The Second Circuit U.S. Court of Appeals has become the first federal Court of Appeals to apply the Supreme Court's recent pro-arbitration decision in an antitrust case, American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), to the employment setting. Specifically, in an important pro-employer decision, the Second Circuit has ruled that an arbitration agreement can require employees to waive their rights to bring, or to participate in, class action litigation. Sutherland v. Ernst & Young LLP, 2013 U.S. App. LEXIS 16513 (Aug. 9, 2013). This decision confirms that employers may be able to eliminate their risk of class action employment litigation if they adopt a properly-constructed arbitration program.

At Hire, Employee Agreed to Mandatory Alternative Dispute Resolution Program

Stephanie Sutherland worked for Ernst & Young (E&Y) as a salaried audit associate for a little over one year. At the time she accepted the job, Sutherland signed a standard E&Y offer letter, which stated that "if an employment related dispute arises between you and the firm, it will be subject to mandatory mediation/arbitration under the terms of the firm's alternative dispute program, known as the Common Ground Program." The E&Y Common Ground program requires that disputes "will be submitted first to mediation and, if mediation is unsuccessful, then to binding arbitration," and significantly, the Common Ground program specifies that disputes "pertaining to different [e]mployees will be heard in separate proceedings." Notwithstanding these provisions, Sutherland filed a wage-hour collective action, claiming that she was misclassified as exempt and was owed approximately $1900 in unpaid overtime.

After Sutherland filed her putative class action, E&Y sought to compel arbitration. E&Y argued that the Federal Arbitration Act (FAA) required enforcement of the arbitration agreement, including the agreement that Sutherland arbitrate her claims on an individual basis. Sutherland sought to rely on a loophole in the form of a judicially-created exception to the FAA for circumstances where enforcement of the arbitration agreement would prevent the plaintiff from "effectively vindicating" her claims. In her case, Sutherland argued, basic economics called for application of the "effective vindication" exception, since her claim amounted to less than $2000, and would be dwarfed by her attorney's fees and costs — which she estimated to be approximately $200,000 — if she were forced to proceed individually. Thus, Sutherland in essence argued "that to 'effectively vindicate' her claims in an individual arbitration, she would be required to expend approximately $200,000 to recover less than $2,000."

The District Court agreed with Sutherland and relied on the "effective vindication" exception in ruling that the provision calling for mandatory individual arbitrations was invalid. As the District Court saw it, "enforcement of the class waiver provision… would effectively ban all proceedings by Sutherland against E&Y… because of the nature of her 'low-value, high-cost claim.'" E&Y appealed to the Second Circuit, which reversed and enforced the class action waiver.

Collective Actions are Not Necessary to Effectively Vindicate FLSA's Rights and the FLSA's Authorization of Collective Actions Does Not Override the FAA

The Second Circuit addressed Sutherland's "effective vindication" argument by looking to the Supreme Court's recent American Express Co. v. Italian Colors Restaurant case. While American Express was an antitrust case, the Second Circuit found that it is fully applicable in the employment setting and held that it "compels the conclusion that Sutherland's class-action waiver is not rendered invalid by virtue of the fact that her claim is not economically worth pursuing individually." The Second Circuit thus becomes the first Court of Appeals to applyAmerican Express to an employment case, and effectively close the "effective vindication loophole that has been used by courts, including the district court below, to block individual arbitration. Thus, even where, as in Sutherland's case, "pursuing individual arbitration would be prohibitively expensive because the recovery [sought] is dwarfed by the costs of individual arbitration" class action waivers are enforceable.

The Second Circuit next turned to Sutherland's alternative arguments that the FAA's pro-arbitration policy "has been overridden by a contrary congressional command." Sutherland first attempted to find this "contrary congressional command" in the FLSA's express authorization of collective actions. But the Second Circuit made short work of this argument, joining the Fourth, Fifth, and Eighth Circuits in holding that while the FLSA does authorize collective actions, it does not require them and it does not prevent employees from agreeing to forego their ability to participate in collective actions.

Finally, the Second Circuit relegated to a footnote Sutherland's alternative argument that the National Labor Relations Act (NLRA) constitutes the "contrary congressional command" and bars class action waivers because it protects employees' rights to act collectively. This argument may have been accepted by the NLRB, but the Second Circuit joined the Eighth Circuit in declining to give any deference to the NLRB's reasoning. The Second Circuit also noted that the NLRB may have been proceeding without a proper quorum based on invalid recess appointments.

Class Action Waivers More Likely to be Enforced

The Second Circuit's decision is significant because it is the first Court of Appeals decision to apply the Supreme Court's most recent strong pro-arbitration American Express decision to the employment setting. In doing so, the Second Circuit becomes the fourth Court of Appeals to rule that the FLSA does not bar class action waivers. As a practical matter, this means that the "effective vindication" loophole now is closed and employers likely can eliminate entirely their risk of wage-hour class actions or collective actions by incorporating a properly drafted class action waiver into an arbitration program. Of course, arbitration has pitfalls of its own and is not a "one size fits all" answer for every employer. But with the current judicial landscape and strong pro-arbitration rulings from the Supreme Court, most employers may want to give arbitration serious consideration.