Seal_of_the_U_S__District_Court_for_the_Eastern_District_of_Pennsylvania.pngBy Rebecca Bjork and Gerald L. Maatman, Jr.

It is often good strategy to try and get rid of a class or collective action case early on, preferably at the pleadings stage. This is so because discovery and class certification can be a very complicated and lengthy process, one that any defendant who has a large workforce knows will involve risk and often take months or years to get to a tipping point. One recent opinion, which you can read here, underscores these stakes. 

In MacDonald v. Unisys Corp., No. 12-CV-1705, 2013 U.S. Dist. LEXIS 82361 (E.D. Pa. June 12, 2013), the court considered a motion to dismiss and to compel arbitration filed by the defendant, who was accused of a scheme to violate the Age Discrimination in Employment Act (ADEA) in relation to the outsourcing of a portion of its internal IT function to Hexaware Technologies, Inc. (Hexaware). Id. at *2-3. Plaintiffs alleged that all internal IT employees in the U.S. that the company decided to terminate were immediately offered employment with Hexaware. Id. at *2. If they did not accept employment with Hexaware, they would have been considered to have voluntarily resigned. Id.

Of the 77 U.S. employees terminated, 70 were age 40 or over. Id. at *3. They were terminated in April 2010; their employment agreements with Hexaware stated their employment with Hexaware would begin on May 1, 2010; and the agreements contained mandatory arbitration clauses. Id. at *3-4. Less than a year later, according to the taken-as-true allegations of the complaint, Unisys directed Hexaware to terminate the six named plaintiffs. Id. at *4.   

They subsequently filed a collective action, alleging that their “termination by Unisys, immediate hiring by Hexaware, and eventual termination by Hexaware constituted a ‘sham transfer’ which was orchestrated by [Unisys] in an effort to eliminate older workers from its workforce.” Id. at *4-5 (quotation marks in original). They brought two counts: Count I alleged that Unisys violated the ADEA when it terminated internal IT employees in April 2010, and in Count II, they alleged that Unisys violated the ADEA when it directed Hexaware to terminate its employees who had formerly worked for Unisys in its internal IT department. Id. at *8-9. 

Unisys brought the motion to dismiss and compel arbitration under Fed. R. Civ. P. 12(b)(6). Id. at *6. For Count I – whether Unisys violated the ADEA by terminating the plaintiffs in April 2010 – Unisys sought to compel arbitration by pointing to the arbitration agreements with Hexaware, coupled with plaintiffs’ own allegation that their terminations were part of a continuing scheme culminating in Hexaware ultimately terminating them. The court rejected this argument and denied the motion with prejudice, noting that the arbitration clause did not apply to the April 2010 terminations, as the agreements did not take effect until May 1, 2010. The court explained, “[w]ithout a doubt, the arbitration provisions Plaintiffs entered into with Hewaware that mandated arbitration of employment disputes arising out of or related to their employment that began on May 1, 2010 did not cover Plaintiffs’ pre-May 1, 2010 terminations from Unisys.” Id. at *14, 24. 

Count II was, as it turns out, tricky for the company to shake as well. Both sides agreed that valid arbitration agreements existed between the plaintiffs and Hexaware. But Hexaware had not moved to dismiss and was not a party. Unisys, therefore, could only prevail in dismissing this count if it could show it was a third party beneficiary of the arbitration agreement or the doctrine of equitable estoppel applies. The court concluded that it could not make this assessment on a motion to dismiss because “the applicability of equitable estoppel and/or third party beneficiary theories depends upon materials outside the sphere of those that can be considered in a motion to dismiss.” Id. at *22-23. Accordingly, the court denied the motion to compel arbitration without prejudice to Unisys to renew it under the summary judgment standard “after relevant discovery has occurred[.]” Id. at *24.  

As defense counsel and in-house attorneys who are defending class or collective action cases understand, the scope of “relevant discovery” can often be much, much more than what a defendant, an arbitrator, and even a court or a bargained for. We suspect that as a result of the motion to dismiss ruling in this case, it may continue to churn along for some time.