Southern District of New York Compels Arbitration of FLSA Collective Action Claims on an Individualized Basis

by Sheppard Mullin Richter & Hampton LLP

[authors: Rebecca Hirschklau and Eric Raphan]

On December 4, 2012, Southern District of New York District Judge Barbara S. Jones, granted a motion to compel arbitration on an individual basis in a class and collective action brought pursuant to, among other things, the Fair Labor Standards Act (“FLSA”) in Cohen v. UBS Financial Services, Inc., Docket No. 12 Civ. 2147 (BSJ)(JLC).

The plaintiffs, five current and former California resident Financial Advisors of defendant UBS Financial Services, Inc. (“UBS”), asserted class and collective action claims against UBS for alleged violations of the FLSA, the California Labor Code and the California Unfair Competition Law. UBS moved to compel arbitration, pursuant to Federal Arbitration Act, 9 U.S.C. Section 1, on the grounds that the plaintiffs signed arbitration agreements during the course of their employment with UBS wherein they each agreed that:

any disputes between you and UBS including claims concerning compensation, benefits or other terms or conditions of employment . . . or any other claims whether they arise by statue or otherwise, including but not limited to, claims arising under the Fair Labor Standards Act . . . or any other federal, state or local employment . . . laws, rules or regulations, including wage and hour laws, will be determined by arbitration . . . . By agreeing to the terms of this Compensation Plan . . ., you waive any right to commence, be a party or an actual putative class member of any class or collective action arising out of or relating to your employment with UBS.

The plaintiffs opposed UBS’s motion by arguing, among other things, that the arbitration agreements could not be enforced because requiring the plaintiffs to individually arbitrate their claims would prevent them from vindicating their federal statutory rights under the FLSA. In support of this argument, the plaintiffs relied upon the Second Circuit’s decisions in In re American Express Merch. Litig., 667 F.2d 204 (2d Cir. 2011), aff’g on reh’g Amex II, 634 F.3d 187 (2d Cir. 2011), reh’g en banc denied by 681F.3d 139 (2d Cir. 2012), cert. granted, American Exp. Co. v. Italian Colors Restaurant, Docket No. 12-133, 2012 WL 3096737, at *1 (U.S. Nov. 9, 2012) (“AMEX III”). Judge Jones rejected this argument for two primary reasons.

First, Judge Jones rejected the plaintiffs’ reliance on Ranier v. Citigroup Inc., 827 F. Supp. 2d 294 (S.D.N.Y. 2011) and D.R. Horton, Inc. and Michael Cuda, N.L.R.B. 12-CA-25764, 2012 WL 36274, *1 (Jan. 3, 21012) for the proposition that the waiver of the right to proceed collectively under the FLSA is unenforceable as a matter of law. Judge Jones noted that she had previously rejected this same argument, and the precedent upon which the plaintiffs relied, in Lavoice v. UBS Fin. Servs., Inc., No. 11 Civ. 2308, 2012 WL 124590, at *2 (S.D.N.Y. Jan. 13, 2012).

Second, Judge Jones rejected the plaintiffs’ argument that even if class waivers are not per se unenforceable, the waivers at issue in this case cannot be enforced because they preclude the plaintiffs from vindicating their statutory rights under the FLSA. In support of this argument, the plaintiffs relied upon the Second Circuit’s decision in Amex III and argued that the costs of arbitration would so exceed the possible benefits that they would be practically precluded from vindicating their statutory rights if required to proceed on an individual basis. Judge Jones found this argument unpersuasive, explaining that the plaintiffs’ potential damages and their ability to recover their attorneys’ fees in arbitration if they successfully prove their claims undermines any argument that the plaintiffs are not able to vindicate their statutory rights under the FLSA in arbitration. Judge Jones also rejected the plaintiffs’ contention that the determination of their potential damages should take into account their low probability of prevailing on the merits. In dismissing this argument Judge Jones noted that the plaintiffs “have provided the Court with nothing to support their self-serving estimates as to the likelihood of success. The Court accordingly gives no weight to this dubious argument.”

Judge Jones also gave no credence to the plaintiffs’ argument that the arbitration agreements were unenforceable because they violated the Financial Industry Regulatory Authority Code (“FINRA Code”), which governs arbitrations for financial advisors. Specifically, the plaintiffs argued that Rules 13204(a) and 13204(b) of the FINRA Code state that “class action claims may not be arbitrated under the Code” and that “[a]ny claim that is based upon the same facts and law, and involves the same defendants as in a . . . putative class action . . . shall not be arbitrated under the Code.” However, Judge Jones noted that Rule 13204 allows parties to enter into additional agreements that are beyond the scope of the FINRA Code and provides that the FINRA Code does not affect the enforceability of such additional agreements. Therefore, Judge Jones found that the FINRA Code did not preclude enforcement of the arbitration agreements.

Judge Jones’s decision is a victory for employers in the hotly-contested issue of whether or not employers can compel individualized arbitration of FLSA claims where, as here, the employees have executed an arbitration agreement that provides for individual arbitration.


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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