Supreme Court Upholds Legality of Class Action Waivers in Arbitration Agreements in the Employment Context

by BakerHostetler
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The controversy surrounding the validity of employment arbitration agreements with class action waivers has been simmering at least since 2012. Now, with the Supreme Court’s decision in Epic Systems Corp. v. Lewis, we have an answer: They “must be enforced as written” despite any debatable policy within the National Labor Relations Act that suggests otherwise. Before we analyze the majority and dissenting opinions, let’s take a quick look backward.

The Long Ramp-up

Since 2012, the National Labor Relations Board (NLRB) has taken the position that arbitration agreements with class or collective action waivers deprive employees of their rights to proceed collectively under Section 7 of the National Labor Relations Act (NLRA). That NLRB position ultimately provoked a federal circuit split that posed serious challenges for national and multistate employers.

In May 2016, the Seventh Circuit initially created the split with its decision in Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016), which held that an arbitration agreement precluding collective arbitration or collective actions violates Section 7 of the NLRA, 29 U.S.C. § 157, and is unenforceable under the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 et seq. That put the Seventh Circuit squarely at odds with the Fifth, Second, Eighth and Eleventh circuits, which had previously held that the FAA’s policy of favoring arbitration overrides any concerted activity rights employees have to class or collective remedies.

In August 2016, however, the Ninth Circuit joined the Seventh Circuit and held in Morris v. Ernst & Young U.S. LLP, 834 F.3d 975 (9th Cir. 2016), that, despite the FAA, under Section 7 employees have substantive rights to pursue collective relief that cannot be waived in an arbitration agreement.

During September and October 2016, certiorari petitions were filed in Epic Systems and Morris, as well as in NLRB v. Murphy Oil, in which the NLRB sought review for the Fifth Circuit’s holding that Section 7 rights did not override the FAA’s arbitration enforcement command. See 361 NLRB No. 72 (2014), rev’d in part, 808 F.3d 1013 (5th Cir. 2015).

Then, on Jan. 13, 2017, the U.S. Supreme Court granted certiorari in three cases that provided the means for the Court to decide whether arbitration agreements with class and collective action waivers are enforceable under the FAA, irrespective of the NLRA. See 137 S. Ct. 809 (2017). Oral argument took place on Oct. 2, 2017. The decision, issued Monday, May 21, was issued under the Epic Systems Corp. case number, together with Morris and Murphy Oil.

The New Decision

In a 5-4 majority opinion authored by Justice Gorsuch, the Court delivered an unmistakable conclusion that the NLRA does not contain a class action right that trumps the FAA:

The NLRA secures to employees rights to organize unions and bargain collectively, but it says nothing about how judges and arbitrators must try legal disputes that leave the workplace and enter the courtroom or arbitral forum. This Court has never read a right to class actions into the NLRA—and for three quarters of a century neither did the National Labor Relations Board. Far from conflicting, the Arbitration Act and the NLRA have long enjoyed separate spheres of influence and neither permits this Court to declare the parties’ agreements unlawful. (Slip op. at 2.)

Justice Gorsuch first relied on the specific language of the savings clause of the FAA, which states that arbitration agreements are enforceable except “upon grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. In doing so, he rejected the employees’ argument that Section 7 of the NLRA fits into the savings clause by noting that “the saving clause recognizes only defenses that apply to ‘any’ contract.” (Slip op. at 7.) And according to Supreme Court precedent, “this means the savings clause does not save defenses that target arbitration either by name or by more subtle methods, such as by ‘interfer[ing] with the fundamental attributes of arbitration.’” Id. (quoting Kindred Nursing Centers L.P. v. Clark, 581 U.S. ___ (2017).)

Additionally, Justice Gorsuch rejected the employees’ argument that the NLRA contains a congressional command to displace the FAA insofar as individual employment arbitration agreements are concerned. Section 7, however, “does not express approval or disapproval of arbitration. It does not mention class or collective action procedures. It does not even hint at a wish to displace the Arbitration Act—let alone accomplish that much clearly and manifestly, as our precedents demand.” (Slip op. at 11.) The majority further cast doubt on the employees’ attempt to use the NLRA to create an arbitration escape route within the Fair Labor Standards Act: “[T]hey have cast in this direction, suggesting that one statute (the NLRA) steps in to dictate the procedures for claims under a different statute (the FLSA), and thereby overrides the commands of yet a third statute (the Arbitration Act). It’s a sort of interpretive triple bank shot, and just stating the theory is enough to raise a judicial eyebrow.” (Slip op. at 15.)

Justice Ginsburg, joined by Justices Breyer, Sotomayor and Kagan, wrote a dissenting opinion that focused on the premise that the Norris-LaGuardia Act and the NLRA provide “that employees must have the capacity to act collectively in order to match their employers’ clout in setting terms and conditions of employment.” (Slip op., dissent at 3.) Congress understood, she argued, and the Supreme Court “recognized that employees have a ‘fundamental right’ to join together to advance their common interests and that Congress, in lieu of ‘ignor[ing]’ that right, had elected to ‘safeguard’ it.” (Id. at 6 (quoting NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1, 33–34 (1937))).

But those were policy arguments, Justice Gorsuch countered, and flawed ones at that: “[I]t’s altogether unclear why the dissent expects to find such a right in the NLRA rather than in statutes like the FLSA that actually regulate wages and hours. Or why we should read the NLRA as mandating the availability of class or collective actions when the FLSA expressly authorizes them yet allow parties to contract for bilateral arbitration instead.” (Slip op. at 24.)

Ultimately, even accepting that “[t]he policy may be debatable,” the majority held firm that “the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written.” (Slip op. at 25.)

The Next Chapter – The ‘Futility Doctrine’

After the Supreme Court’s ruling, the next big issue the courts in the Sixth, Seventh and Ninth Circuits will likely face is whether employers waived their ability to compel arbitration when they did not move to do so originally.

Normally, courts recognize that a party obtains a renewed right to compel arbitration when a change in relevant law converts a previously futile motion to compel arbitration into a legally cognizable one. Ackerberg v. Johnson, 892 F.2d 1328 (8th Cir. 1989).

The Ninth Circuit addressed the futility issue in Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691 (9th Cir. 1986), which aptly illustrates the change-in-law futility concept.

In Fisher, the Ninth Circuit held that a securities defendant did not waive the right to arbitration by failing to move to compel arbitration. Id. at 693. When the defendant first had the opportunity to compel arbitration, courts declined to enforce arbitration provisions if securities claims were intertwined with state common-law allegations. Id. During the pendency of the Fisher case, the Supreme Court rejected this bar to arbitration. See, e.g., Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985).

Given the Supreme Court’s intervening decision, the Ninth Circuit held that “an earlier motion to compel arbitration would have been futile under these circumstances.” Fisher, 791 F.2d at 697. Thus, the Court held that the defendant in Fisher did not waive its right to compel arbitration in the first instance because to do so prior to the intervening change in law would have been futile. Id.

Fisher provides the framework for current futility cases holding that defendants do not waive their rights to compel arbitration when existing law provides no justifiable grounds to compel.

Key Takeaways

Employers may continue to rely on − or resume relying on − the enforceability of class and collective action waivers within employment arbitration agreements. The Epic Systems Corp. decision clarified that NLRA Section 7 rights do not supplant FAA mandates to enforce such agreements as written. Further, the Court’s broad language suggests that other common obstacles argued by some courts and attorneys may lack validity and must yield to the FAA’s arbitration mandate.

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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