Availability of class actions in arbitration.

• Author: Spero, Donald J.
• Position: Part 1

Certain rights conferred by statute are not susceptible to being waived by individuals on whom the statute confers those rights. Employment lawyers who deal in Fair Labor Standards Act (the FLSA) (1) cases are made aware of this fact by the Supreme Court decision in Brooklyn Savings Bank v. O'Neil, 324 U.S 697 (1944).

It has been held in this and other courts that a statutory right conferred on a private party, but affecting the public interest, may not be waived or released if such waiver or release contravenes the statutory policy.... Where a private right is granted in the public interest to effectuate a legislative policy, waiver of a right so charged or colored with the public interest will not be allowed where it would thwart the legislative policy which it was designed to effectuate. With respect to private rights created by a federal statute, such as [29 U.S.C.] [section] 16 (b), the question of whether the statutory right may be waived depends upon the intention of Congress as manifested in the particular statute. (2)

The court further reasoned that the legislative history of the FLSA showed a purpose to protect certain individuals who lacked bargaining power from substandard wages and that to "allow waiver of statutory wages by agreement would nullify the purposes of the [a]ct." The court stated, "the same policy considerations which forbid waiver of basic minimum and overtime wages under the [a]ct also prohibit waiver of the employee's right to liquidated damages." (3) This view was reiterated in Schulte v. Gangi, 328 U.S. 108, 114-15 (1946), in which the court ruled "the remedy of liquidated damages [in FLSA cases] cannot be bargained away by bona fide settlements of disputes over coverage."

The reasoning in Brooklyn Savings Bank v. O'Neil and Schulti v. Gangi leads to the question of whether a waiver of the right to bring a class action (4) is enforceable, whether it be in a judicial or arbitration forum. No bar to waiving the right to bring an employment claim in court has a force matching the prohibition against waiving substantive FLSA rights. Nonetheless, some courts have concluded that class action waivers in certain specific instances are unenforceable as against public policy. As might be expected, the courts are not unanimous on this issue.

Given that waiver of class action entitlements are not per se unenforceable as being in violation of public policy, the questions to be answered are when they will be enforced. In answering these questions, it is necessary to take into account the federal policy favoring class actions. This policy was forcefully articulated by the Supreme Court in Deposit Guaranty National Bank v. Roper, 445 U.S. 326, 338 (1980).

The use of the class-action procedure for litigation of individual claims may offer substantial advantages for named plaintiffs; it may motivate them to bring cases that for economic reasons might not be brought otherwise.n9 Plainly there has been a growth of litigation stimulated by contingent-fee agreements and an enlargement of the role this type of fee arrangement has played in vindicating the rights of individuals who otherwise might not consider it worth the candle to embark on litigation in which the optimum result might be more than consumed by the cost. The prospect of such fee arrangements offers advantages for litigation by named plaintiffs in class actions as well as for their attorneys. For better or worse, the financial incentive that class actions offer to the legal profession is a natural outgrowth of the increasing reliance on the "private attorney general" for the vindication of legal rights; obviously this development has been facilitated by Rule 23.

N9 A significant benefit to claimants who choose to litigate their claims in a classaction context is the prospect of reducing their costs of litigation, particularly attorney's fees, by allocating such costs among all members of the class who benefit from any recovery. Typically the attorney's fees of a named plaintiff proceeding without reliance on Rule 23 could exceed the value of the individual judgment in favor of any one plaintiff. Here the damages claimed by the two named plaintiffs totaled $1,006.00. Such plaintiffs would be unlikely be able to obtain legal redress at an acceptable cost, unless counsel were motivated by the fee-spreading incentive and proceeded on a contingent fee basis. This, of course, is a central concept of Rule 23. (5)

Policy Favoring Arbitration vs. Policy Favoring Class Actions

Decisions dealing with the enforceability of arbitration agreements take into consideration Congress' intent to create a strong policy favoring arbitration as set forth in the Federal Arbitration Act (the FAA). (6) This policy is embodied in 9 U.S.C. [section] 2 (emphasis added):

A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

The Supreme Court established in Moses H. Cone Memorial Hosp. v. Mercury Construction Corp., 460 U.S. 1, 24 (1983), that "[section] 2 is a Congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary."

Likewise, the Supreme Court focused on the salutary effect of the availability of class actions in Amchem Prods. v. Windsor, 521 U.S. 591, 617 (1997), when it quoted with approval the comments of the Seventh Circuit in Mace v. Van Ru Credit Corp., 109 F.3d 338, 344 (7th Cir. 1997).

The policy at the very core of the class action mechanism is to overcome the problem that small...