Class Action Waivers Are Enforceable Says Court of Appeal

Just as the rise of class action lawsuits changed the nature of the legal landscape in the United States over the last few decades, arbitration agreements now threaten to hand power back to big businesses. That, at least, is the worry of some lawyers and legal professionals who are finding themselves up against a new enemy in their effort to take on big businesses: the courts themselves.

Companies increasingly use the clauses as a defense against class and collective actions.

The use of arbitration agreements – contractual clauses that bind individuals to settle disputes using an arbitrator outside of the court system – has been widely covered over the last few months, both in individual cases such as Xbox One and at a wider level, with the Supreme Court ruling on multiple relevant cases. The issues at hand often deal with whether users who have a legitimate complaint can take part in a class action, or whether arbitration agreements can effectively bar consumers from seeking redress for any and all potential problems. While individuals have a right to seek compensation if a company has produced a defective product or service, any agreement that you sign can be legally binding, and companies increasingly use the clauses – often hidden in pages of terms and conditions – as a defense against class and collective actions. Some have called for arbitration agreements to be banned or more widely regulated, but a number of high profile cases have shown that, if anything, courts are willing to defend their use. For big business, it’s a blessing. For consumers and employees, it’s worrying.

Earlier this month, the Second Circuit Court of Appeals ruled on Sutherland v. Ernst & Young LLP, a case involving an employee who took legal action against Ernst & Young after she was allegedly misclassified under the Fair Labor Standards Act. While exempt workers are not owed overtime wages, the employee argued that she was not a manager and therefore not exempt from overtime wages. She therefore sought nearly $2000 in unpaid wages.

Upon starting work in September 2009, however, the worker had signed an offer letter that included a provision that disputes be handled through mediation. In the company’s eyes, this acted as a waiver to any right to launch a class action. The employee argued that the high cost of an individual lawsuit and the relatively low value of the award meant that individual action was impossible. While the Second Circuit agreed, the company appealed. The Court of Appeals has now ruled that the class action waiver is enforceable, thanks in part to the specific wording. The court also noted, however, that the Supreme Court’s ruling in American Express Co. v. Italian Colors Restaurant trumped prior district rulings and effectively established a new policy. The Supreme Court’s ruling included an instruction to lower courts to “rigorously enforce” arbitration agreements.

The power of class action lawsuits may be under threat, for good or for bad. A rising sense of annoyance at the cost of attorneys’ fees and the perceived prevalence of frivolous suits is replacing the empowerment felt when class action lawsuits first gave consumers the opportunity to fight companies without the previously required burden of quantitative proof of injury. The Supreme Court’s shift away from class actions is, to some, a sign that lawyers have gone too far without considering the consequences of their actions. Others see it as a cynical move by big businesses feeling the pressure of class action lawsuits. Either way, consumers need to be aware of the agreements they sign and the implications of any contracts when they agree. In employment and product liability, arbitration is become an increasingly common tool – and the non-disclosure of any settlements means less and less information could become available for those who wish to take legal action.