A recent decision by the U.S. District Court for the Southern District of New York illustrates the impact of class waiver provisions in employment agreements. In Sutherland v. Ernst & Young LLP, plaintiff, a former accountant, brought a class action against Ernst and Young (“E&Y”) under the Fair Labor Standards Act and New York law, alleging that she and putative class members were unlawfully denied overtime compensation. E&Y moved to dismiss and compel arbitration of Sutherland’s claims on an individual basis pursuant to the parties’ arbitration agreement which included a class waiver provision.

In denying defendant’s motion, the court relied on In re American Express Merchants’ Litigation, 554 F.3d 300 (2nd Cir. 2009) (“Amex”). There, the Second Circuit invalidated a class waiver provision in an arbitration agreement, finding that it precluded plaintiffs from vindicating their statutory rights. The Amex court held that the enforceability of a class waiver provision should be determined by referencing several factors, including: (1) the provision’s fairness; (2) the individual plaintiff’s cost-to-recovery ratio; (3) the ability to recover attorneys’ fees and costs and thus obtain legal representation; and (4) the waiver’s effect on the company’s “ability to engage in unchecked market behavior.”

The court’s reliance on Amex was surprising considering the Supreme Court’s recent order vacating and remanding the judgment in that case to the Second Circuit for reconsideration in light of Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp, 130 S. Ct. 1758 (2010) (“Stolt-Nielsen”). In Stolt-Nielsen, the Supreme Court held that class arbitration is not permitted unless the parties agree to it. The district court determined, however, that Amex remained persuasive authority and analyzed Sutherland’s case using the factors articulated there.

Based on this analysis, the district court determined that the arbitration agreement at issue was unenforceable. Specifically, the court found that Sutherland’s maximum potential recovery of approximately $1,867.02, was “too meager to justify” her expenses, which were likely to exceed $200,000. The court reasoned that under these circumstances, Sutherland was unlikely to find an attorney willing to represent her. By contrast, if Sutherland was permitted to aggregate her claim with similarly situated individuals, “she would have no difficulty in obtaining legal representation.” Finally, the court asserted that enforcement of the class waiver provision would grant E&Y effective immunity from labor laws. Therefore, the court denied defendant’s motion to dismiss and compel arbitration and permitted plaintiff’s class action to proceed.

This entry was written by Sarah Green.

Photo credit: Cristian Baitg