Co-authored by Brandon L. Spurlock and Alex S. Drummond

Since the U.S. Supreme Court’s ruling last year in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010), the battle lines are being drawn in federal courts over the extent to which employers can use workplace arbitration agreements to stay out of court proceedings and/or class actions.

Sutherland v. Ernst & Young LLP, No. 10-CV-3332 (S.D.N.Y. Mar. 3, 2011), a recent decision out of the U.S. District Court for the Southern District of New York [link to ruling], is the latest example of the impact of class waiver provisions in employment agreements. In Sutherland, Plaintiff was a former accountant who alleged that Ernst & Young (“E&Y”) misclassified her and other similarly-situated individuals as exempt from overtime under the Fair Labor Standards Act (“FLSA”). She brought a putative collective action under the Section 216 (b) of the FLSA and a Rule 23 class action under New York state law claiming that she and putative class members were unlawfully denied overtime compensation. Plaintiff had signed a dispute resolution agreement with E&Y, which called for binding arbitration on an individual, rather than class-wide, basis. E&Y moved to dismiss Plaintiff’s complaint and compel arbitration of Plaintiff’s claim on an individual basis. 

Relying upon In Re American Express Merchant’s Litigation, 554 F.3d 300 (2d Cir. 2009) (“Amex”), the District Court found E&Y’s class waiver provision unenforceable on the grounds that enforcing the provision would preclude Plaintiff from vindicating her statutory rights. Even though she retained the right to pursue her individual claims in arbitration, the District Court determined that she would have to find legal counsel – at an estimated cost of $160,000 – to pursue a claim worth $1,800. The District Court concluded that no attorney would sign on to do so, and that this precluded Plaintiff from vindicating her rights. The District Court determined that Amex retained persuasive force notwithstanding the Supreme Court’s summary order vacating the judgment in that case and remanding to the Second Circuit in light of the Supreme Court’s April 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010), which held that class arbitration is not allowed unless the parties agree to it. 

The District Court reasoned that because it would be prohibitively expensive for Plaintiff to pursue her overtime claims on an individual basis, and because the arbitration provision barred any claim other than an individual claim, the class waiver provision was unenforceable because it would prevent Plaintiff from vindicating her statutory rights. At the same time, the District Court stated that it could not compel class-wide arbitration based on Stolt-Nielsen. In effect, this meant that Plaintiff could pursue her claims in a judicial forum.

Sutherland illustrates how Plaintiffs are apt to argue for an end-run around Stolt-Nielsen. The District Court determined the class waiver in the arbitration agreement was unenforceable because it prevented the vindication of the employment claim at issue, thus allowing workers to pursue class and/or collective actions in federal court notwithstanding agreements requiring individual arbitrations. While this argument is easier for plaintiffs’ counsel to make in an FLSA case, the force of the argument is attenuated when employment discrimination claims – which allow for up to $300,000 in combined compensatory and punitive damages – are at issue.

It remains to be seen if this decision remains viable when the Supreme Court rules later this year in AT&T Mobility LLC v. Concepcion, which concerns the issue of whether class action waivers in a consumer contract of adhesion are enforceable. AT&T Mobility was argued before the Supreme Court on November 9, 2010.

The Sutherland ruling is a plaintiff-friendly decision. It should make employers cognizant of the possibility that class arbitration waivers in employment or dispute resolution agreements may not provide protection from class proceedings. Employers should continue to monitor decisions addressing this issue, as these cases will have a significant impact on how employment-related class actions are litigated and defended in the future.