Second Circuit Seal.jpgAuthored by Robert S. Whitman

The Second Circuit heard oral argument yesterday morning in two important cases affecting the validity of class-action waivers in arbitration agreements, and based on the tenor of the questioning, the judges will take a skeptical look at the district judges’ decisions, both of which refused to enforce waivers in FLSA cases.

The two cases – unrelated but raising similar issues – present the appellate court with the opportunity to consider decisions that put significant roadblocks in the path of employers seeking to use arbitration agreements to bar class or collective actions in wage-hour and other employment cases.  While the Supreme Court has said that class/collective waivers are permissible under the FAA notwithstanding any state law rules to the contrary, the two district court decisions discussed today have made it difficult for employers within the Second Circuit to know whether these waivers will be enforced.

In the first case, Sutherland v. Ernst & Young LLP (reported earlier in this space), the district court held that a class action waiver was unenforceable because, given the small amount at issue for her individually (a few thousand dollars), it was economically infeasible for her to pursue the small claim through individual arbitration.  The district court relied in part on the Second Circuit’s decision in American Express Co. v. Italian Colors Restaurant, where the court rejected arbitration on a non-class basis because the costs of proceeding individually were prohibitive.

As we have reported, AmEx is currently pending (for the third time) before the Supreme Court and was argued last month.  Both sides in Sutherland took pains to persuade the Second Circuit that they win regardless of the outcome in AmEx.  E&Y, for its part, sought to distinguish AmEx on grounds that the anticipated costs in that antitrust case (primarily for expert analysis) were both far greater than in the instant FLSA dispute and were not fully recoverable even if the plaintiff prevailed.  Sutherland’s lawyer, in contrast, contended that the disparity between the potential damages in her case and the cost required to obtain a judgment was so great that only a “lunatic” would bring the case on an individual rather than class or collective basis.

The Sutherland argument also offered the judges a taste of the ongoing controversy over D.R. Horton, in which the NLRB declared that class action waivers in arbitration agreements violate the National Labor Relations Act.  Asked whether the court should defer to the Board’s decision, Sutherland’s counsel said yes, arguing that deference is required under Supreme Court doctrine and that courts may not enforce illegal contracts.  E&Y’s counsel, noting that D.R. Horton concerns the NLRA but not the FAA, sharply disagreed.

The second case, Raniere v. CitiGroup, Inc., raises the issue of whether section 216(b) of the FLSA confers a “substantive right” to pursue a collective action that is non-waivable via arbitration agreements.  Citi argued that the district court’s decision taking that position, and refusing to uphold the class/collective action waiver in its arbitration agreement, is contrary to the decisions of every court that has addressed the issue, as well as inconsistent with the articulated position of the U.S. Department of Labor.

These arguments seemed to resonate with the Second Circuit judges, who questioned Raniere’s counsel closely regarding the so-called “policy” arguments that he, and District Judge Robert Sweet, had advanced in arguing for a rule of non-waivability.  Putting a rather fine point on it, one judge observed (albeit in the form of a question) that Raniere’s contentions were better addressed to Congress than to the courts.

There is no timetable for the Second Circuit’s decisions in either case.  But because Sutherland may be directly affected by the Supreme Court’s forthcoming decision in AmEx, which is expected by late June, the court may simply defer a decision in that case until summer.  The decision in Raniere, which is less directly connected to AmEx, could come sooner.

One thing is for certain: Second Circuit employers with class action waivers in their arbitration agreements, or those waiting on the sidelines until the issue is resolved, will be anticipating both decisions eagerly.