Category Archives: Class Waivers

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.: Defendant’s Attempt to Obtain Class Waivers From Absent Class Members While Motion for Conditional Certification Pending Impermissible; Corrective Measures Ordered

Williams v. Securitas Sec. Services USA, Inc.

Before the court was the emergency motion of plaintiffs for a protective order and corrective mailing to address defendant’s improper communications with absent class members.  While plaintiffs motion for conditional certification was pending before the court (but before it had been resolved), the defendant sought to obtain class waivers of the claims in the case from its current employees, by sending each an alternative dispute resolution agreement.  The court held that such attempts by the defendant amounted to an obstruction of the court’s role in managing the collective action, granted plaintiffs motion and ordered related corrective action by defendant.

The motion alleged that defendant distributed to all its employees, including its Pennsylvania employees, a document entitled “Securitas Security Services USA, Inc. Dispute Resolution Agreement” (hereinafter “the Agreement”). The body of the Agreement consists of ten paragraphs on four type-written, single-spaced pages and is written in a small font. A fifth page provides a place for the employee to acknowledge receipt of the document.  In relevant part:

“The Agreement purports to require all Securitas employees to submit “any dispute arising out of or related to Employee’s employment with [Securitas] … or termination of employment” to a binding arbitration conducted pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq. It states in small boldface letters that “this Agreement requires all such disputes to be resolved only by an arbitrator through final and binding arbitration and not by way of court or jury trial.” The Agreement specifies that any dispute arising from federal “wage-hour law” and the FLSA must be arbitrated. The Agreement states, again in small bold font, “there will be no right or authority for any dispute to be brought, heard or arbitrated as a class, collective or representative action (“Class Action Waiver”).”

Paragraph 7 of the Agreement says that although the Agreement is meant to apply “broadly,” if an employee is “a named party plaintiff, or ha[s] joined as a party plaintiff this Agreement shall not apply to those Actions, and you may continue to participate in them without regard to this Agreement,” but “shall apply to all Actions in which you are not a plaintiff or part of a certified class.” The Agreement then lists five representative or class action lawsuits in which Securitas is a named defendant, including this lawsuit, “Frankie Williams and Kimberly Ord, filed 12/10/2010, USDC, Eastern District of Pennsylvania Case No. 2:10–CV–07181–HB.” The term “Actions” is defined as “litigation on behalf of [Securitas] employees in which those employees desire to represent claims of other employees in class, collective or other representative actions.” Thus, the term “Actions” does not appear to be limited only to the five lawsuits enumerated later in paragraph 7. The nature of the Williams action is not explained.

The Agreement further states that if the employee would like to participate in one of the “Actions,” he or she “may opt out of this Agreement by following the procedure set forth in Section 9, below.”  To opt out of the Agreement, the employee must call a toll-free telephone number within 30 days of the date the employee received the Agreement. According to the Agreement, “Should an Employee not opt out of this Agreement within 30 days of the Employee’s receipt of this Agreement, continuing the Employee’s employment constitutes mutual acceptance of the terms of this Agreement by the Employee and [Securitas].” The Agreement declares that not opting out means an employee forfeits the right to participate in any collective or representative action. Securitas adds that it will not retaliate against any employee for opting out of the Agreement or for asserting claims according to its terms.

The fifth page of the Agreement states as follows:

ACKNOWLEDGMENT OF RECEIPT OF THE SECURITAS SECURITY SERVICES USA, INC. DISPUTE RESOLUTION AGREEMENT

BY SIGNING BELOW, I AM ACKNOWLEDGING RECEIPT OF THE SECURITAS SECURITY SERVICES USA, INC. DISPUTE RESOLUTION AGREEMENT, EFFECTIVE IMMEDIATELY.

Below this text is a place for the employee to sign and date the Agreement. There is also a place for a witness to sign his or her name.”

The court rejected defendant’s attempts to stretch the holding of the Supreme Court’s recent holding in AT&T Mobility LLC v. Concepcion, stating:

“Under Hoffman–La Roche, this court has a responsibility to prevent confusion and unfairness concerning this action in which plaintiffs seek to have the matter proceed as a collective action and to insure that all parties act fairly while the court decides whether and how this action will move forward under the FLSA. In the meantime, to prevent confusion and unfairness, we will order Securitas to rescind the Agreement with respect to its Pennsylvania employees as it relates to this litigation. We will require Securitas to set forth the nature of this action and advise its Pennsylvania employees that the Agreement is not binding with regard to those employees’ right to participate in this lawsuit, notwithstanding the fact that the employee may have signed the Agreement or failed timely to opt out.

Securitas contends that any interference by this court with its efforts to compel arbitration of disputes with its employees will be contrary to the Supreme Court’s recent decision in AT&T Mobility LLC v. Concepcion, –––U.S. ––––, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011). We disagree. In Concepcion, the Supreme Court held that, generally, states may not adopt rules of contract interpretation that undermine the “overarching purpose” of the FAA, which “is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.” Id. at 1748. There, the Court considered California contract law, which deemed unconscionable certain contracts that disallowed class arbitration. The Court found the law impermissibly stood “as an obstacle to the accomplishment of the FAA’s objectives.”

Securitas’ reliance on Concepcion is inapposite because plaintiffs’ motion for a protective order does not rely on any state-law ground to invalidate the Agreement. Here the issue is quite different. This court has found the Agreement to be a confusing and unfair communication with the class of possible plaintiffs in this action under the FLSA.

Securitas argues that invalidating the Agreement merely because this class action lawsuits is pending is equivalent to preventing it from adopting any arbitration policy at all. Whatever right Securitas may have to ask its employees to agree to arbitrate, its current effort, which specifically references this lawsuit, is confusing and misleading and clearly designed to thwart unfairly the right of its employees to make an informed choice as to whether to participate in this collective action under the FLSA. Since the Agreement by its terms will directly affect this lawsuit, this court has authority to prevent abuse and to enter appropriate orders governing the conduct of counsel and the parties. Hoffman–La Roche, 493 U.S. at 171–72. Securitas did not act fairly when it gave notice through the Agreement to potential class members concerning this lawsuit.

Defendant’s proposal to resolve the plaintiffs’ pending motion for conditional class certification before resolving issues related to the Agreement is insufficient to prevent potential plaintiffs from misapprehending their rights. The confusing nature of the Agreement may cause Securitas employees to misunderstand the nature of their rights to participate in this litigation while the court determines whether to conditionally certify a class, damage not easily undone. Similarly, Securitas’s proposal to allow its Pennsylvania employees a second 30–day opt out period if the court conditionally certifies a class is also insufficient because it is for the court, not Securitas, to determine the amount of time employees shall have to consider their right to join this action. Immediate action by this court is necessary.

Securitas shall be required to implement the corrective measures described in the accompanying order.”

In the accompanying Order, the court required that the defendant submit a proposed corrective notice to the plaintiffs within 48 hours which, among other things, stated the the dispute resolution agreement was not binding on with regard to participation in the case (i.e. they would not be precluded from joining this class if they signed the agreement at issue).

Click Williams v. Securitas Security Services USA, Inc. to read the entire Memorandum Opinion and here to read the accompanying Order.

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E.D.N.Y.: Where Agreement to Arbitrate Is Silent As To Class Arbitration, Arbitrator Not Court to Decide Class Arbitrability Issue

Guida v. Home Savings of America, Inc.

Plaintiffs brought this putative class action on behalf of themselves, and on behalf of individuals similarly situated, against Defendants, asserting claims under the Fair Labor Standards Act (“FLSA”), 29 U.S.C. §§ 201 et. seq., and related New York state wage and labor laws.  Defendants moved to dismiss plaintiffs’ complaint, and compel arbitration on an individual basis pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1 et. seq.  While Plaintiffs agreed to arbitrate the dispute, they argued that the arbitrator should decide whether the arbitration can proceed on a class basis, because the arbitration agreement was silent on the issue of class arbitration.  The court agreed and held that while the parties were required to arbitrate the dispute, the determination of whether or not the arbitration should proceed on a class basis is for the arbitrator to make in the first instance.

Discussing the relevant provisions of the agreement(s) to arbitrate, the court explained:

“The terms of the Alternative Dispute Resolution Agreement are identical for all of the plaintiffs. The following are relevant portions from the Alternative Dispute Resolution Agreements:

I understand that Home Savings of America makes available arbitration for resolution of employment disputes that are not otherwise resolved by internal policies or procedures.

I agree that if I am unable to resolve any dispute through the internal policies and procedures of Home Savings … I will arbitrate … any legal claim that I might have against Home Savings … or its employees, in connection with my employment or termination of employment … whether arising out of issues or matters occurring before the date of this Agreement or after such date.

I agree to abide by and accept the final decisions of the arbitration panel as ultimate resolution of any disputes or issues for any and all events that arise out of employment or termination of employment.

I agree that the Employee Dispute Resolution Rules of the American Arbitration Association will apply to any resolution of any such matters. In exchange for the benefits of arbitration, I agree that the arbitrator will only have the power to grant those remedies available in court, under applicable law.”

In light of the silence as to class arbitration, the court held that the issue was one for the arbitrator, not the court to decide.  The court reasoned that Supreme Court jurisprudence supported this holding, because the issue was one of substantive interpretation of the contract language and not merely a procedural issue:

“This Court concludes, in light of StoltNielsen and Bazzle, that the ability of a class to arbitrate a dispute where the parties contest whether the agreement to arbitrate is silent or ambiguous on the issue is a procedural question that is for the arbitrator to decide.  Even though Bazzle does not have the full weight of Supreme Court precedent, it is nevertheless instructive. See, e.g., Barbour v. Haley, 471 F.3d 1222, 1229 (11 th Cir.2006) (“Plurality opinions are not binding on this court; however, they are persuasive authority.”); Galli v. N.J. Meadowlands Comm’n, 490 F.3d 265, 274 (3d Cir.2007) (concluding that dicta in Supreme Court opinions has persuasive value). The Second Circuit found Bazzle persuasive, as have other courts prior to Stolt–Nielsen. See Vaughn v. Leeds, Morelli & Brown, P.C., 315 F. App’x 327, 329 (2d Cir.2009) (concluding that the district court “properly compelled arbitration on the question of the arbitrability of class claims under the Settlement Agreement[,]” citing Bazzle and Howsam); JSC Surgutneftegaz v. President & Fellows of Harvard College, 04 Civ. 6069(RMB), 2007 U.S. Dist. LEXIS 79161, at *6 (S.D.N.Y. Oct. 11, 2007) (citing Bazzle for the proposition that “arbitrators are well situated to answer the question whether contracts forbid[ ] class arbitration” (quotation marks omitted)); Scout. com, LLC v. Bucknuts, LLC, No. C07–1444 RSM, 2007 WL 4143229, at *5 (W.D.Wa. Nov.16, 2007) (concluding that, in light of Bazzle, it was for the arbitrator to decide the procedural question of whether the plaintiffs can arbitrate as a class (collecting cases)). Furthermore, many courts since Stolt–Nielsen have continued to follow Bazzle’s conclusion that the ability to arbitrate on a class basis is a procedural question left for the arbitrator to decide. This Court finds the Third Circuit’s opinion in Vilches v. The Travelers Companies, Incorporated, No. 10–2888, 2011 U.S.App. LEXIS 2551 (3d Cir. Feb. 9, 2011), particularly instructive. In Vilches, the Third Circuit reconciled Bazzle and StoltNielsen as follows:

Although contractual silence [on the issue of arbitration on a class basis] has often been treated by arbitrators as authorizing class arbitration, Stolt–Nielsen suggests a return to the pre-Bazzle line of reasoning on contractual silence, albeit decided by an arbitrator, because it focuses on what the parties agreed to—expressly or by implication.

Id. at *12–13 n. 3. The Third Circuit concluded that the ability of the plaintiffs to proceed on a class basis in arbitration was essentially a question of “what kind of arbitration proceeding the parties agreed to [,]” id. at *10 (emphasis in original) (citing Bazzle), and went on to conclude that “[w]here 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.” Id. at *11 (quotation marks omitted) (citing StoltNielsen, 130 S.Ct. at 1771–72, describing the plurality opinion in Bazzle). In Vilches, the agreement in question “did not expressly reference class or collective arbitration or any waiver of the same.” Id. at *3. The parties debated whether a revised arbitration policy including a class arbitration waiver applied to plaintiffs but agreed that plaintiffs’ causes of action alleged in the complaint otherwise fell under the purview of the arbitration agreement. Id. at *3–6, *9–10. The court in Vilches referred the “questions of whether class arbitration was agreed upon to the arbitrator.” Id. This Court similarly concludes that Stolt–Nielsen and Bazzle are reconcilable and that arbitrating on a class basis is a procedural question that is for the arbitrators to decide in accordance with the Supreme Court’s analysis in Stolt–Nielsen, which provides a framework for the arbitrator’s analysis of the issue.

Nor is Vilches alone in its conclusion. There are a number of cases in addition to Vilches in which courts have concluded, subsequent to Stolt–Nielsen, that the ability of plaintiffs to arbitrate on a class basis is an issue to be determined by the arbitrator. See, e.g., Aracri v. Dillard’s Inc., No. 1:10cv253, 2011 WL 1388613, at * 4 (S.D.Ohio Mar.29, 2011) (concluding that “it is not for this Court, but for an arbitrator to decide whether class arbitration is forbidden under the Arbitration Agreement and Dillard’s Rules of Arbitration” where the arbitration agreement did not explicitly mention class arbitration but the parties contested whether Dillard’s Rules, to which all arbitration claims were subject, provided for class arbitration); Smith v. The Cheesecake Factory Restaurants, Inc., No. 3:06–00829, 2010 U.S. Dist. LEXIS 121930, at *7 (M.D.Tenn. Nov. 16, 2010) (concluding that “whether the parties agreed to class arbitration is to be resolved by the arbitrator[,]” citing Stolt–Nielsen and Bazzle); Fisher v. General Steel Domestic Sales, LLC, No. 10–cv–1509–WYD–BNB, 2010 U.S. Dist. LEXIS 108223, at *6–7 (D.Col. Sept. 22, 2010) (where parties agreed that plaintiffs’ claims were subject to arbitration but were contesting whether the agreement in question permitted class arbitration, “based on the plain language of Stolt–Nielsen, it is clear that an arbitrator may, as a threshold matter, appropriately determine whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class” (quotation marks omitted)). See also Clark v. Goldline Int’l, Inc., No. 6:10–cv–01884 (JMC), 2010 U.S. Dist. LEXIS 126192, at *21–22 (D.S.C. Nov. 30, 2010) (“[T]he court notes that whether a class is appropriately certified in this case or otherwise is yet to be determined. Second, whether the Account Agreement precludes any putative classmember from bringing a claim has no bearing on the validity or enforceability of the arbitration provisions. Such issues raised by Plaintiffs must be determined by an arbitrator, not this court.” (citing Bazzle)). But see Chen–Oster v. Goldman, Sachs & Co., No. 10 Civ. 6950(LBS)(JCF), 2011 U.S. Dist. LEXIS 46994, at *10 (S.D.N.Y. Apr. 28, 2011) (concluding that the ability to arbitrate on a class basis requires a “determination of the scope and enforceability of the arbitration clause, and therefore the issue is appropriately characterized as a dispute over arbitrability[,]” further noting that this question “fits into the narrow circumstances where contracting parties would likely have expected a court to have decided the gateway matter[,]” relying on Stolt–Nielsen’s emphasis that Bazzle was solely a plurality opinion).”

Interestingly, the court also addressed and rejected Defendants’ argument that the Supreme Court’s recent holding in AT & T Mobility LLC v. Concepcion stood for the proposition that the issue of whether or not to arbitrate on a class basis is not a procedural issue, which would have allowed the court to decide the issue.

Click Guida v. Home Savings of America, Inc. to read the entire Memorandum and Order.

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U.S.S.C.: State Law Regarding Unconscionability of Class Waivers in Arbitration Agreements Preempted by the Federal Arbitration Act (FAA)

AT&T Mobility LLC v. Concepcion

There has long been talk of the pr0-business conservative majority that currently comprises the United State’s Supreme Court.  However, many pundits have commented that while the Court has ruled as might be expected, largely based on their political leanings, on social issues, there has been wide agreement that other cases have not necessarily gone as some might have expected.  Last term with its decision that corporations could contribute unlimited amounts of money to political campaigns (while individuals were subject to the caps put in place by campaign finance laws), it appeared that the Court was getting more comfortable in trading in a lot of the basic individual freedoms that have always been a foundation for the United States, in exchange for satiating the demands of big business who are forever seeking to tilt the playing field in its favor.  Wednesday the Court handed down perhaps its biggest blow to average Americans ever, when it reversed the Ninth Circuit’s opinion in Concepcion v. AT&T Mobility, a decision that had sought to balance individual consumer rights, against those of a behemoth corporation.

As the Court stated in its Syllabus opinion, “[t]he cellular telephone contract between respondents (Concepcions) and petitioner (AT&T) provided for arbitration of all disputes, but did not permit classwide arbitration. After the Concepcions were charged sales tax on the retail value of phones provided free under their service contract, they sued AT&T in a California Federal District Court.Their suit was consolidated with a class action alleging, inter alia, that AT&T had engaged in false advertising and fraud by chargingsales tax on “free” phones. The District Court denied AT&T’s motion to compel arbitration under the Concepcions’ contract. Relying onthe California Supreme Court’s Discover Bank decision, it found the arbitration provision unconscionable because it disallowed classwide proceedings. The Ninth Circuit agreed that the provision was unconscionable under California law and held that the Federal Arbitration Act (FAA), which makes arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract,” 9 U. S. C. §2, did not preempt its ruling.”

However, the Supreme’s disagreed.  Instead they held that “[b]ecause it ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,’ Hines v. Davidowitz, 312 U. S. 52, 67, California’s Discover Bank rule is preempted by the FAA. Pp. 4–18.”

Of course big business cheered the opinion as a necessary step towards giving parties the rights they had contracted for.  In reality however, the Ninth Circuit’s decision was much more in line with the realities of today’s business environment.  As anyone who has a cell phone can attest, the contracts we all enter into with a cell phone provider are anything but a fairly negotiated one.  In order to get your phone and/or start your service, you must sign away any rights you would normally have, in a take it or leave it contract.

Although aimed at eliminating consumer class actions, those in which the size of the claims is typically a few dollars to a few thousand dollars at most, the effects of the decision will be felt throughout all types of litigation, including employment and wage and hour litigation, where individual claims are often small by themselves, by collectively worthwhile for an attorney to pursue, in order to vindicate the rights of an entire class.  Given what could be a death nell for class and collective litigation for employees, pro-consumer legislators have been shaken to action.

As noted by blog thePopTort, Senator Al Franken, who actually has a great track record persuading Congress to outlaw unfair arbitration agreements, is taking the lead on this one.  Responding to yesterday’s decision, “U.S. Sens. Al Franken (D-Minn.) and Richard Blumenthal (D-Conn.) and Rep. Hank Johnson (D-Ga.) said today they plan to introduce legislation next week that would restore consumers’ rights to seek justice in the courts. Their bill, called the Arbitration Fairness Act, would eliminate forced arbitration clauses in employment, consumer, and civil rights cases, and would allow consumers and workers to choose arbitration after a dispute occurred.”

Consumer and employee groups have been quick to respond as well, calling for legislation, that has been raised but stalled in prior legislative sessions in Washington, D.C.  For example the National Employment Lawyers Association (NELA), who had filed an Amicus Brief in support of the Concepcions, released this press release calling for immediate action by Congress to rectify the situation.  It remains to be seen how this will all end in both the short and long terms, but for now the decision is unquestionably a boon for big business, who has essentially been given the green light to ignore laws big and small to the detriment of average Americans, with the knowledge that there will be little or no repercussions for same.

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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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Filed under Arbitration, Class Certification, Class Waivers