News & Updates

Second Circuit Upholds Class-Action Waivers in Arbitration Agreements in Certain Circumstances August 16, 2013

A recent Second Circuit decision has resulted in a major victory for employers who seek to eliminate class actions and resolve employment disputes through arbitration. In Sutherland v. Ernst & Young LLP, Case No. 12-304 (August 9, 2013), the court held that nothing in the Fair Labor Standards Act of 1938 (FLSA), 29 U.S.C. § 201, et seq. prohibits an employer from including a class action waiver provision in an arbitration agreement. Under this holding, an employee cannot avoid a class-action waiver provision in an arbitration agreement by claiming that the waiver removes the financial incentive for her to pursue a claim under the FLSA. However, the Second Circuit did note that such a provision can be invalidated if it seeks to waive or prohibit the employee’s legal rights. 

At the time of her employment, the plaintiff, Stephanie Sutherland, signed an offer letter that stated, “if an employment related dispute arises between you and the firm, it will be subject to mandatory mediation/arbitration under the terms of the firm’s alternative dispute resolution program, known as the Common Ground Program, a copy of which is attached.” The plaintiff also signed a confidentiality agreement, which listed the terms of the “Alternative Dispute Resolution” policy. The agreement also included a class-action waiver provision. 

Nevertheless, Ms. Sutherland brought a collective and putative class action against her former employer, Defendant Ernst & Young LLP (E&Y), pursuant to FLSA and Title 12 of the Compilation of Codes, Rules and Regulations of the State of New York, 12 N.Y.C.R.R. § 142-2.2. Ms. Sutherland claimed that E&Y allegedly violated the FLSA and New York law by failing to properly compensate her and others similarly situated, if they worked more than 40 hours per week. E&Y moved, pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure and the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., to dismiss or stay the proceedings, and to compel arbitration of Ms. Sutherland’s claims on an individual, rather than on a class-wide, basis in accordance with the parties’ arbitration agreement. Judge Kimba Wood denied E&Y’s motion and found that the arbitration agreement was unenforceable. E&Y appealed. 

In enforcing the arbitration agreement, the Second Circuit relied on two important points. First, the court noted that the FLSA does not expressly prohibit class action waivers. Indeed, the court pointed out that Section 216(b) requires an employee with a FLSA claim to affirmatively opt-in to any collective action. The court concluded that if Congress intended to give an employee a “right” to a class action by allowing her to affirmatively opt in to it then “the employee has the power to waive participation in a class action as well.” Thus, the Second Circuit found that an employee can waive her right to participating as a class to pursue FLSA relief. 

Next, the Second Circuit addressed the “judge-made” exception to the Federal Arbitration Act. Under this rule, courts have invalidated agreements that prevent the “effective vindication” of a federal statutory right. In her attempt to invoke this exception, Ms. Sutherland argued that it would be cost-prohibitive for her to proceed with individual arbitration because she seeks to recover less than $2,000, but would incur approximately $200,000 in legal fees. 

In rejecting her argument, the Second Circuit relied on the recent decision in Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013). In Am. Express Co., the Supreme Court explained that the exception seeks to prevent the possibility of a party waiving a right to pursue statutory remedies. Id. at 2310. Thus, the exception would apply to an arbitration agreement provision that forbids a party from exercising certain statutory rights. Id. at 2310 – 231. Likewise, the exception would apply to a provision that selects a forum whose filing and administrative fees are so high it would be impracticable to use it. Id. at 2310–2311. But, the court stated, the exception does not apply “when it is not worth the expense involved in proving a statutory remedy. Id. Thus, the Second Circuit opined that the high expense in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy. Accordingly, the court found that Ms. Sutherland’s arguments did not invalidate the class-action waiver provision. 

In drafting class-action waiver provisions in arbitration agreements, employers must engage in two important steps. First, the employer must confirm that the applicable statute permits a class-action waiver. Once that hurdle is overcome, the employer must not include any language that will prohibit an employee’s right to proceed with statutory rights. As discussed in Am. Express Co., this includes any attempt to waive a legal right or proceed in a forum with excessively high filing and administrative fees. Such language could actually invalidate the provision and open the door to avoidable litigation. 

For more information about how this case may impact your business, contact: