Reversing its own precedent, the 2nd U.S. Court of Appeals upheld a class and collective action waiver provision in an arbitration agreement.
The case involved Stephanie Sutherland, an Ernst & Young audit employee who filed a collective action under the Fair Labor Standards Act against her former employer. She charged the company with failing to pay her a total of $1,867.02 in overtime.
When she began to work for the company, Sutherland signed an offer letter and a confidentiality agreement, which included an arbitration provision covering both “[c]laims based on federal statutes such as…the Fair Labor Standards Act,” as well as state law claims concerning wages and salary. In addition, the agreement prohibited class or collective actions. Based on the agreement, E&Y sought to compel individual arbitration.
Sutherland objected. Given the costs to arbitrate her claim individually –she estimated attorneys’ fees of $160,000, costs in excess of $6,000, and expert testimony running at least $25,000 – she would have to spend roughly $200,000 to recover less than $2,000.
A federal court judge agreed that requiring individual arbitration would prevent Sutherland from “effectively vindicating” her rights under state law and the FLSA. The court relied heavily upon a 2nd Circuit case brought by a class of merchants alleging antitrust violations against American Express.
Ernst & Young appealed. In the interim, the American Express case from the 2nd Circuit went up to the U.S. Supreme Court. In June the justices reversed the 2nd Circuit, ruling that plaintiffs could not invalidate a class arbitration waiver under the “effective vindication” doctrine. Even though it would be cost-prohibitive for the class members to bring their claims on an individual basis, the 5 to 3 Court said “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.”
Applying the Italian Colors v. American Express decision to Sutherland’s case, the 2nd Circuit reversed the order denying E&Y’s motion to compel individual arbitration.
The FLSA does not contain a “contrary congressional command” barring waivers of class arbitration, the three-judge panel wrote, citing similar conclusions from the 4th, 5th, and 8th Circuits. The text of the statute does not indicate an intent to preclude such a waiver, the court said, and recent U.S. Supreme Court precedents “inexorably lead to the conclusion that the waiver of collective action claims is permissible in the FLSA context.
Further, Sutherland could not rely upon the “effective vindication” doctrine.“Despite the obstacles facing the vindication of Sutherland’s claims, the Supreme Court’s recent decision in Italian Colors, which reversed ourdecision…compels the conclusion that Sutherland’s class action waiveris not rendered invalid by virtue of the fact that her claims are noteconomically worth pursuing individually,” the 2nd Circuit wrote.
“[I]n light of the Supreme Court’s holding that the ‘effective vindication doctrine’ cannot be used to invalidate class-action waiver provisions incircumstances where the recovery sought is exceeded by the costs of individual arbitration, we are bound to conclude that Sutherland’s arguments are insufficient to invalidate the class-action waiver provision here,” the court concluded.
To read the decision in Sutherland v. Ernst & Young LLP, click here.
Why it matters: The 2nd Circuit’s decision is a resounding victory foremployers, affirming the fact that employees can validly waive class orcollective arbitration proceedings in employment agreements. It also reinforces the impact of the Supreme Court’s enforcement of class actionwaivers in the employment setting. While Italian Colors involved antitrust claims, the 2nd Circuit did not hesitate to apply the principles of the decision in the context of an FLSA collective action.