Employment Law | Expert Legal Commentary

January 13, 2014

Sutherland v. Ernst & Young LLP: Second Circuit Denies Class Arbitration for Low-Value Employment Claims

Sutherland v. Ernst & Young LLP

By Jeremy Gray of Zuber Lawler & Del Duca

Sutherland v. Ernst & Young LLP: Second Circuit Denies Class Arbitration for Low-Value Employment Claims

The Second Circuit has upheld a waiver of class arbitration under the Federal Labor Standards Act. In Sutherland v. Ernst & Young LLP, No. 12-304 (2d Cir. Aug. 9, 2013), the Court found that the high cost of pursuing individual arbitration in light of a very low-value claim was not sufficient justification to invalidate an employee’s waiver of class arbitration. The Court was especially bound by the Supreme Court’s similar holding in American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), which dealt with another high cost/low reward arbitration in an antitrust matter.

Background

Stephanie Sutherland was an employee at Ernst & Young and did mostly clerical work.  Sutherland was classified as a salary-only employee, and thus received no overtime pay.  At the time of hiring, she signed a mandatory arbitration agreement which mandated separate, individual proceedings (and thus forbid class arbitration).

Sutherland alleged that she regularly worked over 40 hours per week, but due to being misclassified by Ernst & Young under the Fair Labor Standards Act (“FLSA”) and New York state law, she was not compensated for overtime.  Sutherland filed a class action in district court against Ernst & Young, despite the arbitration agreement, to recover $1,867.02 in unpaid overtime on the theory that Ernst & Young wrongfully classified her as “exempt” under employment laws.

Ernst & Young moved to dismiss the proceedings and compel to arbitration in light of the arbitration agreement.  Sutherland, however, argued that the provision requiring individual arbitration was unenforceable because it prevented her from “effectively vindicating” her rights under the FLSA and New York state law.  Specifically, Sutherland estimated that attorneys fees and costs of an arbitration would be about $200,000 in order to recover less than $2,000, and thus recovery was only available in a collective action with shared costs.

The district court sided with Sutherland and denied Ernst & Young’s motion to dismiss.  The court relied on In re American Express Merchants’ Litigation, 554 F.3d 300 (2d Cir. 2009) (“Amex I”), which invalidated a provision barring class actions in an antitrust matter because the plaintiffs would have been unable to vindicate statutory rights if the provision was enforced.  The district court found that similarly, “enforcement of the class waiver provision in this case would effectively ban all proceedings by Sutherland against E&Y.”  Sutherland v. Ernst & Young, LLP, 768 F. Supp 2d 547, 554 (S.D.N.Y. 2011).

Court Finds Two Potential Pathways to Invalidate Arbitration Agreement

On appeal to the Second Circuit, the Court asked whether an employee can invalidate a class action waiver provision in an arbitration agreement when that waiver removes the financial incentive for her to pursue an FLSA claim.

Generally, courts have been in favor of enforcing arbitration agreements.  The Court noted that the Supreme Court recently compelled lower courts to “rigorously enforce arbitration agreements according to their terms, including terms that specify with whom the parties choose to arbitrate their disputes, and the rules under which that arbitration will be conducted.” Italian Colors, 133 S. Ct. at 2309.

The Court, however, noted two ways in which arbitration agreements (or parts thereof) can be held unenforceable.  The first is if Congress has expressed “contrary congressional command” as was discussed in Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 226 (1987).  The second is if the agreement prevents “effective vindication of a federal statutory right” as was discussed in Italian Colors, 133 S. Ct. at 2310.  The Court discussed these two pathways in turn.

Court Finds No Contrary Congressional Command That Would Allow Rejection of Waiver of Class Arbitration

The Court first examined whether there was any evidence of a “contrary congressional command” that would allow courts to reject a waiver of class arbitration.  While the Court noted that the Second Circuit had never addressed this issue, the Court was persuaded by the fact that other circuits and the Supreme Court did not find a contrary congressional command to allow such rejections. Italian Colors, 133 S. Ct. at 2309.

In response, Sutherland argued that the FLSA creates a “right” to collective action because statute provides that an action may be brought by “one or more employees for and in behalf of himself or themselves or other employees similarly situated.”  29 U.S.C. § 216(b).  The Court dismissed this argument, noting that § 216(b) also requires an employee to affirmatively opt-in to any collective action.  The Court reasoned that if an employee must opt-in, he or she must also have the power to waive participation in a class action.  Owen v. Bristol Care, Inc., 702 F.3d 1050, 1052-53 (8th Cir. 2013).

The Court also cited two Supreme Court cases which held that the waiver of collective action claims is permissible.  In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Supreme Court held that the Federal Arbitration Act (“FAA”) preempted a California judicial rule which found that some class action waivers in consumer contracts were unconscionable.  The Supreme Court found that the rule would “interfere with fundamental attributes of arbitration and thus create a scheme inconsistent with the FAA.”  Id. at 1748.  In Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), the Court upheld a waiver of collective action provision in the Age Discrimination in Employment Act.

The Court concluded that the FLSA does not include a “contrary congressional command” that prevents Sutherland’s arbitration agreement from being enforced by its terms.

Court Bound by Limited “Effective Vindication Doctrine,” No Relief for High Cost, Low Value Claims

The Court next dealt with whether Sutherland could invoke a judge-made exception to the FAA which “allows courts to invalidate agreements that prevent the effective vindication of a federal statutory right.”  Italian Colors, 133 S. Ct. at 2310.  Sutherland argued that individual arbitration would prevent the effective vindication of her FLSA claim because of the high cost, low reward nature of her claim.

The Court first noted that Amex I, which formed the basis of the district court’s denial of Ernst & Young’s motion to dismiss, was subsequently reversed by the Supreme Court in Italian Colors.

The Court then explained that the “effective vindication doctrine” was more limited than Sutherland had argued.  The doctrine could be used to invalidate “a provision in an arbitration agreement forbidding the assertion of certain of statutory rights….(and) would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impractical.” Id. at 2310-11.  However, the Supreme Court continued that plaintiffs could not use the doctrine to invalidate class action waivers because “they had no economic incentive to pursue their FLSA claims individually in arbitration.”  Id. at 2310.  The Supreme Court concluded that “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.” Id. at 2311.

The Court concluded that under the Supreme Court’s holding in Italian Colors, Sutherland’s high cost, low reward argument was not a sufficient basis to invalidate the class action waiver under the “effective vindication doctrine.”  In the end, the Court reversed the district court and compelled arbitration.

Conclusion

The Court’s holding in Sutherland extends the view that courts will strictly enforce arbitration agreements as written to include class arbitration waivers under the FLSA.  Employers with concerns about managing employee disputes or those facing employment litigation or arbitration claims should contact experienced employment counsel to see how Sutherland may affect your ability to control employment-related disputes.

About the Author

Jeremy Gray is a Partner of Zuber Lawler & Del Duca, focusing on employment law.

Image Credit: ©iStockphoto.com/bluestocking

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