By Patrick Bannon and Michael Steinberg

Seyfarth Synopsis: An appellate court has ruled that a district court should not authorize notice of an FLSA suit to employees who are ineligible to join the suit because they agreed to resolve disputes exclusively through arbitration. And, the court recognized that sending FLSA notice too broadly can pose “dangers” of unfair harm to employers.

In FLSA collective actions, plaintiffs usually request, early in the litigation, that courts authorize written notice to potential plaintiffs of the opportunity to join the suit. Courts often grant such requests, believing that there is no downside to doing so.

On January 24, 2020 the Seventh Circuit became the second federal appeals court to consider whether notice may be sent even to employees who are ineligible to join an FLSA suit because they have executed valid arbitration agreements. A unanimous appellate panel answered the question “no” and, along the way, showed a refreshing recognition of the potential for abuse of the FLSA notice process.

In Bigger v. Facebook, Inc., a former Client Solutions Manager claimed that Facebook misclassified her as overtime-exempt in violation of the FLSA. Bigger asked the district court to conditionally certify the case as a collective action and to authorize notice to a national collective of Facebook Client Solutions Managers. In opposing the request for notice, Facebook asserted that most of the employees Bigger proposed to notify had entered into arbitration agreements. Therefore, Facebook argued, they were not potential plaintiffs and should not receive notice. The district court considered it too soon to determine whether potential opt-ins had valid arbitration agreements because the opt-ins weren’t (yet) parties and because the court believed it should not make merits determinations at the conditional certification stage of an FLSA collective action. The district court therefore authorized notice to the entire group plaintiff proposed — arbitration agreements or not.

On appeal, the Seventh Circuit concluded that the district court should have allowed Facebook to prove that many of the employees had agreed to arbitration. In reaching that result, the court recognized a crucial, often-overlooked point about FLSA litigation: sending court-authorized notice to potential opt-ins can unfairly harm employers. “[P]laintiffs may wield the collective action format for settlement leverage,” the court noted, and “notice giving, in certain circumstances, may become indistinguishable from the solicitation of claims . . . .” Given those “dangers,” the Seventh Circuit concluded, district courts must give employers a chance to show that potential notice recipients have valid arbitration agreements. If the plaintiff does not contest or the employer proves that certain employees have valid arbitration agreements, notices may not be sent to those employees.

The Bigger decision, and a similar Fifth Circuit ruling last year in JPMorgan, are especially important given the growing phenomenon of mass arbitration, in which plaintiffs’ counsel file or threaten to file hundreds, thousands, or even tens of thousands of simultaneous individual arbitration demands — often for small amounts. For an employer that has agreed to bear the costs of arbitration, the up-front arbitration filing fees alone can create enormous Day 1 settlement pressure. While the overall mass arbitration problem remains, Bigger and JPMorgan make it harder for plaintiffs’ counsel to use the FLSA notice process to identify and connect with individuals who could then pursue individual arbitration claims.