The recent decision in Parisi v. Goldman, Sachs & Co., that plaintiffs are bound by valid arbitration agreements in Title VII cases – even when making class allegations – is a win for employers trying to avoid expensive class actions.

First, a little background, all from cases that did not involve employment claims: In 2010, the U.S. Supreme Court held that, where an arbitration agreement said nothing about class claims, a party could not be required to arbitrate on a class-wide basis. In 2011, the Court said that an express class action waiver in an arbitration agreement was generally valid. On the other hand, some federal appellate courts have said that a party cannot waive a “substantive statutory right” by way of an arbitration clause.

In Parisi, three female former employees sued the fi rm and The Goldman Sachs Group, alleging that the defendants engaged in a pattern and practice of sex discrimination, in violation of Title VII and the New York City Human Rights Law. During her employment, one of the plaintiffs, Lisa Parisi, had signed a Managing Director Agreement that said any disputes relating to her employment were subject to arbitration. The agreement was silent about the arbitration of class claims. As a result, after the plaintiffs fi led their lawsuit, the defendants fi led a motion to compel Ms. Parisi to individually arbitrate her claims.

Ms. Parisi argued that she should not have to arbitrate because she did not understand when she signed the agreement (1) that it was precluding her from bringing class claims, or (2) that it was precluding her from asserting her “substantive right to challenge systemic discrimination.” The defendants countered that a pattern-or-practice claim was not a substantive statutory right but only a method of proof – in other words, it was only one of many ways that a plaintiff could prove discrimination.

A federal court in the Southern District of New York, adopting a magistrate’s recommendation, found that the arbitration clause was valid but denied the defendants’ motion to compel arbitration, agreeing with Ms. Parisi that the agreement effectively waived Ms. Parisi’s “substantive rights” to bring a pattern-or-practice lawsuit under Title VII.

The defendants sought review by the U.S. Court of Appeals for the Second Circuit (which hears appeals from federal district courts in the states of Connecticut, New York, and Vermont). The Second Circuit reversed.

The Court’s Decision

The court noted that the Federal Arbitration Act creates a strong policy favoring arbitration, which “applies even when the claims at issue are federal statutory claims, unless the FAA’s mandate has been ‘overridden by a contrary congressional command.’” According to the court, the “substantive right” exception had been found to apply in only two types of cases: (1) where merchants would have been forced to individually arbitrate antitrust claims under the Sherman Act, or (2) where the agreement would have interfered with the right of the plaintiff to assert all rights that were authorized by the relevant statute (for example, an arbitration agreement that prohibited an employee from recovering compensatory and punitive damages in a race discrimination case).

In a Title VII “pattern-or-practice” claim, the plaintiff alleges that discriminatory actions were the Company’s regular practice, rather than one or more isolated occurrences. The Second Circuit had recently held in another case that pattern-or-practice was only a method of proving discrimination, not a free-standing cause of action.

Relying on this earlier decision, the Second Circuit found that Ms. Parisi’s class claim was something that she could “waive” – either expressly or by operation of law. (The U.S. Court of Appeals for the Fifth Circuit, which hears appeals from federal district courts in Louisiana, Mississippi, and Texas, had held the same way in a 2001 case.)

The court noted that Ms. Parisi’s agreement said nothing about class claims, so her means of proving her own discrimination case at arbitration and her potential recovery were not limited by the arbitration agreement. This made her situation different from cases where the arbitration agreement would have limited the rights given to plaintiffs under the applicable statutes.

The distinction between “pattern-or-practice as a substantive cause of action” versus “pattern-or-practice as a method of proof” may seem to be a technicality; however, it is hugely signifi cant. If it’s only a method of proof, then a class waiver in an arbitration agreement will prevent the employee from asserting class claims. Even if the agreement is silent, it will bar the class claims if one of the parties to the arbitration does not want to arbitrate those claims.

Analysis

The Parisi decision is clearly a win for employers in the Second Circuit and potentially elsewhere because it allows them to craft arbitration agreements in such a way that they should be able to avoid a great deal of class litigation.

Perhaps more importantly, this decision may be a good sign for employers awaiting the Second Circuit’s decisions in two cases currently pending regarding whether arbitration clauses could prevent collective actions under the Fair Labor Standards Act. (However, it should be noted that the collective action mechanism under the FLSA is not the same as the class action mechanism that applies to Title VII and other claims.)

Employers who do not have arbitration agreements should seriously consider adopting them in light of the Parisi decision as well as the Supreme Court precedent. Employers who already have such agreements should review them to ensure that they will have the effect of compelling most claims to be arbitrated on an individual basis.