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4th Circuit Affirms Arbitration Class Certification

Published by on January 28, 2008

In a published decision today, the U.S. Court of Appeals for the Fourth Circuit affirmed an arbitration award in an FLSA class action.  The case is interesting because of the implications for employers using mandatory arbitration agreements. The opinion is here:  Long John Silver’s v. Cole. Long John Silver’s (LJS) started a mandatory arbitration procedure […]

In a published decision today, the U.S. Court of Appeals for the Fourth Circuit affirmed an arbitration award in an FLSA class action.  The case is interesting because of the implications for employers using mandatory arbitration agreements.

The opinion is here:  Long John Silver’s v. Cole.

Long John Silver’s (LJS) started a mandatory arbitration procedure in 1995.  The policy provided for arbitration by the American Arbitration Association pursuant to its commercial arbitration rules.  The claimants in this case filed an arbitration proceeding alleging that LJS failed to properly compensate them under the FLSA.  They later filed an amended arbitration complaint seeking class certification pursuant to the AAA rules.

The difficulty arose because the AAA rules provide for an “opt-out” class procedure, while the FLSA provides for an “opt-in” procedure.  The arbitrator concluded that the arbitration agreements had waived the FLSA’s “procedural” rule and applied the “opt-out” provisions of the AAA rules.  After so concluding, the arbitration entered a Class Award.  LJS challenged the award in federal district court.

A copy of the partial class certification award by the arbitration is here:  Arb. Award.

The arbitrator made an interesting comment about LJS’s argument that he should defer to the federal court interpretation of the FLSA rules:

“In view of these consequences, some attention must be paid to the context of the controversy.  Plaintiffs originally sought to advance their FLSA claim as a collective action in federal court (the Johnson case).  Defendants successfully sought the preemption of those claims by invocation of those provisions of the employment contract which compelled the private arbitration of the parties’ disputes within the framework of the Supplementary Rules.   It was Defendants who sought the avoidance of the FLSA procedures by the substitution of AAA procedures.   Having succeeded in accomplishing a private litigation unmoored from federal procedural rules, the claim for a necessary adherence to the FLSA procedural rules is unpersuasive.”

Despite the intervention of the Department of Labor, the Fourth Circuit concluded that it was not clear that the FLSA “opt-in” procedure was a nonwaivable substantive right.  Accordingly, the arbitrator’s conclusion that it was nonwaivable was not based on an unreasonable interpretation of the law.  (While the Court may have reached a different conclusion on the merits, the Court’s review of an arbitration award is extremely limited.  In fact, the Court notes that the standard of review of an arbitration award “is among the narrowest known to the law.”)  The Court affirmed the arbitrator’s certification of a nationwide class action against LJS under the FLSA.

This decision highlights an area that receives little attention in the arguments for and against arbitration, namely, the uncertainty that is inherent in the arbitration process.  The outcome of the claimant’s efforts to pursue an FLSA class in federal court would have been predictable — the court would have authorized a class notice to all similarly situated individuals after determining the appropriate scope of “similarly situated” individuals and those who opted into the case after receiving the notice would proceed as plaintiffs.  Such an outcome, while probably undesirable to the employer, was at least predictable given the caselaw.  The arbitration class award, however, is a much more undesirable outcome for the employer here — they are now subject to a national opt-out class action.

Although mandatory arbitration agreements in the employment context are becoming more common (see Connecticut Employment Law Blog story for example), there are efforts underway in Congress to forbid pre-dispute arbitration agreements in the employment context (see here for What Is The Future Of Arbitration?).  For the present, mandatory arbitration policies will continue to be a matter of employer choice based on the perceived advantages and disadvantages of the system.

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