Careful What You Ask For…

A recent Fourth Circuit case highlights potential pitfalls with class and collective action arbitrations. In Long John Silver’s Restaurants, Inc. v. Cole, et al., 514 F.3d 345 (4th Cir. 2008), the court affirmed an arbitrator’s award determining (i) the Fair Labor Standards Act’s (FLSA) “opt-in” collective action certification process was inapplicable to the arbitration proceedings, and (ii) employees could pursue an “opt out” class action. The award magnified the scope of the case by including all employees who fell within the definition of the putative class, not just those who filed consents to join the action.

The underlying arbitration was initiated by several individuals who claimed the employer committed FLSA wage and hour violations. The arbitrator first determined the applicable arbitration agreement did not preclude a class arbitration proceeding. The arbitrator next determined the FLSA did not preclude the waiver of its “opt-in” collective action mechanism and permitted the case to proceed as an “opt out” class action, such as those authorized under Federal Rule of Civil Procedure 23.

Predictably, the employer sought judicial review of the arbitrator’s unexpected approach to the arbitration. The federal District Court that reviewed the arbitrator’s award denied the challenge noting, “no clear principle of law bound the arbitrator,” and the arbitrator had “thoroughly analyzed the relationship of the [opt-in mechanism] and the arbitration agreement.”

Citing well-worn principles regarding judicial review of arbitral proceedings, the Fourth Circuit Court of Appeals rejected Long John Silver’s appellate contentions and affirmed the District Court’s opinion. Although the Fourth Circuit recognized it applied “extremely limited review” of the arbitrator’s decision, it also noted the arbitrator “did not exceed the scope of his authority by certifying an ‘opt-out’ class.”

There are many lessons to be learned from this case.  First, employers should decide if the arbitral forum is appropriate for aggregated claims, such as class and collective actions. Federal courts tend to be well suited for, and more consistent when, handling complex cases.

Next, it is vital to carefully craft underlying arbitration agreements. Employers should consider decisively precluding class and collective actions by unequivocally banning them in the arbitration agreement. Alternatively, employers should deliberately articulate procedures applicable to class or collective arbitrations; doing so may significantly limit the arbitrator’s discretion. For example, the outcome in Long John Silver may have been different had the arbitration agreement specified the FLSA’s “opt-in” procedure applied to all collective claims alleging FLSA violations.

Finally, if an employer prefers arbitration, it should be aware that arbitrators’ awards will be given great deference when making decisions about procedural aspects of class or collective arbitrations. Employers should not necessarily count on arbitrators to follow traditional class and collective action principles, nor should they expect courts to interfere with arbitrators’ procedural decisions.

Note: This article was published in the July 2008 issue of the Class Action eAuthority.