In recent years many employers have implemented mandatory arbitration agreements to require that legal disputes with employees be decided by a neutral arbitrator, rather than by jury trial. Arbitration agreements are coming under scrutiny as unfairly preventing employees from having their “day in court” and having access to jury trials – most recently with the passage of the “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021,” which took effect March 3, 2022 and now prohibits pre-dispute agreements to arbitrate sexual harassment and sexual assault claims (unless the employee – after the claim arises – voluntarily elects to participate in arbitration). Other legislative attempts to broadly bar the use of mandatory arbitration agreements with respect to all employment claims have been proposed in Congress but, to this point, have not gained much traction.
But it is not all doom and gloom for employers with mandatory arbitration programs – as federal Courts continue to uphold their use. One area where arbitration agreements have been particularly effective is in precluding employees from pursuing class action claims against employers, and in particular, collective action claims seeking unpaid minimum wages and overtime pursuant to the Federal Fair Labor Standards Act (“FLSA”). In FLSA cases a single employee who claims violations can bring a collective action and be granted permission by the Court to send written notice inviting past and current employees of the employer (which can number in the dozens, hundreds or even thousands – depending on the size of the employer) to join the lawsuit. Collective action FLSA claims present significant exposure and litigation costs for employers. However, federal Courts, including the Fifth Circuit Court of Appeals (which governs Louisiana, Texas and Mississippi) have held that mandatory arbitration agreements can be used to require one-on-one resolution of legal claims in private, single plaintiff arbitration, thereby barring. the collective action strategy often favored by plaintiff attorneys in FLSA cases.
In the recent case of In re A&D Interests, Inc. 2022 WL 1315465 (5th Cir. 5/3/22), the Fifth Circuit demonstrated continued support of these principles. A panel of the Fifth Circuit issued a writ of mandamus reversing a lower federal district court decision that permitted the plaintiffs in the case (exotic dancers who were suing the employer for minimum wage and overtime violations) to move forward with sending notices of a collective action. – even though many of the claimants in the case had signed mandatory arbitration agreements that required single claimant arbitration of legal claims. The district court ruled against the company on a technicality – finding that while the arbitration agreements explicitly excluded dancers from joining “class action” lawsuits, it did not expressly prohibit them from participating in “opt in” collective action claims brought under the Federal Fair Labor. Standards Act. The district court did not address the issue of whether the plaintiffs who signed the arbitration agreements would be required to arbitrate their claims, but ruled that the case could proceed as collective action in the preliminary phase of the litigation. This would have almost certainly resulted in more claimants joining the case as the result of a court approved collective action notice being sent to several current and former dancers.
By granting this relief and reversing the district court at an early stage in the litigation, the Fifth Circuit nipped the collective action in the bud by preventing notices from being sent to other current and former dancers – thereby sparing the company from the high stakes consequences and expense of litigation that might otherwise have involved scores of additional claimants.
A writ of mandamus is a remedy that is rarely granted, and is reserved for situations in which the Court of Appeals finds not only that the lower court committed an abuse of its discretion, but also concludes that special relief is required before an appeal following a final judgment in the case. According to the Fifth Circuit:
“[i]ssuing notice [of a collective action] to those who will not ultimately be able to participate “merely stirs up litigation, ‘… In sum, the district court apparently recognized that the arbitration agreement would prevent the opt-in plaintiffs from ultimately participating in the collective action, but approved class notice anyways. This was not merely an erroneous exercise of discretion… it was wrong as a matter of law. Because the district court clearly and indisputably erred, mandamus relief is appropriate. “
The Fifth Circuit’s timely decision in this case re-affirms that the Court will aggressively protect the use of arbitration agreements as a means for avoiding the exposure and expense associated with collective action claims – and is certainly a boon for employers that use arbitration agreements. However, the In re A&D Interests The case also reinforces the importance of carefully worded arbitration agreements that specifically preclude employees from participating in class action and collective action claims. Employers that want to utilize the still-valuable tool of mandatory arbitration agreements should work closely with their legal counsel to carefully craft an effective and enforceable agreement. Had the company in this case done so, it might not have needed the rescue that the Fifth Circuit provided.