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Litigation News

Litigation News | 2020

New Notice Standard Established in FLSA Collective Actions

John McNichols

Summary

  • Courts must assess employees’ arbitration agreements before issuing notice.
  • Leaders expect that the ruling will increase employers’ settlement leverage in the future.
New Notice Standard Established in FLSA Collective Actions
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Employers now have expanded protection from broad collective actions under the Fair Labor Standards Act (FLSA). Before a court can authorize notice of a collective action to potential plaintiffs, their employer must have an opportunity to show that they are subject to valid arbitration agreements waiving their rights to sue, the U.S. Court of Appeals for the Seventh Circuit held. Because the notice often drives settlement discussions in FLSA collective actions, ABA Section of Litigation leaders expect that, if followed, the ruling will increase employers’ settlement leverage in the future.

New Framework for Collective Action Notice Procedures

In Bigger v. Facebook, a Facebook employee filed a putative collective action against Facebook alleging violations of the overtime-pay requirements of FLSA and Illinois state law. On the plaintiff’s motion to certify a collective action and notify her fellow employees of their opportunity to join the lawsuit, the employer objected, asserting that many employees had signed arbitration agreements waiving their rights to participate. The U.S. District Court for the Northern District of Illinois granted the plaintiff’s motion.

The Seventh Circuit reversed, holding that before the district court could send notice to the plaintiff’s proposed group, the employer should have had an opportunity to show that individual members of the group were subject to valid and enforceable arbitration agreements. If the plaintiff disputed the existence or enforceability of the agreements, the Seventh Circuit continued, the district court would have to decide those issues as a threshold matter before notice could issue. In outlining these steps, the Seventh Circuit expanded on the Fifth Circuit’s decision last year in In re JPMorgan Chase & Co., which held that a collective action notice should not issue to potential plaintiffs subject to arbitration agreements, but which did not involve a threshold dispute over the agreements’ enforceability.

Underlying the Seventh Circuit’s holding was its reasoning that although collective actions can enhance efficiency by resolving common issues in a single proceeding, they also “present dangers.” One such danger was the potential “for abuse of the collective action device,” and in particular that the notice could “increas[e] the pressure to settle” simply by increasing the number of claimants, regardless of the merits of their claims.

Increased Focus on the Notice Stage in FLSA Collective Actions

Section of Litigation leaders highlight the decision’s emphasis on the import of notice in FLSA collective actions. “The decision is very important because it focuses on the notice stage, which is a controversial stage in this type of case,” observes David E. Gevertz, cochair of the Section’s Employment & Labor Relations Committee. “The concerns about the notice can drive a lot of the settlement discussions wholly separate and apart from the merits of the action,” he adds.

“The danger to a corporate defendant in a FLSA collective action is that the notice can really expand the number of claimants, because it’s an opt-in format,” agrees Adam Polk, cochair of the Section’s Class Actions & Derivative Suits Committee. As Polk explains, an opt-in format—in which potential plaintiffs must affirmatively elect to join the action—differs from that of ordinary class actions under Federal Rule of Civil Procedure 23, which presumes that potential plaintiffs are part of the lawsuit unless they opt out. Because a class under Rule 23 does not expand the number of claimants, Polk observes, the concerns that underlie Bigger do not apply in ordinary class actions. Thus, “if the rule in Bigger is going to gain traction, it should be limited to opt-in cases,” opines Polk.

Bigger “Expressly Acknowledges What Practitioners Know”

In addition, Section leaders find the Bigger decision notable in its willingness to address the realities of litigation. “The value of the decision is that it explicitly acknowledges what practitioners already know, which is that the collective action notice can be the tail that wags the dog in wage and hour cases,” Gevertz comments. “There is not an insignificant cost to gathering all of the information required by the notice, and the notice will solicit persons who may have other types of claims, all of which can create a host of satellite problems for the employer,” he adds.

Polk agrees that “disproportionate discovery can be a factor in this type of case,” but notes that the Seventh Circuit’s remedy may be unnecessary. “In an ordinary class action, the existence of arbitration agreements among potential class members would be addressed as a typicality problem. That would work under FLSA, too,” he states. Polk also warns that by litigating the validity of arbitration agreements at the notice stage, a court “may be establishing an arbitration requirement for absent class members, who may not even be represented. That’s a problem.”

Lessons Learned and Practice Tips

For FLSA litigants and their counsel, the decision in Bigger helps set expectations about the role that arbitration agreements will play in litigation. As Gevertz observes, the decision “is the first one to lay out the steps to determine whether arbitration agreements will limit the scope of the lawsuit. So for practitioners, it gives us a higher degree of confidence when we’re talking with a client about the arbitration agreements that it has with its employees.”

Polk, in turn, notes that the case has important take-aways for both plaintiff and defense lawyers. “If you’re a plaintiff’s attorney, be cognizant of how you define your class, as certain potential members may be subject to arbitration. But if you’re a defense lawyer, get the issue of arbitrability going right out of the gate, because the case gives you an opportunity to take a stand at an earlier juncture,” he states.

Resources

  • Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019).
  • Hoffman-La Roche Inc. v. Sperling, 493 U.S. 165, 170-71 (1989).
  • Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983).

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