THE FUTURE OF CLASS ACTION WAIVERS IN EMPLOYMENT ARBITRATION AGREEMENTS
Posted on Nov 06, 2017 |Publications
By: David S. Feather, Esq.
New York Law Journal Labor & Employment Special Report
For the past several years, management-side employment and labor law attorneys have felt relatively confident in advising employers that it was lawful to have class/collective action waivers in arbitration agreements with their employees. This belief was based, in large part, on two relevant, although not entirely on-point, Supreme Court decisions, as well as a number of subsequent District and Circuit Court decisions. However, a recent split within the Circuit Courts on this issue has placed that confidence in doubt. The Supreme Court granted certiorari in three such recent Circuit cases, consolidated those cases, and heard oral argument on them on October 2, 2017. A decision, which should definitely resolve the issue of the enforceability of such waivers, is not expected until late Spring at the earliest.
PRIOR SUPREME COURT DECISIONS
In AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) the Supreme Court held that the Federal Arbitration Act (FAA) preempted state law doctrines that “disfavor arbitration” if those laws required the availability of class-wide arbitrations. According to the Supreme Court, such statutes interfere with the fundamental attributes of arbitration and create a scheme which is inconsistent with the FAA.
This was followed by Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013), in which the Supreme Court held that congressional approval of Fed. R. Civ. P. 23 did not establish an entitlement to class proceedings for the vindication of statutory rights. In Italian Colors Rest. the Supreme Court also rejected the Respondents' argument that the waiver of the right to proceed via class action violated the “effective vindication” exception to the FAA. This exception allows a court to invalidate, on public policy grounds, arbitration agreements which effectively prevent a party from actually or effectively pursuing his or her statutory rights/remedies. In so finding, the Court held that the fact that waiving one's right to proceed via class action, while perhaps not making it worth the expense involved in proving a statutory remedy, does not constitute the elimination of the right to pursue that remedy. Simply put, the Court stated that a class action waiver merely limits arbitration to the two contracting parties, and does not eliminate those parties' right to pursue their statutory remedy.
Although AT&T Mobility arose in the context of a consumer class action matter, and Italian Colors Rest. dealt with an alleged violation of the Sherman Act by a credit card company, following these decisions many (but not all) federal district courts considered them dispositive of the issue of whether class/collective action waivers in employment arbitration agreements were lawful. See, e.g., Chambers v. Groome Transp. of Ala., 41 F. Supp. 3d 1327 (M.D. AL 2014); Porreca v. Rose Group, 2013 U.S. Dist. Lexis 173587 (E.D. PA 2013); but cf. Sutherland v. Ernst & Young LLP, 847 F.Supp.2d 528 (S.D.N.Y. 2012)(finding the agreement at issue would operate as a waiver of the plaintiff's right to pursue her statutory remedies pursuant to the FLSA, and thus holding that the doctrine articulated by the Supreme Court in AT&T Mobility was inapplicable to the facts therein).
UNANIMITY IN CIRCUIT COURTS
Courts deciding whether waivers of class/collective actions in employment arbitration agreements are enforceable typically discuss, and resolve, two key issues. First is the inherent tension between two statutes, the FAA and the National Labor Relations Act (NLRA). On one hand, Section 2 of the FAA provides that arbitration agreements shall be “valid, irrevocable, and enforceable”. The Supreme Court has continually stressed that this section reflects a liberal federal policy favoring arbitration, that the enforceability of arbitration agreements/clauses is a matter of contract, and that courts must enforce them according to their terms. On the other hand, however, Section 7 of the NLRA guarantees employees the right to engage in concerted activities for the purpose of mutual aid or protection, while Section 8 of the same Act makes it an unfair labor practice for an employer “to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in Section 7”.
The second key issue is whether, under any circumstances, such arbitration clauses run afoul of the “effective vindication” exception to the FAA due to the relatively high cost of arbitration vis-à-vis the small damages of many individual claims in the employment law context, and in particular claims brought pursuant to the Fair Labor Standards Act (FLSA).
Prior to May 2016, all Federal Circuit Courts which dealt with the enforceability of class/collective action waivers in employment arbitration agreements had concluded that they are, indeed, enforceable. For example, in Vilches v. Travelers Cos., 413 Fed. Appx. 487 (3d Cir. 2011), the Third Circuit upheld an arbitration clause with a waiver of class actions, holding that there was no suggestion in the text, legislative history or purpose of the FLSA that Congress intended to confer a nonwaivable right to a class action under that statute. Likewise, in D.R. Horton v. NLRB, 737 F.3d 344 (5th Cir. 2013), the Fifth Circuit, concluding that the use of class action proceedings is a procedural and not a substantive right, and that neither the statutory history of the NLRA nor its legislative history contain a congressional command to override the FAA, held that an employment arbitration agreement's waiver of class procedures was lawful. See also Murphy Oil USA, Inc. v. NLRB, 808 F.3d 1013 (5th Cir. 2015).
In Owen v. Bristol Care, Inc., 702 F.3d 1050 (8th Cir. 2013), the Eighth Circuit, in finding that employment-based arbitration agreements containing class waivers were enforceable, held that the FLSA contained no contrary congressional command as required to override the FAA, nor was there any inconsistency between either the FLSA text or its legislative history and the conclusion that such waivers were lawful. The Eight Circuit reiterated that holding in Cellular Sales of Mo., LLC v. NLRB, 824 F.3d 772 (8th Cir. 2016). Finally, in Walthour v. Chipio Windshield Repair, LLC, 745 F.3d 1326 (11th Cir. 2014), the Eleventh Circuit concluded that the enforcement of collective action waivers in arbitration agreements is not inconsistent with the FLSA, and that the FLSA does not provide a non-waivable, substantive right to bring a collective action.
The Second Circuit Court of Appeals has decided this issue on at least three recent occasions, and has joined the Third, Fifth, Eighth and Eleventh Circuits in holding that employees may waive the right to proceed via collective/class action in arbitration. In Sutherland v. Ernst & Young, 726 F.3d 290 (2d Cir. 2013), the Court, following the reasoning of Supreme Court in Italian Colors Rest., supra, held that while the effective vindication doctrine could be used to invalidate a provision in an arbitration agreement if it precluded the assertion of certain statutory rights, employees cannot use the doctrine to invalidate a class-action waiver provision by showing that they had no economic incentive to pursue their FLSA claims individually through arbitration.
In Rainiere v. Citigroup Inc., 533 Fed. Appx. 11 (2d. Cir. 2013), the Second Circuit overruled both of the lower court's conclusion: first, that a waiver of the right to proceed collectively under the FLSA is unenforceable as a matter of law, and second, that if one 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 the entire class or collective. See also Patterson v. Raymours Furniture Co., 659 Fed. Appx. 40 (2d Cir. 2016)(citing Sutherland, supra in upholding an arbitration waiver of a collective or class action in an FLSA matter).
SPLIT IN THE CIRCUITS
The unanimity of the Circuit Courts was shattered by the Seventh Circuit in Lewis v. Epic Sys. Corp., 823 F.3d 1147 (7th Cir. 2016). In that case, the Court, holding that Section 7 of the NLRA should be read broadly to include resort to representative, joint, collective or class legal remedies, concluded that any contract provision which strips employees' rights to engage in concerted activities, such as class or collective actions, was unenforceable.
That decision was followed by the Ninth Circuit's decision in Morris v. Ernst & Young, LLP 834 F.3d 975 (9th Cir. 2016), in which the Court held that by forcing an employee to proceed individually, such waivers prevented the initiation of concerted work-related legal claims, thus violating Sections 7 and 8 of the NLRA. Finally, in NLRB v. Alt. Entm't., Inc., 858 F.3d 393 (6th Cir. 2017), the Sixth Circuit reached the same conclusion for basically the same reasons.
SUPREME COURT GRANTS CERTIORARI
The United States Supreme Court granted certiorari in the matters of National Labor Relations Board v. Murphy Oil USA, Inc., Epic Systems Corp. v. Lewis and Ernst & Young v. Morris, consolidated these matters for purposes of oral argument, and heard oral argument on October 2, 2017.
As set forth above, in deciding the three consolidated cases before them, the Justices will have to resolve the inherent tension between the FAA's liberal policy on arbitration and the NLRA's protection of collective activity. In addition, the Court will have to determine whether, in forbidding class/collective actions, such arbitration clauses may run afoul of the “effective vindication” exception to the FAA due to the relatively high cost of arbitration and the small monetary amounts of many individual claims in the employment law context, and in particular claims under the FLSA. Whatever its final holding(s), the Court's decision will provide much-needed clarity for management-side employment and labor law attorneys regarding this issue.
David S. Feather, Esq. is a member of NAM's (National Arbitration and Mediation) Hearing Officer Panel and is available to arbitrate and mediate employment law matters throughout New York State. He is also the principal of Feather Law Firm, P.C., a boutique labor and employment law firm located in Garden City, NY.
For any questions or comments, please contact Jacqueline I. Silvey, Esq. / NAM General Counsel, via email at firstname.lastname@example.org or direct dial telephone at 516-941-3228.
Reprinted with permission from the November 6, 2017 issue of The New York Law Journal © 2017 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.