Category Archives: Class Certification

S.D.Cal.: Although Arbitration Agreement With Class Waiver Enforceable, Confidentiality Provision Stricken as Unconscionable Because Overbroad

Grabowski v. Robinson

This case was before the court on defendant’s motion to compel arbitration on an individual (rather than class) basis.  Although the court noted that plaintiffs were required to sign the arbitration agreement contained in their compensation agreements, under threat of forfeiture of commissions, the court held that did not make the agreement unenforceable as entered into under duress.  The court also, in large part, dismissed other arguments regarding the substantive and procedural unconscionability of the agreement.  However, as discussed here, the court held that the confidentiality provision which barred any discussion of the litigation without the other party’s consent to be far too broad.

Discussing the confidentiality provision the court stated:

“Plaintiff contends: ‘[T]he Defendant’s rules impose confidentiality which unfairly favors Defendant. While arbitration normally is not open to the public, the Defendant’s rules go much further. Defendant’s rules require that the record of the proceedings be confidential under threat of a sanction order by the arbitrator.’

The Employment Dispute Mediation/Arbitration Procedure contains a provision entitled, “Confidentiality,” which states:

All aspects of the arbitration, including without limitation, the record of the proceeding, are confidential and shall not be open to the public, except (a) to the extent both Parties agree otherwise in writing, (b) as may be appropriate in any subsequent proceedings by the Parties, or (c) as may otherwise be appropriate in response to a governmental agency or legal process, provided that the Party upon whom such process is served shall give immediate notice of such process to the other Party and afford the other Party an appropriate opportunity to object to such process.

At the request of a Party or upon his or her initiative, the Arbitrator shall issue protective orders appropriate to the circumstances and shall enforce the confidentiality of the arbitration as set forth in this article.

In Davis, the Court of Appeals for the Ninth Circuit stated that, under California law, “[c]onfidentiality by itself is not substantively unconscionable,” but the employer’s “confidentiality clause … is written too broadly” and “unconscionably favors [the employer],” when the clause at issue “would prevent an employee from contacting other employees to assist in litigating (or arbitrating) an employee’s case.” Davis, 485 F.3d at 1078–79 (“The clause precludes even mention to anyone ‘not directly involved in the mediation or arbitration’ of ‘the content of the pleadings, papers, orders, hearings, trials, or awards in the arbitration’ or even ‘the existence of a controversy and the fact that there is a mediation or an arbitration proceeding.’ ”). In this case, the confidentiality provision in the Employment Dispute Mediation/Arbitration Procedure is broader than what the court in Davis indicated would be conscionable. Cf. id. at 1079 (noting that “[t]he parties to any particular arbitration, especially in an employment dispute, can always agree to limit availability of sensitive employee information (e.g., social security numbers or other personal identifier information) or other issue-specific matters, if necessary”).

The Court finds that the confidentiality provision in the arbitration agreement is substantively unconscionable under California law.”

While courts- seemingly bound by a recent slew of employer/arbitration-friendly decisions from the Supreme Court- continue to compel arbitration and enforce class and collective action provisions contained in arbitration agreements, this decision seems somewhat in line with the remedial nature of the FLSA and related state wage and hour laws.  One way employees and their counsel can try to even the playing field might be to seek court-approved notice of pending litigation, notwithstanding the inability to proceed as a class/collective action.  Notifying other employees of existing litigation (and their rights to be paid in accordance with wage and hour laws) would certainly be in line with the remedial purposes of the FLSA and related state wage and hour laws.  In any event, the court’s holding that an employer cannot hide its alleged violations for other employees certainly seems to be a step in the right direction.

Click Grabowski v. Robinson to read the entire Opinion.

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E.D.Pa.: Dukes Does Not Affect Court’s Analysis On 216(b) Conditional Cert Motion; Defendant’s Motion to Reconsider Denied

Spellman v. American Eagle Exp., Inc.

In one of the first decisions, post-Dukes, to clarify what affect the Supreme Court’s recent decision will have on conditional certification of FLSA cases, the answer appears to be not much.

In Dukes, the Supreme Court held that the trial court had inappropriately certified a class of over a million women employed by Wal-mart, based on claims of gender bias.  The Supreme Court reasoned that the plaintiffs had not met their burden to demonstrate the requisite commonality required by FRCP 23.  In the wake of Dukes, there was much speculation as to whether courts would extend the reasoning in Dukes to cases seeking conditional certification of collective actions under 216(b) of the FLSA.  In one of the first decisions rendered on this issue, the answer appears to be a resounding no.

This case was before the court on the defendant’s motion seeking reconsideration of the court’s prior order conditionally certifying a class of drivers employed by defendant.  Plaintiffs alleged that defendant, a trucking company, improperly misclassified all of its drivers as independent contractors, when they were really employees.  Holding that plaintiffs had met their lenient burden of proof as so-called stage one, the court conditionally certified a nationwide class of drivers, all of whom had been classified as independent contractors.  Following the Duke’s decision, the defendant sought reconsideration of the order conditionally certifying the class.  Denying the motion, the court explained that the differences between FRCP 23, the class action provision under which Dukes was decided and 216(b), the opt-in provision for FLSA collective actions render Dukes inapplicable in the context of an FLSA collective action.  As such, the court denied defendant’s motion.

The court reasoned:

“The instant case is a collective action brought pursuant to the FLSA, 29 U.S.C. § 216(b). Unlike Rule 23 class actions. the FLSA requires collective action members to affirmatively opt in to the case. See § 216(b). To determine whether the proposed group of plaintiffs is “similarly situated,” and therefore qualified to proceed as a conditional collective action, a district court applies a two-step test. See Smith v. Sovereign Bancorp, Inc., No. 03–2420, 2003 U.S. Dist. LEXIS 21010 (E.D.Pa. Nov. 13, 2003). In the first step, which is assessed early in the litigation process, the plaintiff at most must make only a “modest factual showing” that the similarly situated requirement is satisfied. See Bosley v. Chubb Corp., No. 04–4598, 2005 U.S. Dist. LEXIS 10974, at *7–9 (E.D.Pa. Jun. 3, 2005). The Plaintiffs have made this modest factual showing, and this Court’s analysis is not affected by Dukes. The second step of the collective action certification process will be conducted at the close of class-related discovery, at which time this Court will conduct “a specific factual analysis of each employee’s claim to ensure that each proposed plaintiff is an appropriate party.” Harris v. Healthcare Servs. Grp., Inc., No. 06–2903, 2007 U.S. Dist. LEXIS 55221, at *2 (E.D.Pa. Jul. 31, 2007). At this second stage, AEX may argue that Dukes‘s analysis of what constitutes a “common question” is persuasive to this Court’s analysis of whether an FLSA collective action should be certified. In the interim, AEX’s motion for reconsideration is denied.”

Click Spellman v. American Eagle Exp., Inc. to read the entire Order.

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9th Cir.: Defendant in Putative Wage and Hour Class Action May Not “Pick Off” Class With OJ to Named Plaintiff

Pitts v. Terrible Herbst, Inc.

This case was before the Ninth Circuit on any issue that has become more and more prevalent in recent years, with the increased wage and hour putative class and collective action filings.  Specifically, the issue before the Ninth Circuit was “whether a rejected offer of judgment (OJ) for the full amount of a putative class representative’s claim moots a class action complaint where the offer precedes the filing of a motion for class certification.”  The Ninth Circuit held that it does not and a defendant may not “pick off” a class by making such an offer to the named-plaintiff alone.

The procedural history in the case is worth discussing, because there were other issues, not discussed in detail, also addressed in the opinion.  The trial court had not set a bright-line deadline for filing a motion for class certification simultaneously.  And, because the defendant failed to provide plaintiff with the records pertaining to the putative class members during the initial discovery period, plaintiff filed a motion to compel and sought to extend the discovery deadline as well.  The court ultimately granted both motions.  However, while it held that the OJ did not moot the claim, it nonetheless dismissed the case, because the plaintiff had failed to move for class certification as of the initial discovery deadline.  This appeal ensued.

After reviewing surveying applicable case law from around the country, the court held that the district court below properly concluded that a defendant may not “pick off” a putative class action, by tendering payment to the named-plaintiff alone.

Other issues the court discussed included whether state law class actions (Rule 23 classes) are “inherently incompatable” with FLSA opt-in actions.  However, because the plaintiff had volutarily dismissed his FLSA claims at the lower court, the Ninth Circuit declined to address this hot-button issue, addressed earlier in the year by the Seventh Circuit and currently pending before the Third Circuit.  The court did rule however, that the court below erred in dismissing the case based on plaintiff’s perceived failure to move for class certification in a timely manner.  On this issue the Ninth Circuit opined, “[w]ithout a clear statement from the district court setting a deadline for the filing of the motion for class certification, Pitts could not predict that he was expected to file his motion by the end of the initial discovery deadline.”

Click Pitts v. Terrible Herbst, Inc. to read the entire decision.

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S.D.Fla.: Defendant May Not Seek SJ Against Individual Plaintiffs Where Case Remains Certified At Stage 2

Hernandez v. Starbucks Coffee Co.

In this case plaintiffs, “store managers” at Starbucks claimed they had been uniformly misclassified as exempt employees and wrongly denied overtime as a result.  The case was before the court on defendant’s motion for summary judgment regarding 4 individual plaintiffs in the (certified) class—on the ground that these Plaintiffs offered generally consistent testimony that compels the conclusion that they are exempt “executive” employees as a matter of law.  Significantly, prior to defendant filing its motion for summary judgment, the court had denied defendant’s motion to decertify the class.  The court denied defendant’s motion, largely on the ground that it is inappropriate for a defendant to attempt to target individual plaintiffs for summary judgment, where the class is proceeding as a whole and liability will therefore be determined on a classwide rather than individual basis.

The court explained:

“Before reaching the merits of this argument, the Court must first consider whether it is even proper for Defendant to move for summary judgment as to selected individual Plaintiffs when the Court is presented with a collective action. Relying upon Hogan v. Allstate Ins. Co., 361 F.3d 621, 623 (11th Cir.2004), Defendant argues that where a “FLSA collective action has been conditionally certified but no ruling has been made as to whether the case will proceed to trial as a collective action, the district court may entertain summary judgment motions as to individual plaintiffs.” [DE–241, pg. 12]; see also Lindsley v. Bellsouth Telecomm., Inc., Case No. 07–6569, 2009 WL 322144, at *2 (E.D.La. Feb.9, 2009) (denying motion to strike motion for summary judgment against an individual, named plaintiff, finding it “appropriate to choose [the individual plaintiff] as a test plaintiff to resolve the issue of employee versus independent-contractor status.”).

In response, Plaintiffs argue that the Court should reject Defendant’s attempt to have its motion treated as one directed to only certain individuals, as opposed to the class as a whole, pointing to Judge Marra’s conclusion in Pendlebury v. Starbucks Coffee Company, Case No. 04–80521–CIV–KAM, DE–495 (S.D. Fla. filed Jan. 8, 2008). Plaintiffs point out that unlike Hogan, 361 F.3d at 623, neither this Court nor Plaintiffs have consented to a “test plaintiff” procedure, and Defendant cannot randomly select certain individual Plaintiffs and at the same time seek to prohibit Plaintiffs from using testimony from other Plaintiffs in order to oppose the entry of summary judgment. Defendant attempts to refute this argument by contending that Rule 56(a) permits it to seek summary judgment as to a claim or defense, or part of a claim or defense, and reiterates the holding in Hogan. Defendant also argues that Plaintiffs have not cited to any authority prohibiting the Court from considering such a motion where as here the Court has not yet conducted a stringent review of the propriety of collective treatment.

Importantly, subsequent to Defendant filing the instant motion for summary judgment, on June 28, 2011, this Court denied Defendant’s motion for decertification [DE–300], concluding that Plaintiffs are similarly situated and can proceed as a class. As such, the Court has now conducted a stringent review of the propriety of collective treatment and found collective treatment to be appropriate. Defendant’s reliance on Hogan as its basis for moving for summary judgment as to only four (4) individual Plaintiffs is misplaced. Defendant similarly attempted to raise this argument and rely on Hogan in filing its motion for partial summary judgment in Pendlebury. The Pendlebury court rejected Defendant’s argument, pointing out that in Hogan the court had specifically authorized the selection of test plaintiffs for purposes of discovery and motions for summary judgment. Case No. 04–80521–CIV–KAM, DE–495 at pg. 3. The court concluded that “allowing Defendant to move for summary judgment against particular individuals who are indistinguishable from other members of the class defeats the entire purpose of a collective action.” Id. at 5. Instead, the court held that since the action was certified as a collective action, the court would “only address dispositive motions that resolve common issues of law or fact as to the entire class or an identifiable subclass.” Id.

Similarly here, the Court has already concluded that collective treatment is appropriate and has not authorized the use of “test” plaintiffs. Instead it appears that Defendant unilaterally selected individuals as its “test” plaintiffs. Notably, Defendant does not argue that these Plaintiffs somehow represent a “subclass” or otherwise address the Pendlebury court’s ruling on this issue in any manner. Consequently, the Court finds that it is not proper for Defendant to move for summary judgment as to individual Plaintiffs given the Court’s recent conclusion that Plaintiffs shall proceed as a class.”

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S.D.N.Y.: Class Action Waiver Unenforceable in FLSA Case, Because Cost of Individual Litigation vs. Potential Recovery Prohibitive

Sutherland v. Ernst & Young LLP

This case was before the court on Defendant’s motion to stay the proceedings and compel arbitration on an individual (rather than class/collective) basis.  There was no dispute as to whether the Plaintiff had executed the arbitration agreement, containing the class waiver, however the court held that the class waiver was unenforceable, after a lengthy discussion of Second Circuit law and the impact of the recent United States Supreme Court case, Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758 (2010).

The court reasoned:

“Because the Amex decision retains its persuasive force, the Court applies the test adopted in Amex to determine the enforceability of the class waiver provision here at issue. In the totality of the circumstances, the Court finds that the class waiver provision is invalid because it prevents Sutherland from vindicating her statutory rights.

1. Cost to Individual Plaintiff Versus Potential Recovery

The record supports Sutherland’s argument that her maximum potential recovery would be too meager to justify the expenses required for the individual prosecution of her claim. Sutherland alleges “an actual overtime loss of approximately $1,867.02, with potentially liquidated damages of an equal amount under the FLSA.” (Folkenflik Decl. ¶ 8; see also Sutherland Deck. ¶ 4.) If her only option were to prosecute her claim on an individual basis, Sutherland would be required to pay expenses that would dwarf her potential recovery. 

Sutherland’s uncontested submission estimates that her attorney’s fees during arbitration will exceed $160,000, and that costs will exceed $6,000. (Folkenflik Decl. ¶ 20, 24.) Sutherland will utilize expert assistance in support of her claims.(Id. ¶ 22.) Her expert, a professor of accountancy, has submitted an affidavit stating that his fees may exceed $33,500, and that he requires a retainer payment of $25,000. (Carmichael Decl. ¶ 5.) In sum, Sutherland would be required to spend approximately $200,000 in order to recover double her overtime loss of approximately $1,867 .02. Only a “lunatic or a fanatic” would undertake such an endeavor. Carnegie v. Household Intern., Inc., 376 F.3d 656, 661 (7th Cir.2004). Indeed, rather than prosecuting her low-value, high-cost claim on an individual basis, Sutherland “would give up any rights” she might have to recover overtime payments allegedly owed to her. (Sutherland Decl.¶ 2.)

Pursuant to the E & Y Agreement, Sutherland is responsible for the Court Equivalent Fee, or a fee specified by the arbitration provider, whichever is less; arbitration fees and costs are to be shared equally between the parties. (Reece Decl. Exh. D¶ IV.P.) Sutherland has submitted an uncontested affidavit stating that arbitration fees would amount to $24,000, and that the applicable Court Equivalent Fee is $350. (Folkenflik Decl.¶ 24.) E & Y’s offer to pay such costs, which the Court has factored into Sutherland’s expenses as detailed above, thus lessens her burden by $12,350. Although this amount is not insignificant, it is hardly enough to allow Sutherland to bring her claims on an individual basis: she would still be required to spend approximately $200,000 on attorney’s fees and costs, as well as expert fees, in order to recover double her overtime loss of approximately $1,867.02.

E & Y’s attempt to distinguish the cost-recovery differential in Amex from the differential present here is unavailing. The “median plaintiff” in Amex would have recovered damages of $1,751, and the expert’s services would have cost at least several hundred thousand dollars. Amex, 554 F.3d at 317. According to E & Y, a “median plaintiff” in the instant matter could recover “substantially more,” and expert fees here amount to “a small fraction” of those at issue in Amex. (Def. Reply at 6-7.) The Amex decision did not, however, set a cost-to-recovery ratio below which claims are deemed “prosecutable.” The court instead embraced a functional approach, which “depends upon a showing that the size of the recovery received by any individual plaintiff will be too small to justify the expenditure of bringing an individual action.” Amex, 554 F.3d at 320. Sutherland has satisfied her burden on that score.

E & Y also cites to authorities in which the cost-recovery differential was held not to preclude the prosecution of claims on an individual basis. Such decisions are either inapposite or unpersuasive. In Pomposi v. GameStop, Inc., for instance, a class waiver was enforced where the amount in controversy was $11,000, and plaintiff’s total fees and costs ranged from $46,000 to $62,000.09 Civ. 0340, 2010 WL 147196, at *7 (D.Conn. Jan. 11, 2010). The court in Pomposi did not, however, meaningfully discuss plaintiff’s ability to retain counsel notwithstanding the differential between potential costs and recovery. E & Y cites Ornelas v. Sonic-Denver T, Inc., No. 06 Civ. 253, 2007 WL 274738 (D.Colo. Jan. 29, 2007), as standing for the proposition that “compelling arbitration would not preclude plaintiff from pursuing his claims where damages were at least $3500.” (Def. Mem. at 12.) But the plaintiff in Ornelas was allegedly entitled to (i) a trebling of the approximately $3500 in actual damages, and (ii) unspecified punitive damages and interest. Id. at *6. Moreover, the plaintiff in Ornelas apparently would not incur any expert witness fees. Id. at *7. Finally, E & Y offers Anglin v. Tower Loan of Miss., Inc., 635 F.Supp.2d 523 (S.D.Miss.2009) as precedent for “compelling arbitration where damages, attorney’s fees and punitive damages would result in [a] recovery of over $5,000.” (Def. Reply at 12.) The nub of Anglin, however, was that the plaintiff “made no effort” to demonstrate the prohibitive costs of individual arbitration. Anglin, 635 F.Supp.2d at 529. By contrast, Sutherland has “substantial[ly] demonstrat[ed]” that an inability to prosecute her claims on a class basis “would be tantamount to an inability to assert [her] claims at all.” Amex, 554 F.3d at 302-03 n.1.

2. Ability to Obtain Legal Representation

Even if Sutherland were willing to incur approximately $200,000 to recover a few thousand dollars, she would be unable to retain an attorney to prosecute her individual claim. This is due largely to the E & Y Agreement’s obstacles to reimbursement of fees and expenses. Whether attorney’s fees and expenses incurred during arbitration are compensable is subject to the discretion of the arbitrators. (Reece Decl. Exh. D ¶ IV.P.3.) The amount of such reimbursement is also left to the arbitrators’ discretion. (See id. (arbitrators may award attorney’s fees, “in whole or part, in accordance with applicable law or in the interest of justice”); 29 U.S.C. § 216(b) (providing for the reimbursement of “reasonable” attorney’s fees).)

In light of the foregoing, Sutherland cannot reasonably be expected to retain an attorney to pursue her individual claim, and E & Y has not submitted an affidavit stating otherwise. Sutherland cannot afford to advance the fees and costs in order to hire an attorney on an hourly basis: she has remained unemployed since her termination from E & Y in December 2009; she has no savings, and owes $35,000 in student loans. (Sutherland Decl. ¶ 5.) Counsel for Sutherland will not prosecute her individual claim without charge, and will not advance the required costs where the E & Y Agreement’s fee-shifting provisions present little possibility of being made whole. (Folkenflik Decl. ¶ 25.) As the uncontested affidavit of Sutherland’s counsel reflects, Sutherland would find no attorney willing to represent her under the circumstances. (Id. ¶ 27.) Cf. Kristian, 446 F.3d at 60 (“[I]t would not make economic sense for an individual to retain an attorney to handle one of these cases on an hourly basis and it is hard to see how any lawyer could advise a client to do so.”) (internal quotations omitted).

Sutherland’s only option in pursuing her individual claim is thus to retain an attorney on a contingent fee basis. But just as no rational person would expend hundreds of thousands of dollars to recover a few thousand dollars in damages, “no attorney (regardless of competence) would ever take such a case on a contingent fee basis .” Caban v. J.P. Morgan Chase & Co., 606 F.Supp.2d 1361, 1371 (S.D.Fla.2009); see also Folkenflik Decl.¶ 27. Cf. Kristian, 446 F.3d at 59 (“[I]t would not make economic sense for an attorney to agree to represent any of the plaintiffs in these cases in exchange for 33 1/3% or even a greater percentage of the individual’s recovery.”) (internal quotations omitted). E & Y has submitted no evidence that an attorney would expend approximately $200,000 in time and costs in return for a mere chance to earn potentially one-third of Sutherland’s less than $4,000 recovery.

If Sutherland could aggregate her claim with the claims of others similarly situated, however, she would have no difficulty in obtaining legal representation. (See Folkenflik Decl.¶ 25; see also Pl. Reply at 3.) This is because class proceedings “achieve economies of time, effort, and expense….” Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 616 (1997) (internal quotations omitted).

3. The Practical Effect of Waiver

Enforcement of the class waiver provision in this case would effectively ban all proceedings by Sutherland against E & Y. She will be unable to pursue her claims, even if they are meritorious. As a result, E & Y would enjoy de facto immunity from liability for alleged violations of the labor laws. The legislative purposes in enacting such laws-including, for example, combating “labor conditions detrimental to the maintenance of the minimum standard of living” FLSA § 2(a), 29 U.S.C. § 202(a), and assuring workers “additional pay to compensate them for the burden of a workweek beyond” 40 hours per week, In re Novartis Wage and Hour Litig. Litig. 611 F.3d 141, 150 (2d Cir.2010)-would go unfulfilled. “Corporations should not be permitted to use class action waivers as a means to exculpate themselves from liability for small-value claims.” Dale v. Comcast Corp., 498 F.3d 1216, 1224 (11th Cir.2007).

4. Summary

Having examined the totality of the facts and circumstances, the Court finds that the class waiver provision here at issue is unenforceable because it prevents Sutherland from vindicating her statutory rights. See Amex, 554 F.3d at 302-03 n.1.

V. Future Proceedings

Although the class waiver provision is unenforceable, the Court cannot order E & Y to submit to class arbitration. After the offending provision is severed from the E & Y Agreement, (see Reece Decl. Exh. D ¶ V.F.), the Agreement is rendered silent as to whether class arbitration is permissible. In accordance with Stolt-Nielsen, class arbitration may not be imposed on parties whose arbitration agreements are silent on the permissibility of class proceedings. 130 S.Ct. at 1764, 1775. See also Fensterstock v. Educ. Fin. Partners, 611 F.3d 124, 140 (2d Cir.2010). The Court must accordingly deny E & Y’s motion to compel arbitration.”

It will be interesting to see whether courts in other circuits will follow this well-reasoned opinion.  This is an area of FLSA jurisprudence where there is a wide divergence of opinions.  The Eleventh Circuit for example has long-held that FLSA Collective Action rights can be waived by agreement.

Click Sutherland v. Ernst & Young LLP to read the entire opinion.

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S.D.N.Y.: Because FLSA Collective Action Is Not A Class Action, FLSA Collective Action Subject To Arbitration Despite FINRA Rule Prohibiting Class Actions

Velez v. Perrin Holden & Davenport Capital Corp.

Plaintiff brought this action alleging violations of the Fair Labor Standards Act (“FLSA”) and the New York Labor Law (“NYLL”) on behalf of himself and other similarly situated stock brokers employed or formerly employed by defendant Perrin Holden & Davenport Capital Corp. (“PHD Capital”) and its officers and owners. Plaintiff sought designation of the case as as a collective action pursuant to FLSA section 216 for his FLSA claims and as a class action pursuant to Fed.R.Civ.P. 23 for his state law claims.

Defendants moved to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6) or, in the alternative, to compel arbitration pursuant to the Federal Arbitration Act (“FAA”), 9 U.S .C. §§ 3, 4, on the ground that Plaintiff had agreed to arbitrate his FLSA claims at the time he was hired.   In line with other courts that have decided the issue, the court held that a “collective action” is not encompassed within the term “class action” as that term is used in FINRA’s rules, and thus compelled arbitration of Velez’s FLSA claims, allowing for a collective action in FINRA arbitration.

After finding  that the Plaintiff’s claims were subject to arbitration, the court then discussed whether, under FINRA rules banning class actions, Plaintiff could proceed with an FLSA collective action.  Reasoning he could the court explained:

“FINRA Rule 13200 mandates arbitration of disputes between the parties “except as otherwise provided.” (FINRA Rule 13200, Ex. B to Declaration of Matthew D. Kadushin dated Aug. 27, 2010 (“Kadushin Decl.”).) Notably, FINRA Rule 13204 prohibits arbitration of “class action claims.” (FINRA Rule 13204, Ex. A to Kadushin Decl.) It is thus uncontested that Velez’s state law claims-which plaintiff has asserted as a class action pursuant to Fed.R.Civ.P. 23-are ineligible for arbitration. The parties dispute, however, whether that exemption of class action claims from arbitration also applies to plaintiff’s FLSA collective action claims. While defendants contend that collective actions are distinct from class actions and therefore subject to FINRA arbitration, Velez argues that the phrase “class action” in FINRA Rule 13204 encompasses a collective action and therefore collective action claims are not arbitrable. Velez looks to the interpretation by FINRA staff members of FINRA’s rules to support his position.

Every court to address whether an FLSA collective action is arbitrable pursuant to FINRA’s rules has found in favor of arbitrability.  See Gomez v. Brill Securities, Inc., No. 10 Civ. 3503, 2010 WL 4455827 (S.D.N.Y. Nov. 2, 2010); Suschil v. Ameriprise Financial Servs., Inc., No. 07 Civ. 2655, 2008 WL 974045, at *5 (N.D.Ohio Apr. 7, 2008); Chapman v. Lehman Bros., Inc., 279 F.Supp.2d 1286, 1290 (S.D.Fla.2003). This Court agrees with its sister district courts.

FINRA Rule 13204 clearly states that “[c]lass action claims may not be arbitrated” under FINRA’s Code of Arbitration Procedure. However, that rule says nothing about collective action claims. Although collective and class actions have much in common, there is a critically important difference: collective actions are opt-in actions, i.e., each member of the class must take steps to opt in to the action in order to participate in it, whereas class actions are opt-out actions, i.e., class members automatically participate in a class action unless they take affirmative steps to opt out of the class action. Collective actions bind only similarly situated plaintiffs who have affirmatively consented to join the action.

Velez urges the Court to defer to the opinions of FINRA staff who have issued letters construing collective actions to come within the ambit of class actions for the purposes of FINRA arbitration. (See, e.g., Letter from Jean I. Feeney, NASD Assistant General Counsel, dated Sept. 21, 1999, Ex. C. to Kadushin Decl.; Letter from George H. Friedman, NASD Executive Vice President, Dispute Resolution, Director of Arbitration, dated Oct. 10, 2003, Ex. D to Kadushin Decl.) However, those letters do not contain any substantial analysis, and the Feeney letter itself includes the disclaimer that “the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the Board of Directors of [the] NASD.” Moreover, FINRA’s website specifically states that “[s]taff-issued interpretive letters express staff views and opinions only and are not binding on FINRA and its Board.” (FINRA-Interpretive Letters, Ex. 1 to Affirmation of Emily A. Hayes dated Sept. 9, 2010). Such “staff opinion letters are not the sort of agency interpretation that is entitled to deference by this Court.” Gomez, 2010 WL 4455827 at *1; see also Auer v. Robbins, 519 U.S. 452, 461 (1997); Skidmore v. Swift & Co., 323 U.S. 134 (1944). If FINRA wanted to prohibit arbitration of collective action claims, FINRA is certainly able to amend its rules to do so. See FINRA Rulemaking Process, available at http://www.finra.org/In dustry/Regulation/FINRARules/RulemakingProcess (Feb. 2, 2010); see also Gomez, 2010 WL 4455827 at *2.

As noted above, the parties here have agreed in writing to arbitrate certain disputes as required by FINRA. In light of other district court opinions, this Court’s own interpretation of FINRA rules, and the federal policy favoring arbitration as an alternative forum in which to resolve disputes, this Court finds that FLSA collective actions are within the scope of the parties’ agreement to arbitrate. In addition, no congressional intent precludes arbitration of the federal FLSA claims. See, e.g., Gomez, 2010 WL 4455827 at *2; Coheleach v. Bear, Stearns & Co., 440 F.Supp.2d 338, 240 (S.D.N.Y.2006).”

Accordingly, defendants’ motion was granted to the extent that the court compelled arbitration of Plaintiff’s FLSA claims.

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3d Cir.: Enforceability Of Class/Collective Action Waiver In Agreement To Arbitrate Is Issue For Arbitrator Not The Court

Vilches v. Travelers Companies, Inc.

This appeal raised the issue of whether the District Court properly determined that the Plaintiff-Appellant (employee) assented to the insertion of a class arbitration waiver into an existing arbitration policy, and that the waiver was not unconscionable.  The District Court ordered the parties into arbitration to individually resolve the claims brought by Plaintiff under the Fair Labor Standards Act of 1938, 29 U.S.C. § 201, et seq. (“FLSA”), and New Jersey Wage and Hour Law, N.J.S.A. § 34:11-4.1, et seq. (“NJWHL”).  While it held that the class arbitration waiver was not unconscionable, the Third Circuit vacated the District Court’s order and referred the matter to arbitration to determine whether Vilches can proceed as a class based upon the parties’ agreements.

Discussing the relevant procedural and factual background the court stated:

“We briefly summarize the allegations pertinent to our decision. Appellants Vilches filed a class and collective action in the Superior Court of New Jersey to recover unpaid wages and overtime allegedly withheld in violation of the FLSA and the NJWHL, contending that Travelers consistently required its insurance appraisers to work beyond 40 hours per week but failed to properly compensate the appraisers for the additional labor. Travelers removed the matter to the United States District Court for the District of New Jersey, and filed a Motion for Summary Judgment seeking the dismissal of the complaint and an order compelling Vilches to arbitrate their individual wage and hour claims.

Upon commencing employment with Travelers, Vilches agreed to an employment provision making arbitration “the required, and exclusive, forum for the resolution of all employment disputes that may arise” pursuant to an enumerated list of federal statutes, and under “any other federal, state or local statute, regulation or common law doctrine, regarding employment discrimination, conditions of employment or termination of employment.” (App’x at 79.) The agreement did not expressly reference class or collective arbitration or any waiver of the same. The agreement reserved to Travelers the right to alter or amend the arbitration policy at its discretion with appropriate notice to employees.

In April 2005, Travelers electronically published a revised Arbitration Policy. In addition to restating the expansive scope of the Policy, the update also included an express statement prohibiting arbitration through class or collective action:

The Policy makes arbitration the required and exclusive forum for the resolution of all employment-related and compensation-related disputes based on legally protected rights (i.e ., statutory, contractual or common law rights) that may arise between an employee or former employee and the Company…. [T]here will be no right or authority for any dispute to be brought, heard or arbitrated under this Policy as a class or collective action, private attorney general, or in a representative capacity on behalf of any person. (App’x at 88) (emphasis added). Travelers communicated the revised Policy to Vilches in several electronic communications.

Before the District Court, Vilches initially alleged that they never agreed to arbitrate any claims against Travelers; their position changed, however, during the course of proceedings and they ultimately conceded that all employment disputes with Travelers must be arbitrated pursuant to the arbitration agreement they signed at commencement of employment. They nevertheless insisted that the revised Arbitration Policy introduced by Travelers in April 2005 prohibiting class arbitration, which Travelers attempted to enforce, did not bind them because they never assented to its terms. Vilches further argued that, even assuming that the updated Policy did bind them, the revision was unconscionable and unenforceable.

Notwithstanding the fact that the parties agreed to arbitrate all employment disputes, as we discuss below, the District Court addressed the question of whether Vilches agreed to waive the right to proceed by way of class arbitration. In an oral decision, the District Court granted Travelers’ motion for summary judgment, finding that the various forms of correspondence from Travelers provided sufficient notice to Vilches of the revised Policy, and that their electronic assent and continued employment constituted agreement to the update. As such, the Court held that Vilches waived the ability to proceed in a representative capacity through class arbitration. The Court’s opinion only briefly touched upon the unconscionability claims, stating that “there was no adhesion that was part of that process.” (App’x at 23.) The Court ordered the parties to individually arbitrate the employment disputes, and this appeal followed.”

Holding that the Arbitrator and not the Court should decide the issue of enforceability of the class/collective action waiver, the Third Circuit reasoned:

“The parties agree that any and all disputes arising out of the employment relationship-including the claims asserted here-are to be resolved in binding arbitration. Accordingly, the role of the Court is limited to deciding whether the revised Arbitration Policy introduced in April 2005-and the class arbitration waiver included within that revision-governed this dispute. We conclude that the District Court should not have decided the issue presented as to the class action waiver, and, as we explain below, we will refer the resolution of this question to arbitration in accordance with governing jurisprudence. The District Court should have, however, ruled on the issue of unconscionability and we will address it.

We have repeatedly stated that courts play a limited role when a litigant moves to compel arbitration. Specifically, “whether the parties have submitted a particular dispute to arbitration, i.e., the question of arbitrability, is an issue for judicial determination unless the parties clearly and unmistakably provide otherwise.’ “ Puleo, 605 F.3d at 178 (quoting Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002)). “[A] question of arbitrability arises only in two circumstances-first, when there is a threshold dispute over whether the parties have a valid arbitration agreement at all,’ and, second, when the parties are in dispute as to whether a concededly binding arbitration clause applies to a certain type of controversy.’ “ Id. (quoting Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 452 (2003)). In contrast, the Supreme Court has distinguished “questions of arbitrability with disputes over arbitration procedure, which do not bear upon the validity of an agreement to arbitrate.” Id. at 179. We noted in Puleo that “procedural questions”-such as waiver or delay-“which grow out of the dispute and bear on its final disposition are presumptively not for the judge.” Id.

This matter satisfies neither of the Puleo arbitrability circumstances. As stated, neither party questions “whether the parties have a valid arbitration agreement at all.” Id.; (see also Appellants’ Br. at 15 (“Plaintiffs do not challenge the validity of the arbitration agreements they entered into when they first began their employment”); Appellees’ Br. at 6 (“At the outset of employment, Appellants agreed to the Travelers Employment Arbitration Policy”).) The original arbitration provision to which Vilches admittedly agreed provided that “the required, and exclusive, forum for the resolution of all employment disputes ” would be arbitration. (App’x at 79 (emphasis added).) Here, the issue of whether an employee is bound by a disputed amendment to existing employment provisions falls within the scope of this expansive agreement to arbitrate. Indeed, the language makes clear that the “concededly binding arbitration clause applies” to the particular employment claims at stake here, and the parties do not advance a cognizable argument to suggest otherwise. Puleo, 605 F.3d at 178. Accordingly, the second Puleo arbitrability element is also unfulfilled.

While the parties framed their arguments so as to invite the Court’s attention to the class action waiver issue-namely, whether the revised Arbitration Policy expressly prohibiting class arbitration governs the relationship between Travelers and Vilches-we conclude that “the relevant question here is what kind of arbitration proceeding the parties agreed to.”   Bazzle, 539 U.S. at 452 (emphasis in original). As stated, the addition of the disputed class arbitration waiver did not disturb the parties’ agreement to refer “all employment disputes” to arbitration, and, thus, “does not bear upon the validity of an agreement to arbitrate.” Puleo, 605 F.3d at 179. Assuming binding arbitration of all employment disputes, the contested waiver provision solely affects the type of procedural arbitration mechanism applicable to this dispute. “[T]he Supreme Court has made clear that questions of contract interpretation’ aimed at discerning whether a particular procedural mechanism is authorized by a given arbitration agreement are matters for the arbitrator to decide .” Id. (emphasis in original). Where contractual silence is implicated, “the arbitrator and not a court should decide whether a contract [ was] indeed silent’ on the issue of class arbitration,” and “whether a contract with an arbitration clause forbids class arbitration.” Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp., 130 S.Ct. 1758, 1771-72 (2010).

The Policy originally in force made no mention of class action or class arbitration, and was entirely silent on whether the parties had a right to proceed through class or collective arbitration. In contrast, the amended Policy explicitly precludes class arbitration. Accordingly, we must “give effect to the contractual rights and expectations of the parties,” and refer the questions of whether class arbitration was agreed upon to the arbitrator. Stolt-Nielsen, 130 S.Ct. at 1774.

Although we offer no forecast as to the arbitrator’s potential resolution of these questions, assuming arguendo that the arbitrator finds the class action waiver binding, we will address Vilches’ alternative argument that the addition of the class action waiver was unconscionable for the sake of judicial efficiency, and because it does concern “arbitrabillity.” See Puleo, 605 F.3d at 179.”

The Third Circuit went on to hold that, in the event the class action waiver language was binding, it was not unconscionable.

Click Vilches v. Travelers Companies, Inc., to read the entire opinion.

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