As described in Kramer Levin’s August 2010 Employment Law Update, the United States Supreme Court held in Stolt-Nielsen v. Animalfeeds Int’l Corp., 130 S. Ct. 1758 (2010) that parties could not be compelled to submit class antitrust claims to arbitration when the arbitration clauses in their agreements were silent on the question of class arbitration; as described in our October 2011 Employment Law Update, the Supreme Court ruled in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) that the Federal Arbitration Act (the “FAA”) prohibits states from conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures. Subsequent rulings by the Court have only served to confirm its strong pro-arbitration bent. See Marmet Health Care Ctr., Inc. v. Brown, 132 S. Ct. 1201 (2012) (“West Virginia’s prohibition against predispute agreements to arbitrate personal injury or wrongful death claims against nursing homes is a categorical rule prohibiting arbitration of a particular type of claim, and that rule is contrary to the terms and coverage of the FAA.”); CompuCredit Corp. v. Greenwood, 132 S. Ct. 664 (2012) (rejecting argument of consumers that they had a non-waivable right to sue in court, holding that “[b]ecause the [federal statute at issue] is silent on whether claims under the Act can proceed in an arbitrable forum, the FAA requires the arbitration agreement to be enforced according to its terms”).
In light of these decisions (each outside of the employment context), it seems beyond dispute that the Supreme Court has been giving clear guidance that employers entering into arbitration agreement with their employees were permitted to include class and collective arbitration waivers in their agreements. However, courts within the Second Circuit and a New York State appellate court have gone in divergent directions regarding the reach of Stolt-Nielsen and AT&T Mobility. Further, the National Labor Relations Board (the “NLRB”) has ruled that an employer violates the National Labor Relations Act (the “NLRA”) by requiring employees to sign an arbitration agreement prohibiting the use of class and collective actions to resolve their claims. These developments are summarized below.
In February 2012, the Second Circuit was confronted for the third time with the case In re American Express Merchants’ Litigation, 667 F.3d 204 (2d Cir. 2012). In its first decision, the Second Circuit had considered the enforcement of a mandatory arbitration clause in a commercial contract containing a provision forbidding the parties to the contract from pursuing anything other than individual claims in the arbitral forum; the court ruled the class action waiver unenforceable because it would grant the defendant de facto immunity from antitrust liability based on plaintiff’s submission of evidence detailing the fiscal impracticability of pursuing individual claims – the median volume merchant might expect four-year damages of $1,751, or $5,252 when trebled – a judgment vacated and remanded for reconsideration by the Supreme Court in light of Stolt-Nielsen. Shortly after the second of the Second Circuit’s three decisions — which found its initial decision and analysis unaffected by Stolt-Nielsen – the Supreme Court issued its AT&T Mobility decision and the Second Circuit was forced to tackle the issue again.
In its most recent decision, the Second Circuit for the third time held the class action waiver unenforceable under the FAA, ruling that neither Stolt-Nielsen nor AT&T Mobility addressed the issue it was confronted with: “whether a class action arbitration waiver clause is enforceable even if the plaintiffs are able to demonstrate that the practical effect of enforcement would be to preclude their ability to vindicate their federal statutory rights.” In holding that a class action arbitration waiver clause was not enforceable when it was fiscally impracticable for plaintiffs to vindicate their statutory rights through individual arbitrations, the Second Circuit ruled that existing law required the party seeking to invalidate an arbitration agreement on the ground that it was prohibitively expensive to bear the burden of showing the likelihood of incurring such costs. Notably, the court “[d]id not hold that class action waivers in arbitration agreements are per se unenforceable,” instead “hold[ing] that each waiver must be considered on its own merits.” The Second Circuit recently declined en banc review of this decision.
Several Southern District decisions – rendered after AT&T Mobility, but prior to the most recent American Express Merchants’ Litigation decision – specifically addressed the enforceability of class and collective action waivers in arbitration agreements in the context of Fair Labor Standards Act (the “FLSA”) and New York Labor Law (the “Labor Law”) claims. In Raniere v. Citigroup Inc., 827 F. Supp. 2d 294 (S.D.N.Y. 2011), loan officers who were bound by an arbitration policy requiring any claims to be brought on an individual basis alleged class and collective overtime pay claims. With respect to the named plaintiffs, the court noted that “[e]ach of their potential individual recoveries . . . is large enough that it would be neither lunacy nor fanaticism for either plaintiff, or her counsel, to pursue her claim individually.” In a holding at odds with the numerous federal appellate courts that had considered the issue specifically in the context of the FLSA and seemingly at odds with the Supreme Court’s decision in CompuCredit and the Second Circuit’s decision in American Express Merchants’ Litigation, the court held that the right to proceed collectively under the FLSA cannot be waived because “Congress created a unique form of collective actions for minimum wage and overtime pay claims brought under the FLSA.” Thus, the court found, enforcing the waiver provision would prevent the plaintiffs from vindicating their statutory rights. Further, notwithstanding the fact that it was fiscally practicable for the named plaintiffs to pursue individual claims, the court held that the second of the American Express Merchants’ Litigation decisions “must be read to 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.” The defendants have appealed these holdings to the Second Circuit.
In Sutherland v. Ernst & Young, 768 F. Supp. 2d 547 (S.D.N.Y. 2012), the court denied a motion for reconsideration of its prior decision ruling that the arbitration agreement at issue was unenforceable because it prevented the plaintiff from vindicating her statutory rights under the FLSA and the Labor Law. The agreement required binding arbitration and permitted arbitration on an individual basis only; the named plaintiff claimed actual damages of less than $2,000. The court held that the facts in this case “differ[ed] from Concepcion with respect to the plaintiff’s ability to vindicate her statutory rights.” Specifically, the Sutherland court stated that Concepcion emphasized “the provisions of the arbitration agreement in that case were more favorable to the plaintiffs than a class action,” but that the plaintiff in the case at bar “ha[d] established her inability to vindicate her claims pursuant to the Agreement.” Ernst & Young has appealed this decision.
In LaVoice v. UBS Fin’l Servs., Inc., 2012 WL 124590 (S.D.N.Y. Jan. 13, 2012), a financial advisor asserted class and collective action claims under the FLSA and the Labor Law. Compensation plan documents the employee had entered into provided for binding arbitration and the employee’s waiver of class and collective actions. Relying on the first two American Express Merchants’ Litigation decisions (the third decision was yet to be rendered by the time of the LaVoice court’s opinion), the plaintiff argued that the class waiver provisions were unenforceable. The court ruled that it did not need to reach the question of whether the Second Circuit’s decisions had been overturned by AT&T Mobility because it found the plaintiff’s claims to be arbitrable under both the American Express Merchants’ Litigation and the AT&T Mobility decisions. The court rejected the plaintiff’s argument that the FLSA created an unwaivable right to collective action, finding that argument precluded by AT&T Mobility; in so ruling, the court expressly declined to follow the Raniere court’s decision or the NLRB’s decision (discussed below). The LaVoice court also rejected the plaintiff’s argument that the arbitration agreements were unenforceable because they precluded him from exercising his statutory rights; among other things, the plaintiff asserted overtime claims of between $127,000 to $132,000, and thus he could not meet his burden of making such a showing.
In JetBlue Airways Corp. v. Stephenson, 88 A.D.3d 567, 931 N.Y.S.2d 284 (1st Dep’t 2011), airline pilots filed collective claims for breach of their employment agreements in arbitration, and the employer sought to stay the arbitration and compel the pilots to individually arbitrate their claims. It was undisputed that the agreements contained identical arbitration clauses, providing for binding arbitration (but not including any class or collective action waiver). The First Department held that the question of whether collective arbitration was permissible should be decided by the arbitrators, rather than the court. The court rejected the employer’s argument that Stolt-Nielsen precluded collective arbitrations; it distinguished that precedent on the basis that class arbitration was at issue there, not collective arbitration as in the case before it, and that “[c]lass arbitration and the collective proceeding that the pilots have demanded here are so fundamentally different that Stolt-Nielsen does not dictate the result.” The court added that “because the type of proceeding demanded by the pilots is not, like a class proceeding, so fundamentally different from an ordinary arbitration, we cannot, unlike the Supreme Court in Stolt-Nielsen, definitively say that the parties did not agree to it.”
The decision of the NLRB in D.R. Horton, Inc. and Michael Cuda, Case 12-CA-25764, 357 NLRB No. 184 (Jan. 3, 2012) has added another layer of confusion to the issue of class and collective waivers in arbitration agreements. In that case, the NLRB considered whether an employer violates the NLRA when, as a condition of their employment, it requires employees to sign an arbitration agreement precluding them from filing class or collective claims addressing their wages, hours or other working conditions in any forum. The NLRB ruled that an employer violates the NLRA by requiring employees to sign an arbitration agreement prohibiting the use of class and collective actions to resolve their claims. The NLRB found the arbitration agreement prohibited the exercise of substantive rights protected by the NLRA and that there was no conflict between the NLRA and the FAA under the circumstances of the case before it. The NLRB distinguished Stolt-Nielsen and AT&T Mobility on the basis that “[n]either involved the waiver of rights protected by the NLRA or even employment agreements,” adding that AT&T Mobility “involved a conflict between the FAA and state law, which is governed by the Supremacy Clause, whereas the present case involves the argument that two federal statutes conflict.” The NLRB further noted under its decision, “[e]mployers remain free to insist that arbitral proceedings be conducted on an individual basis” provided “the employer leaves open a judicial forum for class and collective claims.” D.R. Horton has appealed the NLRB’s decision.
There are special considerations for securities firms arbitrating cases before FINRA regarding this issue. Even before Stolt-Nielsen and AT&T Mobility, FINRA’s arbitration rules pertinent to employment disputes provided that class action claims could not be arbitrated before it. FINRA has recently proposed a rule change that would bar the arbitration of collective action claims as well. The SEC has given accelerated approval to the proposed rule change.
FINRA has recently initiated disciplinary proceedings against Charles Schwab & Company for violating its rules against class action waivers based on a provision in Schwab’s customer account agreement requiring customers to waive their rights to participate in class actions. Schwab initiated a judicial action seeking a declaration that it did not violate the applicable rule or, alternatively, that the rule could not be enforced to bar the class action waiver provision in light of the FAA. The court granted FINRA’s motion to dismiss this action. See Schwab v. Fin’l Indus. Regulatory Auth., 2012 WL 1859030 (N.D. Cal. May 11, 2012).
Stolt-Nielsen and AT&T Mobility reflect the strong pro-arbitration bent of the Supreme Court, and courts have interpreted differently the breadth of these decisions. It appears prudent for New York employers who enter into arbitration agreements with their employees and are concerned with potential FLSA cases to include class and collective waivers in those agreements in light of the fact that there is no provision in the FLSA that expressly precludes arbitration, and the Second Circuit in American Express Merchants’ Litigation embraced a case-by-case approach considering each waiver on its own merits.
Until the Supreme Court mandates a different result, employers located within the Second Circuit who include class and collective waivers in their arbitration agreements will see them struck if the plaintiff is able to prove that it is fiscally impracticable based on the potential damages and costs to vindicate their statutory rights through individual arbitrations. And, of course, employers who include such waivers run afoul of the current NLRB decision on the issue, a decision likely to be eventually heard by the Supreme Court.