Supreme Court Okays Class Action Waivers in Employee Arbitration Agreements

by Jackson Walker
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May a company ask its employees to enter into agreements to arbitrate disputes and that also waive an employee’s ability to bring a class or collective action on behalf of other present or former employees? On May 21, 2018, the United States Supreme Court said yes: Arbitration agreements between employees and employers containing class and collective action waivers are enforceable. Epic Systems Corp. v. Lewis, No. 16‑285 (May 21, 2018). This important decision puts to rest one of the most publicized and debated legal issues affecting employees and employers this decade.

This skirmish began in 2012 when the National Labor Relations Board (NLRB) held in In Re D.R. Horton, Inc. that class and collective action waivers in employment agreements violate Section 7 of the National Labor Relations Act (NLRA). Section 7 protects employees’ ability to engage in concerted activity for mutual aid and protection with regard to terms and conditions of employment. Three members of the five-member NLRB reasoned that: (i) employees who sue their employer on behalf of themselves and other employees are engaged in concerted activity; and (ii) agreements requiring employees to resolve disputes with their employer in one-on-one arbitration are unenforceable violations of NLRA § 7.

With its singular focus on the NLRA, the NLRB discounted another federal statute central to the enforceability of arbitration agreements—the Federal Arbitration Act, a venerable law enacted years before the NLRA was signed into law. The FAA, enacted in 1925 in response to widespread judicial hostility to arbitration in the early twentieth century, provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” In other words, unless the arbitration agreement is, for example, unconscionable as written or was procured by fraud or duress, the agreement to arbitrate must be enforced.

Seizing upon the FAA’s requirement for the enforcement of arbitration agreements and decades of Supreme Court cases rejecting challenges to their enforceability, the Fifth Circuit Court of Appeals in New Orleans overruled the NLRB’s D.R. Horton decision in 2012. A six-year debate in the courts thus followed: which statute controls? The NLRB and groups opposed to class and collective action waivers argued that Section 7 of the NLRB represents a “contrary congressional command” overriding the FAA. Employer associations and other proponents of arbitration and freedom of contract stressed the public policy favoring arbitration expressed by Congress in enacting the FAA in contrast to the absence of language in the NLRA removing employee class and collective actions from the FAA’s mandate.

The NLRB unsuccessfully tried to persuade the Fifth Circuit to overrule D.R. Horton in later cases, and other federal courts of appeals, including the circuits based in St. Louis and New York, agreed with the Fifth Circuit. The essence of the decisions approving class action waivers in arbitration agreements between employees and employers is that the FAA’s language creating a presumption in favor of enforcement of arbitration agreements is a more compelling expression of congressional intent than the general language of NLRA § 7.

Clarity of congressional intent is often influenced by one’s point of view, however, and two federal circuits saw the FAA v. NLRA balance much differently. First to reject the Fifth Circuit’s D.R. Horton decision favoring class action waivers was the Seventh Circuit in Chicago. In May 2016, in Epic Systems v. Lewis, the Seventh Circuit held that agreements requiring employees to resolve disputes in one‑on‑one arbitration are not enforceable under the NLRA or the FAA. The court’s syllogism was: (i) pursuit of collective and class actions concerning wages, terms, and conditions of employment is protected concerted activity under the NLRA; (ii) requiring employees to waive statutorily protected rights is “illegal”; therefore (iii) since illegality is a ground for revocation of a contract, the FAA does not support enforceability of employee class and collective action waivers.

The Ninth Circuit Court of Appeals in San Francisco was quick to side with the Seventh Circuit. Two months after the Seventh Circuit’s decision in Epic Systems, a divided panel of the Ninth Circuit held that a contract requiring Ernst & Young LLP employees to pursue employment claims through individual arbitration was unenforceable. The dissenting judge on a three-judge panel, Sandra Ikuta, characterized her colleagues’ decision as “breathtaking in its scope and in its error.” Judge Ikuta added that the majority’s decision was “directly contrary to Supreme Court precedent and… [on] the wrong side of a circuit split.”

With or without Judge Ikuta’s parting shot in her Ernst & Young LLP dissent, there was no doubt by mid‑2016 that a direct circuit split had emerged on the FAA v. NLRA clash. There was also little doubt the Supreme Court would grant certiorari to resolve the circuit split. And so it did. On January 13, 2017, the Supreme Court granted the NLRB’s petition for writ in NLRB v. Murphy Oil USA (one of the cases the NLRB lost in the Fifth Circuit), as well as the petitions by the employers in Epic Systems and Ernst & Young LLP cases.

The three cases were consolidated in the Supreme Court. They were also the first cases to be argued during the current Supreme Court term. That was on October 2, 2017. Most pundits present for oral argument reported that questioning by the justices indicated a 5‑4 split with the majority favoring enforceability of class action waivers in arbitration agreements.

The pundits were right. In a 5‑4 decision written by Justice Gorsuch, and joined by Chief Justice Roberts and Justices Kennedy, Thomas, and Alito, the Court stressed the overriding public policy favoring arbitration expressed in the FAA. The majority cited several considerations demonstrating that Congress did not exclude class and collective actions by employees from waiver by agreement to resolve all disputes in one‑on‑one arbitration.

The savings clause in the FAA allows courts to refuse to enforce arbitration agreements only for “generally applicable contract defenses, such as fraud, duress or unconscionability” (quoting AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011)). Interference with one’s ability to file a class or collective action is not a defense applicable to contracts in general.

The FAA was enacted before the NLRA. There is a presumption that if Congress intends a later-enacted statute to impact pre‑existing law it will be clear about its intent.

The Court rejected the argument that Section 7 of the NLRA protects employees’ rights to file class or collective action. Rather, the NLRA applies to union organizing and collective bargaining—not to litigation.

In other contexts, Congress has been clear when it meant to prescribe dispute resolution procedures that override the FAA. Congress did not express any such intent in the NLRA.

In the context of collective wage-hour actions under the Fair Labor Standards Act, the Court has previously held that individual arbitration agreements are enforceable to defeat collective actions authorized by the FLSA. See Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 32 (1991).

Finally, and notably, Justice Gorsuch reasoned that the National Labor Relations Board’s opinion on the subject is entitled to no deference under the Chevron doctrine. Although the NLRB administers the NLRA, it does not administer the FAA. In a clash of two statutes, the NLRB’s perspective is of no significance.

The dissenting opinion was authored by Justice Ginsburg. Justices Breyer, Kagan, and Sotomayor joined in the dissent. The dissenters emphasized that the majority’s opinion means that employees will have little to no practical ability to enforce their rights under law. Requiring employees to litigate compensation or discrimination claims that, on an individual basis, often involve relatively small amounts in controversy effectively undermines enforcement of one’s rights. Justice Ginsburg argued that the NLRA was enacted on the premise “that employees must have the capacity to act collectively in order to match their employers’ clout in setting terms and conditions of employment.” Employment agreements containing arbitration clauses are rarely the result of arm’s length bargaining and, Justice Ginsburg observed, arbitration agreements with class and collective action waivers diminish the ability of employees to enforce workplace rights.

Now that the Court has spoken, non‑union employers that have not already done so are free to request applicants and employees to enter into agreements requiring individual arbitration of employment disputes. The question for employers is whether arbitration agreements with class action waivers is an appropriate and desirable employment practice for their business. The answer will be “yes” for many companies, and “no” for others.

Arbitration is not a panacea to risk of employment claims. Arbitration has costs and disadvantages that in some contexts are not worth incurring. For some employers, for example, a historical lack of employment claims or the costs associated with private arbitration may weigh against entering into arbitration agreements with its employees.

For other employers, especially those with large workforces and that are vulnerable to unfair compensation claims, arbitration agreements can be very useful. The oil field is a compelling example of an industry in Texas that has been beset by collective action wage‑hour lawsuits. In view of Epic Systems, employers in the oil patch and many other industries may and should consider the pros and cons of arbitration agreements in the context of their business and industry. Epic Systems also presents an opportunity for employers that have arbitration agreements in place to review and possibly revise their agreements with the Court’s strong endorsement of employment arbitration in mind.

Finally, Epic Systems will not be well-received among many members of Congress and their constituencies. A legislative effort to undo this decision and bar class and collective action waivers is foreseeable, but by no means imminent. As one highly visible figure in Washington, D.C., is prone to say, “time will tell.”

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.

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