Second Circuit Enforces Collective/Class Action Waiver and Upholds Mandatory Arbitration Agreements

A recent decision by the Second Circuit Court of Appeals marks a significant victory for employers. Sutherland v. Ernst & Young LLP, which the Second Circuit Court of Appeals decided on August 9, fortifies an employer’s ability to use individual arbitration agreements to avoid wage and hour collective actions under the Fair Labor Standards Act (FLSA).

In Sutherland, the Second Circuit held that a former Ernst & Young employee, Stephanie Sutherland, could not invalidate a class-action waiver provision in an arbitration agreement when that waiver removes the financial incentive for her to pursue a claim under the FLSA. That holding, consistent with the recent decision by the Supreme Court of the United States in American Express Co. v. Italian Colors Restaurant, reversed the decision by the U.S. District Court for the Southern District of New York denying Ernst & Young’s motion to dismiss or stay the proceedings and compel arbitration of Sutherland’s wage and hour claim.

In denying Ernst & Young’s motion, the federal district court had relied on In re American Express Merchants’ Litigation, (Amex I), a Second Circuit decision that had invalidated a class-action waiver provision in an arbitration agreement on the grounds that enforcing the waiver would require plaintiffs to incur prohibitive costs and would deprive them of substantive rights under the federal antitrust statutes.

In American Express, however, the Supreme Court held that the Federal Arbitration Act did not permit courts to invalidate a waiver of class arbitration on the ground that the plaintiff’s cost of individually arbitrating a federal statutory claim exceeded the potential recovery. The American Express opinion, authored by Justice Scalia, includes the now oft-quoted proposition that “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” By abrogating the basis of the Second Circuit’s holding in Amex I—which itself was the basis of the district court’s denial of Ernst & Young’s motion to compel arbitration—American Express set the stage for the Second Circuit’s ruling in Sutherland.      

In reaching its holding in Sutherland, the Second Circuit first recognized that the FLSA did not contain a contrary congressional command barring waivers of class arbitration. Not only does the text of the FLSA offer no support for such a command, Supreme Court precedent illustrates that the waiver of collective action claims is permissible in the FLSA context. The Second Circuit’s finding that the FLSA does not bar class waivers is significant, because it establishes that an individual’s right to a collective action is not a substantive right under FLSA and, as such, can be waived.

Relying on American Express, the Second Circuit then held that a plaintiff cannot use the so-called “effective vindication doctrine” to invalidate a class-action waiver provision by showing that it makes no economic sense for him or her to pursue the claim individually in arbitration. Indeed, in Sutherland, the worker argued that, if forced to arbitrate under the relevant waiver provision, she would have to expend approximately $200,000 to recover less than $2,000. Sutherland thus makes plain that the Second Circuit will not invalidate a class-action waiver provision solely because the costs of individual arbitration would far exceed the recovery sought.

Given an employer’s potential exposure with respect to wage and hour class and collective actions, Sutherland and another decision on the FLSA, which the Second Circuit issued in August as well, both provide a welcome degree of certainty with respect to the viability of class waivers in arbitration agreements. These decisions show that the Second Circuit is joining the growing trend among circuit courts in rejecting the argument that the FLSA does not allow class action waivers. Given the Second Circuit’s stature and influence among the circuit courts, Sutherland will likely have a significant impact on future litigation involving FLSA class action waivers outside of the Second Circuit.

These two recent decisions also mean that the sole remaining significant battle over the viability of FLSA class action waivers is now before the Fifth Circuit Court of Appeals in D.R. Horton v. National Labor Relations Board.  In that case, D.R. Horton is challenging the National Labor Relations Board’s finding that it is a violation of federal labor law for an employer to require employees to sign class action waivers as a condition of employment. While wage and hour practitioners await the Fifth Circuit’s decision with great anticipation, the Second Circuit’s decision in Sutherland shows that the stars may be aligned for supporters of class action waivers.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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