In May, the U.S. Supreme Court held that mandatory arbitration agreements containing class action or collective action waivers must be enforced as written.
The challenge to enforceability was that the National Labor Relations Act (“NLRA”) says employees can seek relief on a class basis. The Court examined three appeals involving workers whose employment agreements required all disputes to be arbitrated. The agreements required individualized arbitrations and barred employees from pursuing claims as a class or collective action.
The Court ruled that the NLRA does not override another law, the Federal Arbitration Act (“FAA”). The FAA requires courts to enforce agreements to arbitrate. The Court said the FAA treats arbitration agreements as valid, irrevocable, and enforceable. The Court directed lower courts to respect and enforce the parties’ chosen arbitration procedures and “rigorously to enforce arbitration agreements according to their terms.”
The employees invoked a clause of the FAA that lets courts refuse to enforce arbitration agreements. They claimed the NLRA decreed that the employees’ waivers of class and collective action was illegal.
The Court rejected this argument. The Court interpreted the FAA clause narrowly, stating that it “offers no refuge” for defenses that apply only to arbitration. The Court noted that the aggrieved employees did not claim they were forced to sign the arbitration agreements by fraud or duress or other unconscionability, so there was nothing to render the contracts unenforceable. Instead, the employees objected that their agreements required them to waive rights to class or collective actions.
The Court’s ruling said that lower courts may not let a contract defense “reshape traditional individualized arbitration by mandating classwide arbitration procedures without the parties’ consent.” According to the decision, the FAA required the court “to enforce, not override, the terms of the arbitration agreements before us.”
The Epic Systems case provides support for franchisors whose franchise agreement arbitration provisions prohibit class or collective actions by franchisees. Such provisions may be invalidated only “by an act of fraud or duress or in some other unconscionable way.” Franchisees should pay attention to any arbitration clause in their franchise agreement that bars class actions. Where such a clause is presented to a potential franchisee, it may be worth trying to negotiate the right to pursue class action proceedings against the franchisor.
Read: Epic Systems Corporation v. Lewis
