).

Here, the arbitration provision in section 15 of the parties’ agreement stated

that “the parties to arbitration shall equally share the costs and expenses charged

by the AAA or the arbitrator during the pendency of the arbitration prior to a

determination of which is the prevailing party.” App’x at 53 (emphasis and

capitalization omitted). Moreover, section 15 expressly provided that the

arbitration terms from the agreements would trump any of the AAA’s own rules.

See id. at 51 (“The arbitrator will have no authority to make any ruling, finding[,]

5 or award that does not conform to the terms and conditions of this Agreement.”

(emphasis omitted)); id. (“The arbitrator shall give effect insofar as possible to the

desire of the parties hereto that the dispute or controversy be resolved in

accordance with . . . the provisions of this Agreement.” (emphasis omitted)); id.

(noting that the AAA’s rules would apply “except to the extent that such rules

conflict with the provisions of this agreement, including [s]ection 15, in which

event the provisions of this agreement shall control” (emphasis omitted)); id. at 52

(“The arbitrator shall not have the power to alter or modify any express provision

of this agreement, or to render an award which, by its terms, has the result of

effecting such alteration or modification.” (emphasis omitted)). Nonetheless, in

adhering to its own Fee Schedule rather than the parties’ bargained-for terms, the

AAA demanded that Peregrine pay over 86% of the parties’ filing fees, see id. at 72,

and then administratively closed the case when Peregrine refused to do so, see id.

at 101.

On these facts, we cannot agree with the district court’s finding that the

arbitrations “ha[d] been had in accordance with the [terms of the ELAs].” App’x at 127–

29 (emphasis added) (citing

). Rather, the record indicates that no

arbitration was had under either the ELAs’ terms or the AAA’s Rules. Further,

6 while the AAA notified the parties that it would terminate proceedings if

Peregrine failed to pay the amount required by its rules, it does not appear to have

followed the multi-step process required by its rules. See Billie v. Coverall N. Am.

Inc., No. 22-718-cv,

, at *3 (2d Cir. Mar. 15, 2023) (concluding that

“arbitration ha[d] [not] been had” where parties and arbitrator did not follow

“multi-step termination process overseen by the arbitrator” under AAA’s rules

(quoting

)). Notably, the plaintiffs did not request that “the arbitrator

suspend the arbitration” because “full deposits ha[d] not been paid” pursuant to

Rule 57(e) of the AAA’s Commercial Rules.

On this record, we conclude that

the district court could not find that “the arbitration[s] ha[d] been had in

accordance with the terms of the agreement,”

, and, therefore, should

not have lifted the stay of litigation on this basis.

Peregrine also challenges the district court’s alternate basis for lifting the

stay based on its finding that Peregrine had waived arbitration. “[T]he right to

arbitration, like any other contract right, can be waived.” Doctor's Assocs., Inc. v.

Distajo,

, 455 (2d Cir. 1995) (internal quotation marks omitted). We have

“equated a waiver of the right to arbitrate with a default in proceeding with such

arbitration under [section] 3 [of the FAA].” Id. (internal quotation marks omitted).

7 A “default,” in turn, “refer[s] to a party who, when requested, has refused to go to

arbitration or who has refused to proceed with the hearing before the arbitrators

once it has commenced.” Id. at 454 (internal quotation marks omitted).

As an initial matter, the district court erroneously applied a two-part waiver

test by looking to (1) whether a party acted inconsistently with its arbitration right

and (2) whether the conduct caused prejudice to the other party. To be sure, this

test was once proper under the law of this Circuit. See Carcich v. Rederi A/B Nordie,

(2d Cir. 1968), abrogated by Morgan v. Sundance, Inc.,

(2022). But the prejudice requirement has since been “[s]tripped” from the waiver

inquiry, which now involves asking only whether a party “knowingly

relinquish[ed] the right to arbitrate by acting inconsistently with that right[.]”

Sundance, Inc., 596 U.S. at 419.

Here, we cannot say that Peregrine acted so inconsistently with its

arbitration right as to have waived arbitration. Even if it could be argued that the

AAA was justified in insisting on Peregrine’s compliance with its Fee Schedule to

commence arbitration, Peregrine cannot be faulted for standing on its contractual

entitlements under the ELAs, given the parties’ express agreement that the ELAs’

arbitration provisions would supersede any of the AAA’s rules to the extent the

8 two might conflict. See Billie,

, at *3 (finding that defendant was

not “in default” where defendant refused to advance fees and arbitration

agreement stated that costs of arbitration would be “shared equally between the

Parties”). Moreover, on at least three separate occasions, Peregrine communicated

to the plaintiffs and the AAA that it was “ready, willing, and able to proceed to

arbitration on terms consistent with the [arbitration] provisions.” App’x at 74–75;

see also

at 89–90, 116. In light of the clear terms of the ELAs, it cannot be said

that Peregrine acted so inconsistently with its arbitration rights as to have waived

them when it invoked contractual protections for which it had negotiated.

Cf. Sundance, Inc., 596 U.S. at 418 (explaining that we are to “hold a party to its

arbitration contract just as the court would to any other kind”).

For its part, Peregrine maintains that the district court erred in not

appointing a substitute arbitrator after the AAA decided not to hear the case.

Section 5 of the FAA provides that “if a method” “of naming or appointing an

arbitrator” “be provided and [1] any party thereto shall fail to avail himself of such

method, or [2] if for any other reason there shall be a lapse in the naming of an

arbitrator[,] . . . then upon the application of either party to the controversy[,] the

court shall designate and appoint an arbitrator.”

(emphasis added).

9 Under the law of this Circuit, however, “district courts may [not] use [section] 5 to

circumvent the parties’ designation of an exclusive arbitral forum.” In re Salomon

Inc. S’holders Derivative Litig.,

(2d Cir. 1995). Thus, the touchstone

of the substitute-arbitrator inquiry under section 5 of the FAA is “whether the

language of the parties’ agreement contemplate[d] arbitration before only

[a particular arbitrator], or whether it contemplate[d] the appointment of a

substitute arbitrator should [the designated arbitrator] become unavailable.”

Moss,

; see also In re Salomon, 68 F.3d at 557–58.

Here, the ELAs clearly establish that the parties contemplated arbitration

before the AAA only. First, section 15 of the ELAs stated that arbitration would

be before “an impartial independent appointed by the [AAA’s] New York

branch.” App’x at 51. Further, “[t]he parties agree[d] that the AAA Optional Rules

for Emergency Measures of Protection shall apply”; that “the arbitrator shall apply

the commercial arbitration rules of the [AAA]”; and that any appeals would be

governed by “the AAA’s optional appellate arbitration rules.” Id. at 51, 52

(emphasis omitted). Finally, “the agreement makes no provision for the

appointment of a substitute arbitrator should [the AAA] become unavailable.”

Moss,

. Accordingly, we conclude that the parties opted to arbitrate

10 exclusively before the AAA, and that the district court did not err in declining to

appoint an arbitrator under the “lapse” provision of section 5.

This is not to foreclose the district court, upon application by either party on

remand, from considering the propriety of compelling arbitration under section 4

of the FAA and directing plaintiffs to pay their equal share of the arbitration fees

under the ELAs to initiate such arbitration before the AAA, which will need to

decide whether it still “decline[s] to administer any future employment matter[s]

involving [Peregrine].” App’x at 101; see

(“A party aggrieved by the

alleged failure, neglect, or refusal of another to arbitrate under a written agreement

for arbitration may petition any United States district court . . . for an order

directing that such arbitration proceed in the manner provided for in such

agreement.”). Nor do we now express any view on a possibility not specifically

raised by the parties: whether the “failure to avail” prong under section 5 permits

the court to appoint a different arbitrator. See

(providing that courts

may appoint another arbitrator if “any party [has] fail[ed] to avail himself of [the

parties’] method” “of naming or appointing an arbitrator”). 2 We here conclude

2 Although “district courts may [not] use [section] 5 to circumvent the parties’ designation of an exclusive arbitral forum,” In re Salomon,

, based on “the ‘lapse’ referred to in [s]ection 5,” Moss,

, we have been careful in distinguishing “failure[-]to[-]avail”

11 only that the district court improperly lifted the stay to the benefit of the party that

refused to comply with the express terms of the ELAs.

We have considered the parties’ remaining arguments and find them to be

without merit. 3 Accordingly, we VACATE the order of the district court and

REMAND the case for further proceedings consistent with this order.

FOR THE COURT: Catherine O’Hagan Wolfe, Clerk of Court

arguments from “lapse” arguments, see In re Salomon at 566 (explaining that the “failure[-]to[-]avail . . . provision applies when an arbitration agreement designates an arbitrator . . . and one of the parties refuses to comply, thereby delaying arbitration indefinitely”). Indeed, in “failure-to-avail” cases, Salomon and Moss’s central concern – that courts might interfere with the parties’ rights to an exclusive arbitrator by appointing a substitute arbitrator – is tempered by the fact that one party has stalled arbitration by refusing to abide by arbitration terms, thereby denying the other party its right to arbitration in its entirety. In such cases, it is by no means clear that courts are powerless to appoint another arbitrator under section 5.

3 Peregrine also argues that the district court erred by not striking plaintiffs’ collective-action claims in the federal lawsuit. In light of our determinations that the arbitrations “ha[d] [not] been had in accordance with the terms of the [ELAs]” under section 3 of the FAA,

, and that Peregrine did not waive its arbitration rights by refusing to advance the plaintiffs’ arbitration fees, we need not decide whether the collective-action waivers would apply were the case to proceed as a federal action. 12