On January 24, 2020, the Seventh Circuit Court of Appeals became the second federal appellate court to address whether notice of a collective action under the Fair Labor Standards Act (FLSA) may be sent to individuals who allegedly entered into mutual arbitration agreements waiving their right to join the action.  Following last year’s Fifth Circuit decision in In re JPMorgan Chase & Co., No. 18-20825 (5th Cir.), the Seventh Circuit’s decision in Bigger v. Facebook, Inc., No. 19-1944 (7th Cir.) highlights the growing trend of courts placing some limitations on the issuance of notice to individuals who have executed enforceable arbitration agreements with class or collective action waivers.  This issue remains unsettled outside of courts in the Fifth or Seventh Circuits, however.

Other Court Decisions

Last year a three-judge panel of the Fifth Circuit unanimously held in JPMorgan that the U.S. Supreme Court’s decision in Hoffman-La Roche Inc. v. Sperling, 493 U.S. 165 (1989), “does not give district courts discretion to send or require notice of a pending FLSA collective action to employees who are unable to join the action because of binding arbitration agreements.”  The Fifth Circuit specifically rejected the argument that all collective members have a right to receive notice of any FLSA claims they might have, even if they cannot join the collective action. Importantly, the Fifth Circuit went on to conclude that where the existence of a binding arbitration agreement is in dispute, the district court “should permit submission of additional evidence, carefully limited to the disputed facts, at the conditional-certification stage and deny notice be sent to such employee if the preponderance of evidence shows a valid arbitration agreement.” Despite the Fifth Circuit’s decision, some district courts outside the Fifth Circuit have continued to hold that allowing notice to go out to an entire proposed collective is appropriate, as that issue can be addressed at the second stage of the collective action certification process. Other district courts have held that defendants can always address the issue through a motion to compel, if and when someone opts in.

The Seventh Circuit’s Decision

In Bigger, the plaintiff brought an FLSA collective action against Facebook, Inc. (“Facebook”) in the Northern District of Illinois alleging that she and all other individuals working as level-3 or level-4 Client Solutions Managers were misclassified as exempt employees.  After engaging in some discovery, the plaintiff moved to conditionally certify a putative collective, and asked the court to authorize notice to all 428 members of that collective. In response, Facebook argued that the authorization of notice was improper because most members of the putative collective were subject to arbitration agreements, and were therefore ineligible to join the action.  Specifically, Facebook maintained that at least 336 (or 78%) of the putative collective had entered into binding arbitration agreements.  Facebook also provided the district court with copies of two arbitration agreement forms given to two employees, whose names and signatures were redacted.  Nevertheless, the district court authorized notice to be sent to all individuals in the putative collective.  Facebook then sought and was granted interlocutory appeal on the district court’s decision.

On appeal, Facebook argued that most of the individuals in the putative collective were neither “potential plaintiffs” nor “similarly situated” to the named plaintiff because they executed arbitration agreements waiving their right to participate in the action. Facebook also argued that allowing notice to be sent to individuals who were subject to arbitration would misinform most of the recipients –indicating that they may join this collective action when they in fact were prohibited from doing so under the terms of their individual arbitration agreements. Facebook further asserted that issuing the notices would “unfairly amplify settlement pressure.”

Addressing these issues, the Seventh Circuit considered what it regarded as the goals and dangers of collective actions.  Specifically, the Seventh Circuit considered the twin goals of “enforcement of the FLSA” and “efficiency in the resolution of disputes,” and the dangers of plaintiffs “wield[ing] the collective-action format for settlement leverage” and the improper solicitation of claims.  Given these considerations, the Seventh Circuit held that “a court may not authorize notice to individuals whom the court has been shown entered mutual arbitration agreements waiving their right to join the action.”  The Seventh Circuit went on to note that courts “must give the defendant an opportunity to make that showing.”

The Seventh Circuit set out an analytical framework for district courts to use “when a defendant opposes the issuance of notice by asserting that proposed notice recipients entered mutual arbitration agreements.”  Under this framework, if no plaintiff contests the defendant’s assertions that proposed notice recipients were subject to valid arbitration agreements, then the court may not authorize notice to those individuals.

On the other hand, if a plaintiff does contest the defendant’s assertions, then the court must permit the parties to submit additional evidence on the agreements’ existence and validity before authorizing notice to the alleged “arbitration employees.”  At that stage, the burden is on the defendant to prove, by a preponderance of the evidence, the existence of a valid arbitration agreement for each individual member of the putative collective that it seeks to exclude from receiving notice.  Notably, if the defendant fails to prove that a putative collective member – who might otherwise receive notice – entered a valid arbitration agreement, the court may authorize notice to that individual, if notice to others is authorized as well.

Because this analytical framework was not available at the time the district court initially decided the issue, the Seventh Circuit concluded that the district court did not have the opportunity to apply the correct standard and vacated the order authorizing notice.  The case has been remanded to the district court to allow the parties to submit additional evidence on the existence of valid arbitration agreements between Facebook and the proposed notice recipients.

Conclusion

While the Seventh Circuit’s decision builds on the momentum of the Fifth Circuit’s decision in JP Morgan, it remains unclear whether other circuit courts will follow those decisions.

The Seventh Circuit’s decision also leaves future parties with several open issues. For example, the decision does not specify the form in which the defendant’s showing must be made.  Because the proposed notice recipients will not yet be party-plaintiffs, it is unlikely that a motion to compel those individuals to arbitration will be appropriate; yet, at the same time, it is unclear what other mechanism is appropriate. The Seventh Circuit also did not address the nature of the evidence a defendant must present to prove the existence of a valid arbitration agreement.  For example, must a defendant produce and establish the validity of each potential notice recipient’s arbitration agreement?  Must a defendant support a showing that a putative collective member is subject to a valid arbitration agreement with a declaration, affidavit, or other evidence similar to what it would present in support of a motion to compel an existing party-plaintiff to arbitration? And, will the district court be required to make hundreds, or perhaps thousands, of individual inquiries and decisions on the validity of each putative class members’ arbitration agreement? 

Given the significance of this issue, and the frequency with which it is now arising, it is likely that district courts in other circuits will continue to rule on this issue, and that federal circuit courts of appeal may disagree or create different analytical frameworks, such that this issue could reach the U.S. Supreme Court.  In the meantime, it will be important for employers to monitor how the district court on remand addresses the evidentiary burden set forth by the Seventh Circuit in Bigger.