Second Circuit decision
Southern District of New York decisions
New York State appellate ruling
NLRB's position and FINRA
The US Supreme Court held in Stolt-Nielsen v Animalfeeds Int'l Corp(1) that parties cannot be compelled to submit class antitrust claims to arbitration when the arbitration clauses in their agreements are silent on the question of class arbitration (for further details please see "Arbitration cases: favourable developments for employers").
The Supreme Court ruled in AT&T Mobility LLC v Concepcion(2) that the Federal Arbitration Act 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 stance.(3)
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 agreements with their employees are 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 Labour Relations Board (NLRB) has ruled that an employer violates the National Labour Relations Act by requiring employees to sign an arbitration agreement prohibiting the use of class and collective actions to resolve their claims. These developments are summarised below.
Second Circuit decision
In February 2012 the Second Circuit was confronted for the third time with In re American Express Merchants' Litigation.(4) 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 the plaintiff's submission of evidence detailing the fiscal impractability 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 Federal Arbitration Act, ruling that neither Stolt-Nielsen nor AT&T Mobility addressed the issue that 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 stated that it "[d]id not hold that class action waivers in arbitration agreements are per se unenforceable", instead holding 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 before 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 Labour Standards Act and New York Labour Law claims. In Raniere v Citigroup Inc(5) 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 have considered the issue specifically in the context of the Fair Labour Standards Act, and seemingly at odds with the Supreme Court's decision in CompuCredit(6) and the Second Circuit's decision in American Express Merchants' Litigation, the court held that the right to proceed collectively under the Fair Labour Standards Act cannot be waived because "Congress created a unique form of collective actions for minimum-wage and overtime pay claims brought under the Fair Labour Standards Act".
Thus, the court found that 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(7) 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 Fair Labour Standards Act and the New York Labour 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 "emphasised...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(8) a financial adviser asserted class and collective action claims under the Fair Labour Standards Act and the New York Labour Law. Compensation plan documents that 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 Fair Labour Standards Act 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 and $132,000, and thus he could not meet his burden of making such a showing.
New York State appellate ruling
In JetBlue Airways Corp v Stephenson(9) airline pilots filed collective claims for breach of their employment agreements in arbitration; the employer sought to stay the arbitration and compel the pilots to arbitrate their claims individually. 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 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".
NLRB's position and FINRA
The NLRB's decision in DR Horton Inc and Michael Cuda(10) 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 violated the National Labour Relations Act when, as a condition of their employment, it required 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 National Labour Relations Act 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 National Labour Relations Act and that there was no conflict between the act and the Federal Arbitration Act 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 act or even employment agreements", adding that AT&T Mobility "involved a conflict between the Federal Arbitration Act 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 that "the employer leaves open a judicial forum for class and collective claims". DR Horton has appealed the NLRB's decision.
There are special considerations for securities firms arbitrating cases before the Financial Industry Regulatory Authority (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 Securities and Exchange Commission 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 Federal Arbitration Act. The court granted FINRA's motion to dismiss this action.(11)
Stolt-Nielsen and AT&T Mobility reflect the Supreme Court's strong pro-arbitration stance and courts have interpreted differently the breadth of these decisions. It appears prudent for New York employers that enter into arbitration agreements with their employees and are concerned with potential Fair Labour Standards Act cases to include class and collective waivers in those agreements in light of the fact that there is no provision in the Fair Labour Standards Act 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 which 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. Employers which include such waivers run afoul of the current NLRB decision on the issue – a decision likely to be eventually heard by the Supreme Court.
For further information on this topic please contact Kevin B Leblang or Robert N Holtzman at Kramer Levin Naftalis & Frankel LLP by telephone (+1 212 715 9100), fax (+1 212 715 8000) or email (email@example.com or firstname.lastname@example.org).
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
(3) 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 Federal Arbitration Act."; and 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 as "the [federal statute at issue] is silent on whether claims under the Act can proceed in an arbitrable forum, the Federal Arbitration Act requires the arbitration agreement to be enforced according to its terms".