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Law360, Los Angeles (April 04, 2013, 7:55 PM ET) — A California federal judge ruled Wednesday that Managed Health Network Inc. and its subsidiary couldn’t compel arbitration of a putative class action alleging it misclassified licensed counselors working at U.S. military bases in order to avoid paying overtime wages, finding the counselors’ arbitration provisions were unconscionable.

In a 13-page order, U.S. District Judge Susan Y. Illston ruled that the arbitration provision imposed on the counselors by Managed Health Network and MHN Government Services Inc. was procedurally unfair to the counselors because it was buried in “paragraph 20 of 23 paragraphs” in the contract.

The arbitration clause also was substantively unconscionable because its six-month statute of limitations was not sufficient for the plaintiffs to discover Fair Labor Standards Act violations, allowed MHN to “unilaterally choose the pool of arbitrators” deciding the dispute, prohibited punitive damages and would force plaintiffs to pay a $2,600 American Arbitration Association filing fee — “over seven times greater than the fee in [the Northern District of California] and almost 15 times greater than the AAA fee for employment disputes,” Judge Illston ruled.

The plaintiffs, a putative class of “military family life consultants” whom MHN hired to provide counseling to military service members and their families, filed suit last October in California federal court. They claim that San Rafael, Calif.-based MHN misclassified them as independent contractors and argued instead that should be classified as employees who — unlike independent contractors — are entitled to overtime compensation.

The MHN defendants moved to compel arbitration, arguing that it was a provision in the plaintiffs’ contracts. The plaintiffs opposed, asking Judge Illston to keep the dispute in the public forum of a courtroom.

In denying MHN’s motion to compel arbitration, the judge noted that “although the disparity in bargaining power is diminished because [military family life] consultants are well-educated professionals, it is not fully dispelled.”

“Moreover, signing the agreement was a condition of employment with MHN, and MFL consultants were given no general opportunity to renegotiate the terms,” she said.

Jahan C. Sagafi, a lawyer representing the plaintiffs, said his clients were “pleased the court recognized the incurable problems with MHN’s mandatory arbitration clause and that the claims will now go forward in a court of law.”

Representatives for MHN did not immediately respond to a request for comment Thursday.

The plaintiffs are represented Mark P. Pifko, Natasha K. Mehta, Roland K. Tellis and Allen R. Vaught of Baron & Budd PC, and Jahan C. Sagafi and Kelly M. Dermody of Lieff Cabraser Heimann & Bernstein LLP.

MHN Government Services and Managed Health Network are represented by Timothy J. Long and Lauri A. Damrell of Orrick Herrington & Sutcliffe LLP.

The case is Thomas Zaborowski et al. v. MHN Government Services Inc. et al., case number 3:12-cv-05109, in the U.S. District Court for the Northern District of California.

–Editing by Lindsay Naylor.