Second Circuit Seal.jpgCo-authored by Richard L. Alfred, Patrick Bannon, and John Egan

Will the Second Circuit join six other circuits in holding that agreements to arbitrate FLSA claims on an individual basis — and not on a class or collective basis — are enforceable?  When — if ever — can a plaintiff avoid arbitration by claiming that arbitrating an individual FLSA claim would be economically infeasible?  Sutherland v. Ernst & Young LLP and Raniere v. CitiGroup, Inc., both scheduled for oral argument on March 20, 2103, will provide the answers.  This post addresses Sutherland; we’ll have a post on Thursday regarding Raniere and the oral argument in both cases. 

When Stephanie Sutherland was hired as an accountant at Ernst & Young, she agreed to submit all claims against the firm to arbitration on an individual rather than class or collective basis.  Notwithstanding the agreement, she later sued for $1,867.02 in overtime pay under the FLSA and state law.  She asked the court to certify her FLSA claim as a collective action and her state law claims as a class action.  

Ernst & Young filed a motion to dismiss or stay the proceeding in favor of arbitration pursuant to Sutherland’s agreement.  Sutherland opposed on the ground that that it would be economically infeasible for her to pursue such a small claim through individual arbitration.  Therefore, she argued, enforcing the arbitration agreement would prevent her from effectively vindicating her rights under the FLSA. 

The District Court ruled in Sutherland’s favor and denied Ernst & Young’s motion.  It followed the Second Circuit’s reasoning in American Express Co. v. Italian Colors Restaurant.  In AmEx, an antitrust case, the Second Circuit refused to enforce an agreement to individual arbitration on the grounds that the significant cost of hiring an economic expert would preclude the plaintiff from effectively vindicating its rights if it were limited to individual arbitration. 

The Supreme Court is considering whether to overturn AmEx.  (See discussion here

Ernst & Young appealed to the Second Circuit.  Even though the viability of the Second Circuit’s AmEx decision is in doubt, both sides in Sutherland have focused on how the case should be decided if the Supreme Court affirms AmEx.  Under AmEx, the key issue is whether Sutherland has economically feasible means of pursuing her claims individually in arbitration.

The U.S. Department of Labor and the EEOC submitted a joint amicus brief supporting Sutherland.  They argue that the costs and fees necessary to arbitrate Sutherland’s claims are so high (estimated by Sutherland to be approximately $200,000) that enforcing the arbitration agreement would effectively bar her from pursuing these claims.  They argue, for example, she must pay an arbitration fee of $6,000.  They also claim the need to spend $33,500 to engage an expert. 

In a response brief, Ernst & Young notes that it has stipulated to pay (a) all arbitration fees and (b)  Sutherland’s reasonable expert fees if she prevailed in the arbitration.  Of course, under the FLSA, Sutherland would be entitled to recover her reasonable attorneys’ fees from Ernst & Young if she were to prevail. 

The DOL and the EEOC argue, however, that Sutherland cannot effectively arbitrate her claims even with these cost and fee shifting provisions.  Under AmEx, they argue, “the risk of losing” alone would be sufficient to discourage her from pursuing individual arbitration.  Ernst & Young responds that the Second Circuit has never truly said a plaintiff’s concern about losing could be a reason to invalidate an arbitration agreement.  Moreover, it argues, lawyers routinely litigate individual claims alleging wage and hour violations, albeit small, simply because they can recover their fees under the FLSA. 

Ernst & Young also argues that the rule proposed by the amici would create a “slippery slope.”  Any plaintiff, in any case, could hire pricey lawyers, engage unnecessary experts or otherwise exaggerate the costs of pursuing a claim simply to evade enforcement of an individual arbitration agreement.  (During the Supreme Court’s argument in AmEx, Justice Breyer seemed concerned about this possibility as well.)  Such a rule, Ernst & Young contends, would undermine the Federal Arbitration Act, which requires the enforcement of private arbitration agreements according to their terms. 

If the Supreme Court were to affirm in AmEx, the dispute in Sutherland over the economic feasibility of individual arbitration of FLSA claims could, as a practical matter, determine whether employers can enforce arbitration agreements with their employees — not only in FLSA cases but in a wide range of other statutory disputes.  So far, employers have been winning the issue hands down, with six other circuits endorsing agreements to resolve FLSA claims through individual arbitration. (See additional discussion here)  Stay tuned to this blog for the outcome of Sutherland — and of AmEx.