Second Circuit Reverses District Courts and Enforces Individual Arbitration Agreements with Class Action Waivers in FLSA Cases

by Holland & Knight LLP
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In American Express Co. v. Italian Colors Rest., 133 S. Ct. 2304 (June 20, 2013), the U.S. Supreme Court ruled, in an antitrust case, that an arbitration agreement that waives the right to proceed on a class basis is enforceable — even if the cost of arbitrating on an individual basis might exceed the cost of recovery. In two recent decisions, the U.S. Court of Appeals for the Second Circuit extended the Supreme Court's decision to overtime claims under the Fair Labor Standards Act (FLSA) and New York Labor Law (NYLL). On Aug. 9, 2013, In Sutherland v. Ernst & Young LLP ("Sutherland"), the Second Circuit held that individual arbitration agreements containing class action waivers are enforceable under the FLSA, even though the costs to any particular plaintiff of individually arbitrating an overtime claim might very well exceed any potential recovery. On Aug. 12, in Raniere v. Citigroup, Inc., ("Raniere"), the Second Circuit rejected the argument that the FLSA creates an unwaivable substantive right to pursue claims on a collective basis.

Collectively, these two decisions confirm, and impliedly advise, that employers may limit the risk of class actions by requiring employees to agree to arbitrate FLSA and NYLL claims on an individual basis as a condition of employment.

Sutherland v. Ernst & Young LLP

Background and District Court Decision

In Sutherland, the plaintiff sued Ernst & Young (E&Y) in a collective action under the FLSA on behalf of herself and other potential plaintiffs, alleging that E&Y had misclassified her and similarly situated accounting personnel as exempt from overtime, and seeking unpaid overtime compensation. E&Y responded that when she was hired, Sutherland signed an offer letter which contained a provision explaining that "if an employment related dispute arises between [Sutherland} and [E&Y], it will be subject to mandatory mediation/arbitration under the terms of [E&Y's] alternative dispute resolution program, know as the Common Ground Program, a copy of which is attached." The Common Ground Program, essentially an arbitration agreement, specifically included "claims based on federal statutes such as ... the Fair Labor Standards Act, ... [and] claims concerning wages, salary and incentive compensation programs." The Common Ground Program further provided that a covered dispute cannot be brought in court and that any covered dispute "pertaining to different employees will be heard in separate proceedings."

Relying on the Common Ground Program, E&Y moved to dismiss the lawsuit and to compel Sutherland to arbitrate her claims individually. Sutherland responded that the arbitration agreement should be invalidated because requiring her to arbitrate her claims individually would prevent her from "effectively vindicating" her federal statutory rights under the FLSA. Specifically, she complained, her potentially maximum recovery of less than $2,000 was a mere fraction of her likely potential costs in pursing her claim, nearly $200,000. Persuaded by her arguments, the District Court denied E&Y's motion to dismiss, or stay the proceedings and compel arbitration. The District Court reasoned that "enforcement of the class waiver provision in this case would effectively ban all proceedings by [the plaintiff] against E&Y [given her] low-value, high-cost claim." In an interesting but not unprecedented twist, the District Court based its decision to invalidate E&Y's individual arbitration agreement with class action waiver, in large part, on the Second Circuit's own decision in Italian Colors, which barred an individual arbitration agreement in an antitrust case against American Express.

Second Circuit Takes Two-Step Approach in Overturning Lower Court  

Following the blueprint drawn by the Supreme Court in Italian Colors, the Second Circuit first considered whether the FLSA contains a "contrary congressional command" which would bar waivers of collective treatment of claims in arbitration. The court noted that the Fourth, Fifth and Eighth Circuit Courts of Appeals had each previously concluded that the FLSA does not preclude the waiver of collective action claims.

Based on its own analysis as to the actual text of the FLSA, the court, quoting Italian Colors, stated that the statute "does not evince an intention to preclude a waiver of class-action procedure." In response to the argument by the plaintiff that the FLSA grants the explicit "right" for an employee to bring a collective action in court based on the statute's provision that "an action to recover the liability ... may be maintained against any employer ... in any federal or State Court ... by any one or more employees for and on behalf of himself or themselves or others similarly situated," the court pointed out that the FLSA also requires an employee with a claim to affirmatively opt-in to a collective action lawsuit. Furthermore, the court relied on the recent Eighth Circuit decision, Owen v. Bristol Care, Inc. 702 F.3d 1050 (8th Cir. 2013), for the proposition that "even assuming Congress intended to create some right to class actions, if an employee must affirmatively opt-in to any such class action, surely the employee has the power to waive participation in a class action as well." The court also relied on Supreme Court precedent involving consumer contracts and age discrimination claims to support its conclusion that waiver of collective actions claims is permissible in the FLSA context. The court held that the Federal Arbitration Act (FAA)(9 U.S.C. §1, et seq.) preempts a judicial ruling barring, as a matter of law, class waivers in arbitration agreements and that there is no "contrary congressional command" that can be relied upon to bar a waiver of class treatment of claims.

Moving on to the second step of the analysis, the Second Circuit rejected the plaintiff's assertion that because any recovery she could possibly obtain would be "dwarfed" by the costs incurred in pursing the case, the class action waiver in the arbitration agreement prevented the "effective vindication" of a federal statutory right and was therefore invalid. The Second Circuit recognized that in Italian Colors, the Supreme Court held that the effective vindication doctrine applies only to arbitration agreements that prevent an plaintiff from pursuing a claim altogether. It does not invalidate an arbitration agreement simply because it makes the claim economically not worth pursing.

Raniere v. Citigroup, Inc.

Just three days after its decision in Sutherland, the Second Circuit issued a summary order in Raniere that reiterated its approval of class action waivers in FLSA cases. In Raniere, just as in Sutherland, the plaintiffs filed a collective action alleging FLSA overtime violations. The defendant responded by alleging that the plaintiffs had agreed to arbitrate all claims individually and had waived the right to pursue a class action. Prior to the Supreme Court's Italian Colors decision, the district court had held that "a waiver of the right to proceed collectively under the FLSA "is unenforceable as a matter of law." It further ruled that the "effective vindication doctrine" and the Second Circuit's prior decision, In re American Express Merchants' Litigation, 634 F.3d 187, 196 (2d Cir. 2011), "require that if any one potential class member meets the burden of proving that his costs preclude him from effectively vindicating his statutory rights in arbitration, the clause is unenforceable as to that class or collective [action]." Citigroup appealed to the Second Circuit.

The Second Circuit, squarely relying upon its decision in Sutherland, again held that "no contrary congressional command requires us to reject the waiver of class arbitration in the FLSA context." Further, and just as in Sutherland, the Second Circuit held that the "effective vindication doctrine" would require invalidation of an arbitration agreement only where the agreement would eliminate or otherwise "forbid[] the assertion of certain statutory rights" but not where there is "no economic incentive" or it is otherwise not "worth the expense" to prove an available statutory remedy.

Why Sutherland and Raniere Matter to Employers

These twin decisions by the Second Circuit are big wins for employers — especially for those within the Second Circuit's jurisdiction: Connecticut, New York and Vermont. The court ruled that the Supreme Court's decision in Italian Colors, an antitrust case, applies equally to statutory employment claims such as FLSA claims. The nearly identical rulings effectively mean that employers can limit the risk of collective action FLSA claims by adopting mandatory arbitration agreements that require individual arbitration and waive the right to pursue FLSA and state overtime claims on a collective or class basis. The decisions should also apply to employment discrimination claims under Title VII, the Americans with Disabilities Act (ADA) and similar state law claims.

In light of these cases, employers, particularly those with significant numbers of non-exempt employees (those in a broad range of industry sectors including, but not limited to, construction, financial services, healthcare, hospitality and resorts, retail, and transportation) should now consider the use of arbitration agreements with class action waivers as a vehicle to defeat potential costly state or federal court FLSA and NYLL overtime litigation. Properly drafted agreements, the Second Circuit has declared, will be enforced and the waiver of collective and class action FLSA claims is legally binding, by its terms, no matter the financial disincentive for any employee to bring a claim. These decisions will undoubtedly change the landscape of FLSA overtime and other employment litigation.

Employers should be aware that arbitration agreements must meet other significant requirements to be enforceable. In this regard, the Second Circuit in Sutherland (citing Italian Colors) noted that the "effective vindication doctrine" could "perhaps" be used to invalidate an arbitration provision where "[the] filing and administrative fees attached to arbitration [] are so high as to make access to the forum impractical." Furthermore, even though the Second, Fourth, Fifth and Eighth Circuits have now held that class action waivers are enforceable, the National Labor Relations Board (NLRB) ruled last year in D.R. Horton, Inc., 357 NLRB 184 (2012), appeal pending, No. 12-60031 (5th Cir. filed Jan. 13, 2012) that an employer commits an unfair labor practice under the National Labor Relations Act (NLRA) when it requires employees to sign arbitration agreements that waive their rights to participate in class or collective actions in both judicial and arbitral forums. The NLRB reasoned that such a practice violates the Act because it precludes the right of employees to engage in collective legal action, a "core substantive right" protected by the NLRA. The Second and Eighth Circuits and numerous district courts have already ruled that employees can waive the right to participate in collective litigation and, specifically, that the D.R. Horton decision did not preclude enforcement of class action waivers, but the NLRB still could find that an employer commits an unfair labor practice by requiring employees to sign arbitration agreements containing class action waivers. (The Fifth Circuit, which is considering an appeal of the NLRB's D.R. Horton decision, has also ruled that the FLSA does not prohibit class action waivers.) As a result of these matters, employers should seek legal counsel before adopting or modifying arbitration agreements in light of these new Second Circuit decisions.

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