Supreme Court Decision On Arbitration Clauses Could Significantly Reduce Employer Exposure to Class Claims

by Partridge Snow & Hahn LLP
Contact

Partridge Snow & Hahn LLP

Savvy employers always need to be on the look-out for ways to mitigate the ever-growing risks posed by increasingly burdensome state and federal employment laws. Later this year, the U.S. Supreme Court will have the chance to breathe new life into an old, but effective risk-mitigation tool for employers – the mandatory individual arbitration clause.

Individual Arbitration Clauses, The FAA and The NLRA

Businesses often agree with their vendors and customers to refer claims to individual arbitration, waiving their right to class litigation and class arbitration. Such mandatory individual arbitration clauses are a popular way for businesses to limit risk and the Supreme Court has approved of their use on several occasions. The Court has yet to consider these clauses in the employment context however, where federal policy and precedent have been in tension in recent years.

The tension rests in conflicting understandings of the relationship between the Federal Arbitration Act (FAA) and the National Labor Relations Act (NLRA). The FAA requires courts to enforce agreements to arbitrate disputes. Exceptions to enforcement exist where (1) a contrary congressional command overrides the FAA or (2) the agreement is void for illegality. On the other hand, the NLRA protects the rights of employees to self-organize, bargain collectively, and engage in other “concerted activities” for the employees’ mutual aid and protection. It is an unfair labor practice for any employer to interfere with these rights.

The Conflict Between the National Labor Relations Board and some Federal Courts

In many instances, the FAA and NLRA coexist without issue. The harmony ends, however, when an agreement to arbitrate waives an employee’s right to bring class claims against the employer, but the employee attempts to do so anyway. If the NLRA protects the employee's right to engage in collective action, how can this protection be reconciled with an agreement requiring the employee to arbitrate claims individually?

For the National Labor Relations Board (the Board)—the agency that enforces the NLRA—no reconciliation is possible. Since 2012, the Board has taken the position that arbitration clauses purporting to prevent employees from pursuing their work-related claims on a collective or class basis are illegal. Accordingly, these provisions are not just exempt from enforcement under the FAA, but even asking an employee to accept them is an unfair labor practice under the NLRA. In response to the Board’s stance, many employers updated their forms to drop mandatory individual arbitration provisions.

When the Board’s position was challenged in the federal courts, results diverged. Some courts agreed with the Board’s position. Other courts reached a contrary conclusion. These courts held that the NLRA did not provide a right to class adjudication of claims and contained no congressional command overriding the FAA. The class mechanism, they reasoned, was a procedural tool, not a substantive right. Accordingly, these courts ruled that the class waivers in mandatory individual arbitration provisions did not violate the NLRA and must be enforced under the FAA. The federal court of appeals responsible for Massachusetts and Rhode Island has yet to take a side in this dispute.

In light of the judicial divide over whether the Board has interpreted the NLRA/FAA correctly, the Board has chosen to enforce its interpretation of the two laws against employers nationwide, including in jurisdictions where the courts have rejected the Board’s position. The practical effect of the Board’s policy, therefore, is to limit employers using mandatory individual arbitration clauses to two categories. First, employers who operate in a jurisdiction where the Board’s position has been rejected and who have the inclination and resources to litigate with the Board over the clauses. Second, employers who are unknowingly using old forms that contain the once popular (but now arguably illegal) clauses.

The Supreme Court Steps In and the Board Responds

Amidst this conflict among the Board and the lower federal courts, the U.S. Supreme Court has agreed to resolve the dispute over the proper application of the NLRA and FAA. Granting review in three cases earlier this year, the Court will decide whether class waivers in employer/employee arbitration agreements are illegal under the NLRA or enforceable under the FAA (with or without an opt-in/opt-out provision).

In response to the Court’s grant of review, the Board’s General Counsel issued Operations Management Memo 17-11. Therein, the Board instructed its regional offices to propose the informal settlement of disputes involving mandatory individual arbitration clauses, conditioned on the Board’s position prevailing before the Court. If the parties refuse to settle, the regional office is to prosecute charges against employers where appropriate. Put another way, the Board intends to continue to enforce its reading of the NLRA and FAA against employers until the Supreme Court instructs otherwise.

Ramifications of a Potential Supreme Court Decision

Separate and apart from the Board, the implications of the Court’s review are significant. A decision upholding the class waivers in mandatory individual arbitration clauses would provide a green light for employers to limit their exposure from alleged violations of employment laws. One of the greatest risks of violating an employment law rests with the fact that an infraction is often not isolated to one employee, but rather may affect many employees. Plaintiffs’ lawyers search for such conditions because bringing class claims against employers (whether meritorious or not) is far more likely to result in a big payday for plaintiffs’ lawyers than prosecuting an individual employee’s claim. This is because the higher litigation costs and potential damages associated with class proceedings place significant pressure on employer-defendants to settle. A decision upholding class waivers in mandatory individual arbitration clauses would give employers an important tool to mitigate against class claims and make themselves a less attractive target to plaintiffs’ lawyers. At the same time, such a decision would preserve the principal advantages of individual arbitration: informality, less process, and less cost than class litigation or class arbitration.

A decision against the class waivers, of course, would have the opposite effect. Employers who had contracted to avoid class actions and class arbitration would suddenly be vulnerable to these collective proceedings and all the expense, exposure, and pressure to settle that go with them. Additionally, those same employers—whether because they consciously sought to include mandatory individual arbitration clauses in their employment contracts or just forgot to update their forms—would be subject to greater risk of class claims about their very use of the clauses. After all, in the event the Court agrees with the Board and holds mandatory individual arbitration clauses illegal under the NLRA and unenforceable under the FAA, employers who use the provisions will become an easy and obvious target for plaintiffs’ lawyers, given the increased attention the clauses will likely receive as the Court’s decision approaches. The stakes of a decision either way, therefore, are quite high.

The Supreme Court is likely to hear oral arguments this fall, with a decision before the end of the year or early next year. Stay tuned.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Partridge Snow & Hahn LLP | Attorney Advertising

Written by:

Partridge Snow & Hahn LLP
Contact
more
less

Partridge Snow & Hahn LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.