Second Circuit Compels Arbitration of ERISA Claims—Arbitration Agreement Is Enforceable with Scope of Claims Provision Severed

In American Family Life Assurance Company of New York v. Baker, et al., No. 20-1435, __F.App’x__, 2021 WL 772281 (2d Cir. Mar. 1, 2021), the Second Circuit considered the enforceability of an arbitration agreement.

This is the case’s second visit to the Second Circuit, ending with the court’s stamp of approval on the district court’s (E.D.N.Y) judgment compelling Respondents-Appellants Baker and Varela, insurance sales associates, to arbitrate their ERISA claims with Petitioner-Appellee American Family Life Assurance Company of New York (“Aflac”). In 2019, the Second Circuit considered the Appellants’ appeal of the district court’s judgment granting Aflac’s petition to compel arbitration of the sales associates’ employment-related claims. The Second Circuit held that the arbitration agreement was not procedurally unconscionable, the cost-splitting and confidentiality provisions were not substantively unconscionable, but remand was warranted for purposes of developing the record regarding whether Paragraph 10.7 of the Agreement was substantively unconscionable because it bars the sales associates from pursuing certain state and federal statutory claims against Aflac. Am. Family Life Assurance Co. of New York v. Baker, 778 F. App’x 24, 28 (2d Cir. 2019).

On remand, the district court considered Paragraph 10.7, specifically Paragraph 10.7.1 which reads:

Limitation of Claims and Remedies. With the exception of a claim that is based upon misconduct by Aflac that is willful, malicious or fraudulent, any claim or action by Associate based upon any act, error or omission by Aflac or any of its past or present officers, directors, employees, associates, coordinators, agents or brokers shall be limited to a claim for breach of contract and the remedies and liabilities arising thereunder.

Am. Family Life Assurance Co. of New York v. Baker, No. 17CV7054LDHRLM, 2020 WL 1536317, at *1 (E.D.N.Y. Mar. 31, 2020) (emphasis added). Aflac stated for the record that it will not assert in the future that the limitation of liability language in the above paragraph is a defense to the employees’ complaint. In essence, Aflac waived the provision. The district court found that Aflac’s irrevocable waiver of Paragraph 10.7.1 rendered the argument regarding substantive unconscionability moot under the Second Circuit’s decision in Ragone v. Atlantic Video, 595 F.3d 115 (2d Cir. 2010). The court ordered the employees to individually arbitrate all claims in the draft complaint, including statutory claims asserted under federal or state laws.

On appeal, the second circuit conducted a de novo review of the district court’s decision. The court explained that where provisions of an arbitration agreement operate as a prospective waiver of a party’s right to pursue statutory remedies, the agreement would be unenforceable as against public policy. But here, Aflac represented to the court that it would waive Paragraph 10.7.1 and it is judicially estopped from revoking the waiver. The court found Ragone applicable here because in that case the employer voluntarily waived two provisions in an arbitration agreement that would prevent the employee from effectively vindicating her statutory rights. Even if the court found Paragraph 10.7.1 to be unlawful, the correct remedy under New York law would be to sever the paragraph and enforce the agreement’s remaining terms. The court declined to follow several out-of-circuit cases which invalidated entire arbitration agreements rather than sever unconscionable terms. Because the court cannot conclude that the agreement represents “an integrated scheme to contravene public policy” such that the offending provision is not severable, the court affirmed the judgment of the district court.