Motion to Compel Arbitration Should be Decided Before Conditional Certification of an FLSA Collective Action

Case:   Reyna v. International Bank of Commerce
             United States Fifth Circuit Court of Appeal
             No. 16-40057 (5th Cir. Oct. 20, 2016).

Companies and other business entities often use arbitration agreements to protect themselves from class action liability. The Fifth Circuit allows employers to file Motions to Compel Arbitration as to individual plaintiffs early on in the class formation process. In Reyna v. International Bank of Commerce, the Fifth Circuit held that an employer could file a Motion to Compel Arbitration before a class is conditionally certified.

In Reyna, the plaintiff, Carlos Reyna, brought an action on his behalf and on behalf of other similarly situated individuals against his former employer, International Bank of Commerce (“IBC”), contending that his employer violated the Fair Labor Standards Act (“FLSA”) by failing to pay proper overtime rates. IBC moved to compel arbitration of Reyna’s claims. The district court denied the motion concluding it could not consider the applicability of any arbitration agreement until later in the certification process for an FLSA collective action. IBC filed an interlocutory appeal, arguing that the district court erred in denying its motion to compel arbitration. The U.S. Court of Appeals for the Fifth Circuit reversed the district court’s denial of IBC’s motion to compel arbitration.

IBC employed Reyna as a bank teller from July 2012 through August 2013. Reyna alleged, in his FLSA claim, that IBC paid him only “a rate of one-half time his regular rate,” rather than the “premium overtime pay at a rate of not less than one and one-half times his regular rate of pay. He brought his claim as a collective action under the FLSA. Such collective actions usually proceed in two stages, a conditional certification stage and a final certification stage. IBC moved to dismiss Reyna’s complaint or, in the alternative, compel arbitration, strike claims, and stay or dismiss the proceeding. IBC argued that Reyna agreed to be bound by IBC’s dispute resolution policy which provided the exclusive remedy for challenging employment actions and was a four step grievance process. The policy did not mention FLSA collective actions but did provide that an employee could bring class actions only upon the agreement of all parties. The policy contained a designation clause giving the arbitrator “the exclusive authority” to both “determine the arbitrability of any dispute” and “resolve any dispute relating to the interpretation, applicability, enforceability or formation” of the policy.

IBC filed its motion to compel arbitration based on the policy’s language. IBC further argued that arbitration should be done on an individual basis because both parties did not consent to bringing the claim as a collective action. Reyna opposed the motion arguing that “in collective action suits brought under the FLSA, courts rule on first-stage conditional certification and notice before ruling on the validity and enforceability of any purported arbitration agreement.” The district court denied IBC’s motion, agreeing with Reyna that “at this stage [of the litigation] the only issue is whether the plaintiff is similarly situated to potential class members so that notice should be authorized.” The district court declined to address whether Reyna should be compelled to arbitrate his claim because the question of whether IBC’s policy required arbitration is a “merits-based argument’ that should not be addressed until “the second stage” of the FLSA collective action litigation.

The Fifth Circuit reversed, rejecting Reyna’s argument that courts typically delay consideration of the arbitrability of a claim until after conditional certification is granted. The Fifth Circuit reasoned that to hold otherwise would present a justiciability issue — a court could conditionally certify a collective action solely on the basis of a claim that the plaintiff was bound to arbitrate and was therefore barred from bringing it to court in the first place.

Additionally, the Fifth Circuit cited the “national policy favoring arbitration” embodied by the Federal Arbitration Act in reversing the district court. The Fifth Circuit held that, upon a motion to compel arbitration, a district court should address the arbitrability of a plaintiffs’ claim at the outset of litigation. Compelling arbitration before conditional certification of a class more closely aligns with the national policy favoring arbitration.

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