Earlier this summer when the U.S. Supreme Court issued its opinion in Italian Colors v. American Express, in which the Court enforced a class action waiver in an arbitration agreement to compel the claimants to arbitrate their antitrust claims, the decision seemed likely to have widespread impact even outside the antitrust context. On August 9, 2013, in a decision demonstrating the wide-ranging impact of the Supreme Court’s American Express opinion, the Second Circuit enforced a class action waiver in an Ernst & Young employee’s written offer letter  to require her to individually arbitrate her Fair Labor Standards Act (FLSA) claims, even though the costs of pursuing her claims individually would far exceed the value of her potential recovery. A copy of the Second Circuit’s opinion can be found here.


Stephanie Sunderland worked as a staff employee at Ernst & Young. She was paid a flat salary, regardless of how many hours she worked. During the time she worked for E&Y, she sometimes worked overtime. She filed an action against E&Y claiming that she had improperly been classified as exempt and seeking to recover $1,867.02 in overtime pay. She sued on her own behalf as well as on behalf of similarly situated E&Y employees.


E&Y moved to dismiss or to stay the proceedings and to compel Sunderland to arbitrate her claims on an individual basis, in reliance on the provisions in the offer letter Sunderland had signed at the time she accepted the E&Y job. The parties agreed that the provisions in the offer letter required Sunderland to arbitrate her disputes with the company and also that the provisions included a class action waiver. Sunderland argued that the arbitration provisions were unenforceable because the requirement that she arbitrate her claims individually would prevent her from “effectively vindicating” her rights under the FLSA owing to the expense of pursuing the claims (she estimated that it would cost her approximately $200,000 to litigate a claim worth less than $2,000).


The District Court denied the defendants’ motion in reliance on an earlier opinion that the Second Circuit had entered in the American Express case prior to its Supreme Court review, holding that arbitration agreements would not be enforced where plaintiffs demonstrated that they would be unable to vindicate their statutory rights if a class action waiver was enforced. E&Y appealed. During the pendency of the appeal, the Supreme Court entered its opinion in the American Express case.


In a unanimous per curiam opinion, a three-judge panel of the Second Circuit reversed the district court and remanded the case for further proceedings.


As explained in an August 11, 2013 post on the Wage & Hour Litigation Blog (here), the Second Circuit’s opinion in the Sunderland case “dispenses with two of the arguments that lower courts had used to invalidate class action waivers in the wage-hour context: that the FLSA confers an unwaivable substantive right to pursue a collective action, and that a collective action is the only means by which plaintiffs can effectively vindicate their rights give the low potential recover in the individual action.”


In consideration of Sunderland’s argument that the FLSA gave claimants an unwaivable statutory right to pursue class claims, the Second Circuit referred to Supreme Court case principles holding that the Federal Arbitration Act establishes “a liberal federal policy favoring arbitration agreements” and requiring that an arbitration agreements must be enforced according to their terms unless “overridden by a contrary congressional command.” Noting the “consensus among our Sister Circuits” on the issue, the Second Circuit concluded that the FLSA “does not include a ‘contrary congressional mandate’ that prevents a class-action waive provision in an arbitration agreement from being enforced according to its terns.”


With respect to Sunderland’s argument that the class action waive prevented her from “effectively vindicating” her statutory claims, the Second Circuit noted that its earlier opinion, on which the District Court had relied in denying E&Y’s motion in the lower court, is no longer good law. The Second Circuit noted that “despite the obstacles facing the vindication of Sunderland’s claim,” the U.S. Supreme Court’s decision in the American Express case “compels the conclusion that Sunderland’s class-action waiver is not rendered invalid by virtue of the fact that her claim is not economically worth pursuing individually.” The Second Circuit quoted the Supreme Court’s language from Justice Scalia’s majority opinion in the American Express decision that “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.


Although other courts have enforced arbitration agreements with class action waivers in connection with FLSA claims, there had still been some hold outs, including among district courts in the Second Circuit. As the Wage & Hour Litigation Blog post linked above notes, as a result of the Second Circuit’s decision in Sunderland – and absent further unforeseen procedural developments in the case at the Circuit Court – “the arguments against waivers should not be consigned to history.”


Even though the U.S. Supreme Court’s opinion in the American Express case was consistent with the court’s other recent case laws strongly enforcing arbitration agreements, the Court’s decision did raise the question of just how broadly the enforceability of class action waivers in arbitration agreements would be taken. As the Second Circuit’s opinion in the Sunderland opinion shows, the answer to the question seems to be quite far indeed. Even though the American Express decision involved the enforcement of a class action waive in an antitrust suit, the Second Circuit had no trouble applying the Supreme Court’s decision to enforce a class action waiver in an FLSA case. Clearly the Supreme Court’s line of cases broadly enforcing arbitration agreements – including class action waivers – will have a far-reaching effect.


The broad enforceability of class action waivers is clearly an important trend that could have an enormous impact on litigation generally. The most interesting question is whether courts will enforce an arbitration requirement with a class action waiver in a corporate by-law to require shareholders to arbitrate their claims individually. At least one court has done so already; it seems likely that the question of enforceability of class action waivers in this and many other contexts will be an important litigation question in the months ahead.


ICYMI: FDIC Updates Its Litigation Report: On August 8, 2013, the FDIC updated the page on its website on which it tracks the litigation against former directors and officers of failed banks that the agency has filed or approved. According to the latest update, the agency filed seven additional lawsuits since its prior update, bringing the total number of lawsuits the agency has filed since 2010 to 76, and bringing the number of lawsuits filed so far this year to 32. (By way of comparison, the agency filed 25 lawsuits during all of 2012.)


As of August 8, 2013, the FDIC has also authorized suits in connection with 122 failed institutions against 987 individuals for D&O liability. (As of the agency’s last update in July, the agency had authorized 120 lawsuits.) The number of suits authorized is inclusive of 76 lawsuits that the agency has already filed naming 574 former directors and officers.


Even though the peak of the financial crisis is now nearly five years in the past, banks are continuing to fail. The FDIC has closed two more banks during August 2013, bringing the number of failed banks this year to eighteen and bringing the total number of bank failures since January 1, 2007 to 486. The agency has authorized lawsuits in connection with 122 failed institutions, meaning that the agency has authorized lawsuits in connection with about 25% of bank failures (by comparison, during the S&L crisis, the agency filed D&O lawsuits in connection with about 24% of bank failures). With a total of 76 lawsuits actually filed, the agency has now filed suit in connection with about 15% of bank failures.