On The Case

From the 11th Circuit, a cautionary tale for employers imposing arbitration on workers

(Reuters) - The U.S. Supreme Court’s ruling last term in Epic Systems v. Lewis was a great victory for employers. In Epic, you’ll recall, the justices held, in a 5-4 opinion written by Justice Neil Gorsuch, that companies can require employees to waive the right to arbitrate as a group. In combination with Supreme Court precedent backing employers’ power to impose mandatory arbitration provisions to resolve disputes with their workers, the Epic opinion effectively means that companies can force workers to prosecute their claims alone, in a forum selected by the company.

The Epic decision tilted the already lopsided balance of power between employers and employees even more dramatically in companies’ favor. What could possibly go wrong?

Plenty, according to a ruling Wednesday from the 11th U.S. Circuit Court of Appeals in Hernandez v. Acosta, which provides a $100,000 warning that individual employee arbitration is not necessarily a no-lose proposition for employers. “The idea is that employers prefer arbitration because it promises ‘quicker, more informal, and often cheaper resolutions for everyone involved,’” the 11th Circuit wrote, quoting Epic. “But as this case shows, arbitration does not always live up to this promise.”

This cautionary tale begins back in 2012, when the employment firm J.H. Zidell filed a wage-and-hour class action in Miami federal court against the Florida paving contractor Acosta Tractors. Acosta won dismissal of the case because its workers had signed an employment agreement mandating arbitration of wage disputes. Named plaintiff Martin Garcia then brought a claim at the American Arbitration Association. When J.H. Zidell filed another class action in 2013 on behalf of a second Acosta employee, Acosta once again succeeded in compelling dismissal. The second employee, Esueblo Cordova, joined Garcia’s AAA arbitration.

The Garcia and Cordova arbitration claims turned into a money pit for Acosta. The arbitrator allowed extensive discovery, including more than two dozen depositions. The company paid $33,100 in arbitration fees for the Garcia and Cordova claims and was billed for another $43,640 in anticipated costs.

In the meantime, J.H. Zidell filed yet another class action against the contractor, this time representing former employee Julio Hernandez. (Hernandez was among the Acosta workers deposed in the Garcia and Cordova arbitration and sued after he and the company parted ways.) Hernandez’s case was also sent to arbitration. Acosta asked for his claim to be consolidated with the Garcia and Cordova cases but the arbitrator refused the request. AAA then billed Acosta $25,875 in fees for the Hernandez case, bringing the company’s total arbitration costs to more than $100,000 – not including its own lawyers’ bills.

Acosta declined to pay the more than $68,000 it still owed in AAA fees. Precisely why the company made that decision is a matter of dispute. Acosta said it was unable to pay. Plaintiffs’ lawyers contend Acosta just didn’t like the way the arbitrations were going. Either way, AAA suspended both cases.

The company went back to federal court in Miami, asking that the Garcia, Cordova and Hernandez cases be reopened because arbitration – which, remember, Acosta imposed on employees and moved to compel – had become “an overly-expensive, completely inefficient method of dispute resolution (in which) arbitrators’ fees alone likely exceed the amount in controversy.” Plaintiffs’ lawyers at J.H. Zidell retorted that Acosta was acting in bad faith. They asked for default judgments against the company, requesting full damages for Garcia, Cordova and Hernandez and fees for themselves.

The federal judge presiding over the Hernandez case, U.S. District Judge Federico Moreno of Miami, granted the default judgment motion. He ordered Acosta to pay Hernandez his claimed $7,293 in overtime wages. The Zidell firm subsequently asked for an award of about $42,000 in fees.

That default judgment was the issue in Acosta’s appeal to the 11th Circuit. The appellate panel – Judges William Pryor and Beverly Martin and U.S. District Judge James Hall of Augusta, Georgia, sitting by designation – agreed with the company that Judge Moreno had been too quick to conclude Acosta was acting in bad faith when it shut down its employees’ arbitrations by refusing to pay its AAA bills. “We find no basis in the (Federal Arbitration Act), the caselaw, or anywhere else to support a court’s decision to enter a default judgment solely because a party defaulted in the underlying arbitration,” Judge Martin wrote in the court’s opinion. “The district court therefore erred in doing so.”

But really, Acosta’s win is rather hollow. The 11th Circuit also said it may well turn out to be that the company was engaged in a bad-faith attempt to evade an arbitration headed in the wrong direction. “After all, Acosta acknowledges it quit paying after the arbitrator failed to consolidate Mr. Hernandez’s case with the other cases brought by other Acosta employees, and because it thought the arbitrator had allowed too much discovery,” the appeals court said. “Acosta also noted that arbitration was set to cost more than Mr. Hernandez’s claim was worth. A calculated choice to abandon arbitration after getting adverse rulings from the arbitrator certainly looks like forum shopping. And this type of behavior would surely be a factor the district court could consider in deciding whether to sanction Acosta by entering a default judgment.”

In the broader view, of course, every turn in this litigation is costing Acosta more money. Sure, it was looking at exposure of about $50,000 in damages and fees for plaintiffs’ lawyers in the Hernandez district court case alone. Now, after “winning” at the 11th Circuit, it will have to pony up to defend its conduct in the arbitration proceeding, not just in the Hernandez case but also in the district court cases by Garcia and Cordova, which had been stayed pending the 11th Circuit appeal in Hernandez. And if more workers hear about the cases and bring claims, Acosta’s woes will multiply. Plaintiffs’ lawyer Jamie Zidell of J.H. Zidell didn’t respond to my phone message, but I’d bet his phone lines are open for additional Acosta employees.

After Epic, smart employment lawyers on both sides of the bar have been saying quietly that case-by-case wage-and-hour arbitration could end up being a more expensive proposition for corporate defendants than class actions resolving allegations in one swoop – assuming, of course, that employees actually bring arbitration claims and find lawyers to prosecute their cases. The Acosta example sure seems to prove that point.

Acosta counsel Jack Aiello of Gunster Yoakley & Stewart did not respond to my email.