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Seventh Circuit: No FLSA Collective Action Notice for Workers Subject to Individual Arbitration Agreements

February 03, 2020

In Bigger v. Facebook, Inc., the US Court of Appeals for the Seventh Circuit held that courts should not authorize notice of a pending Fair Labor Standards Act (FLSA) collective action to individuals who have already entered into a valid arbitration agreement waiving their right to join such an action. In doing so the Seventh Circuit joins the Fifth Circuit, which was the first appellate court to hold that lower courts cannot issue notice to potential opt-ins subject to an individual arbitration agreement. 

Seeking to balance efficiency with the potential abuse of the FLSA’s “opt-in” collective action device, the three-judge panel in Bigger held that employers must be afforded an opportunity—before the court authorizes notice of the action—to establish that proposed recipients are subject to a binding individual arbitration agreement. If the employer does so, by a preponderance of the evidence, a district court cannot authorize notice to those individuals. This is another positive ruling for employers with individual arbitration agreements—and could lead other employers to consider adopting the use of them. The ruling did, however, leave open several questions about how courts will implement this new approach.

Background

Plaintiff Bigger, a former Facebook employee, alleged she was misclassified as exempt under the FLSA and sought to recover unpaid overtime pay on behalf of herself and 428 other current or former Facebook employees in allegedly similar positions across the United States. As is typical under the familiar two-stage certification process for FLSA opt-in collective actions, Bigger conducted limited discovery before asking the court to “conditionally” certify and authorize notice to all members of her putative collective action, informing them of the opportunity to opt into the lawsuit.

Facebook opposed, arguing that nearly 80% of the proposed recipients had entered into individual arbitration agreements, rendering them ineligible to join the case. Facebook attached two exemplar agreements (with identifying information redacted) and data about how many proposed recipients executed similar agreements. At the same time, Facebook moved for summary judgment as to Bigger, arguing she was exempt from the FLSA overtime requirements. The district court denied the motion for summary judgment and authorized notice to the proposed collective, including those who Facebook claimed had waived their right to join. Facebook successfully petitioned for an interlocutory appeal to the Seventh Circuit.

The Dilemma Courts Face—and the Seventh Circuit’s Solution

An early motion asking the court to authorize notice of a FLSA collective action raises multiple, often competing, considerations. The FLSA allows “similarly situated” individuals to opt into a collective action to advance the statute’s enforcement objectives and make more efficient the resolution of claims involving the same allegedly illegal activity. But the collective action process also is ripe for abuse, as notifying potential opt-in plaintiffs expands the litigation, unfairly increases settlement leverage, and—if not done appropriately—“may become indistinguishable from the solicitation of claims.” Moreover, in balancing these factors, courts must be “scrupulous to respect judicial neutrality” and avoid “even the appearance of endorsing the action’s merits.”[1]

Here, relying on the twin goals of enforcement and efficiency, the Seventh Circuit held that a court may not authorize notice to individuals who entered into arbitration agreements waiving their right to join a collective action. The FLSA’s goal of efficiency “neither favors nor disfavors this result,” as the Seventh Circuit’s approach first requires the defendant to demonstrate that those individuals already agreed not join the action, leaving no reason to notify them of it. Indeed, sending notice could prompt those receiving it to assert claims in arbitration or elsewhere outside of the pending action, approaching the line between (appropriate) notice and the (inappropriate) solicitation of claims. Likewise, authorizing notice to individuals who already agreed not to join could “at least appear” like the court is expanding the litigation, increasing settlement pressure, or otherwise “plac[ing] a judicial thumb on the plaintiff’s side of the case.”

The Seventh Circuit therefore outlined a two-step analysis when a defendant opposes notice by asserting that proposed recipients have waived their right to join the lawsuit. First, if the plaintiff does not contest the existence of valid arbitration agreements, the court may not authorize notice to any individual subject to such agreements. Second, if the plaintiff disputes the existence of valid individual arbitration agreements, the court must allow the defendant to submit evidence as to the validity of the purported agreements “for each employee it seeks to exclude from receiving notice.” If the defendant establishes a valid agreement by a preponderance of the evidence, the court may not authorize notice to any such employee. The court was silent, however, on the nature or scope of the evidence sufficient to satisfy a defendant’s burden in this regard.

The Seventh Circuit becomes the second federal appeals court to confront this issue. In In re JPMorgan Chase & Co.,[2] the Fifth Circuit held that it was beyond the district court's discretion to order notice to employees subject to individual arbitration agreements. Unlike in Bigger, however, plaintiffs in that case did not dispute the existence or validity of the agreements, meaning the Fifth Circuit did not have to wade into the issue the Seventh Circuit addressed here.

Outlook and Takeaways

This is a significant decision, particularly with individual arbitration agreements becoming increasingly prevalent. The Seventh Circuit’s approach allows defendants to assert the existence of such agreements earlier in FLSA collective actions, before notice is sent to potential opt-ins. Indeed, the court’s reasoning could suggest that lower courts should give increased scrutiny to proposed collective actions in general—even at the “conditional” certification stage. The Seventh Circuit’s approach also should reduce the scope of many collective actions, in turn reducing the plaintiffs’ settlement leverage. And this rule precludes court-authorized notice to individuals with no ability to join the pending action but who, once alerted, might assert similar claims in arbitration or elsewhere, outside of the pending collective action.

It remains to be seen how courts will interpret and apply the Seventh Circuit’s holding. But the decision favors employers maintaining individual arbitration agreements with their employees, as courts in the Fifth Circuit and now Seventh Circuit no longer may notify those individuals of a pending FLSA collective action.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Chicago
Sari Alamuddin

Houston
Stefanie Moll

Los Angeles
John Battenfeld

Miami
Anne Marie Estevez

New York
Leni Battaglia
Chris Parlo
Sam Shaulson

Orange County
Barbara Miller

Philadelphia
Michael Puma

Princeton
Tom Linthorst

Washington, DC
Krissy Katzenstein



[1] Bigger, No. 19-1944 (7th Cir. Jan. 24, 2020).

[2] No. 18-20825 (5th Cir. Feb. 21, 2019) (defended by Morgan Lewis).