Arbitration Agreements Waiving FLSA Collective Actions
The Supreme Court has made clear that although arbitral awards are subject to extremely limited review,1 a class and collective action waiver provision in an otherwise enforceable arbitration agreement is likely to be upheld. In 2011, in AT&T Mobility v. Concepcion,2 the U.S. Supreme Court invalidated as preempted by the Federal Arbitration Act3 (FAA) California decisional law treating certain class arbitration waivers as unconscionable because the state law impermissibly conditioned enforcement of an otherwise valid arbitration agreement on the company's submission to a class-wide arbitration proceeding. The next year, the Supreme Court decided CompuCredit v. Greenwood,4 which held that arbitration agreements in the context of the Credit Repair Organizations Act5 could be enforced despite "right to sue" language in that statute.
Most recently, in American Express v. Italian Colors Restaurant6 (Amex IV), the Supreme Court rejected a Second Circuit panel decision holding that arbitration of an antitrust claim could not be compelled because the claimant could not "effectively vindicate" its claim except on a class action basis. The Supreme Court explained that the "effective-vindication" doctrine was limited to express limits on statutory remedies in the agreement or costs unique to arbitration. Specifically, Amex IV held that the high cost to a plaintiff of bringing an arbitration on an individual basis (as opposed to a class or a collective basis) was the same whether the case was brought in litigation or arbitration, and hence did not present a cost barrier unique to arbitration.
The application of these decisions in the employment context is of particular interest to employers, employees, and their representatives. In a pair of recent cases—Sutherland v. Ernst & Young7 and Raniere v. Citigroup8—the U.S. Court of Appeals for the Second Circuit applied Amex IV to sustain collective-action waivers under the federal Fair Labor Standards Act of 19389 (FLSA).
'Sutherland v. Ernst & Young'
From September 2008 through December 2009, Ernst & Young LLP (E&Y) employed Stephanie Sutherland as an audit employee performing mostly "'preprofessional training' and…clerical work" at an annual salary of $55,000 and treated her as FLSA-exempt. Upon accepting employment with E&Y, Sutherland signed an offer letter acknowledging that "if an employment related dispute arises between [Sutherland] and the firm, it [would] 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 the program attached to the letter explicitly stated that FLSA claims were subject to the program and that Sutherland could not bring a FLSA claim in court. The program also prohibited class or collective actions, providing that "Covered Disputes pertaining to different [e]mployees will be heard in separate proceedings."
On April 20, 2010, Sutherland, at this point no longer an E&Y employee, brought a putative Fed. R. Civ. P. Rule 23 class action and FLSA collective action, on behalf of herself and all others similarly situated, against E&Y in the Southern District of New York. Her suit sought unpaid overtime wages under the FLSA and the New York Labor Law (NYLL). When E&Y moved to dismiss the complaint and compel individual arbitration, Sutherland argued that enforcement of the individual arbitration agreement would "prevent her from 'effectively vindicating' her rights under the FLSA and the NYLL" because she was seeking only $1,867.02 in individual damages but would need to spend about $200,000—the sum of approximately $160,000 in attorney fees, $6,000 in costs, and a minimum of $25,000 for expert testimony—to pursue an individual arbitration.
Sutherland also argued that the FLSA's legislative history demonstrated Congress' intention to create a non-waivable substantive right to bring a collective action under the FLSA. Relying on the Second Circuit's decision in In re American Express Merchants' Litigation10 (Amex II), the district court agreed with Sutherland and denied the motion to dismiss, stating that "'[e]nforcement of the class waiver provision in this case would effectively ban all proceedings by Sutherland against E&Y' because of the nature of her 'low-value, high-cost claim.'"
E&Y appealed, and on Aug. 9, 2013, a Second Circuit panel consisting of Judges Ralph Winter, Jose Cabranes, and Chester Straub reversed and remanded in a per curiam opinion. Quoting Amex IV, the court observed that the Supreme Court has "reminded lower courts to 'rigorously enforce arbitration agreements according to their terms, including terms that specify with whom [the parties] choose to arbitrate their disputes, and the rules under which that arbitration will be conducted.'" The panel proceeded with a two-step inquiry "[c]onsistent with the Supreme Court's recent analysis in [Amex IV]" to determine whether the class action waiver should be invalidated: (1) Does the FLSA contain any "contrary congressional command" prohibiting class arbitration waivers? (2) If the FLSA does not contain any such command, is Sutherland nonetheless unable to "effectively vindicate" her rights through arbitration on an individual basis? (In a footnote, the court noted that "[i]n declining to compel arbitration, the District Court did not distinguish between Sutherland's federal and state law claims." Because the FLSA claim was subject to individual arbitration, the parties also would have to arbitrate the NYLL claim on an individual basis.)
The court answered the first question—whether the FLSA contains a "contrary congressional command"—in the negative. The panel noted that it had never previously addressed this question but identified a consensus among federal appellate courts that nothing in the FLSA prohibits collective action waivers. Even though the text of Section 16(b) of the FLSA expressly provides that "[a]n action…may be maintained against any employer…in any Federal or State court of competent jurisdiction by any one or more employees for and in behalf of himself or themselves and other employees similarly situated," the court held the provision to be a permissive reference only rather than congressional evidence of "an intention to preclude a waiver of class-action procedure."
Because Section 16(b) "also requires an employee with a FLSA claim to affirmatively opt-in to any collective action," an employee must be able to waive such a right, even assuming one exists. The court drew support from the Supreme Court's observation in Gilmer v. Interstate/Johnson Lane Corp.,11 a decision holding arbitrable claims under the Age Discrimination in Employment Act of 196712 (ADEA), "that even if the arbitration could not go forward as a class action or class relief could not be granted by the arbitrator, the fact that the [ADEA] provides for the possibility of bringing a collective action does not mean that individual attempts at conciliation"—including, presumably, attempts by way of pre-dispute arbitration agreement—"were intended to be barred."
The Second Circuit noted that it could not accept Sutherland's request "to limit the scope of Gilmer" because Amex IV "referred to Gilmer with approval." The court also cited the Supreme Court's ruling in Concepcion. Thus, "Supreme Court precedents inexorably lead to the conclusion that the waiver of collective action claims is permissible in the FLSA context."