In Smith v. Servicemaster Holding Co., No. 2:11–cv–02943 (W.D. Tenn. May 21, 2013), the plaintiffs filed a collective action in federal court alleging that the defendant employers had violated the Fair Labor Standards Act, and the federal court granted the defendants’ motion to compel arbitration. The arbitration agreement did not contain a class action waiver, and an arbitrator subsequently found that the “silent” arbitration agreement did not preclude class arbitration. The defendants then asked a court to vacate the arbitrator’s clause construction award because the arbitrator exceeded his power or acted in manifest disregard of the law in entering the partial final award on the class arbitration issue.
The arbitrator distinguished the present case from Concepcion and Stolt-Nielsen because the present case involved an employment dispute. The arbitrator reasoned that the right to proceed collectively under the Fair Labor Standards Act is so intertwined with substantive rights that denying collective relief would undermine those rights. Applying a deferential standard of review, the court refused to vacate the arbitrator’s clause construction award allowing for class arbitration.
This case involved issues similar to those being heard before the Supreme Court this term in Oxford Health Plans v. Sutter, and the defendants asked the court in the alternative to stay the arbitration pending the Sutter decision. However, the court refused to stay the arbitration.
Denying collective or class action relief is highly problematic, but I am concerned about sending collective or class actions into arbitration. There is a problem of collusion with class proceedings, and with the secrecy of arbitration and the lack of procedural protections in arbitration, I am concerned the risk of collusion and risk of harming absent class members may be greater in class arbitration. Ideally, these collective or class actions should proceed in court.
In considering this question, it is important to be cognizant of the difference between FLSA collective actions and Rule 23 class actions. FLSA collective actions are “opt-in” rather than “opt-out,” and when the number of class members is relatively small, are more in the nature of joinder of the individual claims. Since each employee must affirmatively opt-in, the collusion problem is far smaller than it might be in a Rule 23-type opt-out arbitration class action proceeding. Thus, although i agree that proceeding in court would be preferable, and share the view that employment adhesion contracts should not be treated as a valid waiver by the employee of a judicial forum, I am not so concerned about collusion in these cases. Moreover, given that the size of most FLSA claims is small, the cost of the arbitral proceeding may be prohibitive absent a collective action.
Excellent observation! Thanks so much for sharing. I had forgotten about the difference between opt-in and opt-out proceedings. But this raises a larger problem for me. When interpreting a “silent” clause as permitting class arbitrations, how does the arbitrator know what class rules the parties agreed on? The AAA developed supplementary class arbitration rules based on FRCP 23, which I believe provided for opt-outs. If these AAA class rules are used, there will not be any opt-ins. By having a silent clause, did the parties agree to Rule 23 of the Federal Rules or some state variation thereof, or some (all?) of the court procedures used with FLSA collective actions, or perhaps all or some of the federal rules, or some mix of all the above? I dislike Concepcion for many reasons, and it is highly problematic to use the FAA as a shield from class action liability. However, one good point from Concepcion I tend to agree with is that changing from a bilateral arbitration to a class arbitration involves a fundamental transformation, and I don’t think mere silence should be interpreted to give rise to this fundamental transformation. Thanks again for sharing.
Imre