String of Recent Decisions Confirm Employer’s Right to Enforce Class Action Waivers in Arbitration Agreements

Contributed by Suzanne Newcomb

In June, the Supreme Court upheld a contractual ban on class arbitration despite that the cost of individual arbitration so exceeded the potential recovery it made pursuing the claims impractical.  American Express v. Italian Colors.  AmEx was not an employment case but it begged the question:  might a bar to class or collective arbitration of FLSA claims also stand?  The Second Circuit answered with an unequivocal “yes” on Friday in Sutherland v. Ernst & Young and again Monday in Raniere v. Citigroup.

Sutherland earned a set salary for “low level clerical work.”  She sued for unpaid overtime “on behalf of herself and all others similarly situated.”  In addition to standard arbitration language, the agreement mandated that disputes “pertaining to different employees will be heard in separate proceedings.”  Sutherland sought $1,867 and claimed arbitration could cost $200,000.  She argued that the cost of individual arbitration so dwarfed the amount in controversy, it removed any incentive to enforce the statute.  The district court invalidated the arbitration agreement, finding the cost of individual arbitration prevented plaintiffs from “effectively vindicating” their rights.  Quoting AmEx, the Second Circuit reversed the holding, “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”   

So what are the practical implications?  We can confidently include class action waivers in arbitration agreements.  You can do it, does that mean you should?  The answer to that question, like the larger question of whether any arbitration agreement is right for your organization, is not as clear-cut.  Plaintiffs tend to file in court and fight for their right to litigate, thus adding a costly battle to the war.  Traditional arguments against enforcement remain, i.e. fraud, duress, unconscionability, etc.  Moreover, AmEx left the door open (though only slightly) for plaintiffs to argue an arbitration agreement is unenforceable when arbitration is unaffordable and thus prevents the plaintiff from pursuing her claims. 

Even when enforced, arbitration agreements are no panacea.  Arbitration is more private than traditional litigation and it can move more quickly, which can translate to lower attorney fees.  Arbitration removes the jury from the equation and with it the possibility of a “run away jury.”  However, the parties must pay the arbitrator.  Arbitrators tend to limit discovery, may not apply the rules of evidence as strictly and some shun summary judgment (a powerful tool for employers).  Furthermore, arbitrators are notorious for split decisions and there is very little room for appeal if you do not like the decision.  An effective class action waiver may mean fewer claims, but it could force an employer to fight a multitude of small claims.  Deciding whether an arbitration agreement is right for your organization and if so, whether that agreement should include a class action waiver, requires an individualized assessment and should not be taken lightly.