Supreme Court Upholds Employers’ Use of Class Action Waivers in Arbitration Agreements

A sharply divided U.S. Supreme Court decided one of the most highly anticipated employment cases in recent years on May 21, 2018, holding in Epic Systems Corporation v. Lewis that the National Labor Relations Act (“NLRA”) does not prohibit employers’ use of class action waivers in arbitration agreements with employees¹. The Court’s 5-4 decision removes one of the major uncertainties that faced employers seeking to implement employee arbitration programs and, accordingly, the dramatic proliferation of class action waivers that has occurred over the last several years is likely to continue apace. 

The NLRB’s D.R. Horton Decision and the Ensuing Circuit Split 

The crux of the issue in Epic Systems was the claimed conflict between Section 7 of the NLRA, which protects employees’ engagement in “concerted activities…for mutual aid and protection,”² and the Federal Arbitration Act’s (“FAA”) strong policy in favor of enforcement of arbitration agreements. In D.R. Horton, Inc., the National Labor Relations Board (“NLRB”) held that “an employer violates [the NLRA] when it requires employees covered by the [NLRA], as a condition of their employment, to sign an agreement that precludes them from filing joint, class, or collective claims addressing their wages, hours or other working conditions against the employer in any forum, arbitral or judicial.”³ According to the NLRB, the FAA did not preclude this conclusion both because finding that “an arbitration agreement must yield to the NLRA is to treat it no worse than any other private contract that conflicts with Federal labor law,” and because “the waiver interferes with substantive statutory rights under the NLRA, and the intent of the FAA was to leave substantive rights undisturbed.” 

On appeal, the Fifth Circuit refused to enforce the NLRB’s decision.⁴ While several circuit courts agreed with the Fifth Circuit, others have concluded more recently that the right to pursue class or collective claims is in fact protected by the NLRA.⁵ In Morris v. Ernst & Young LLP, for example, the Ninth Circuit ruled that because Section 7’s “‘mutual aid or protection clause’ includes the substantive right to collectively ‘seek to improve working conditions through resort to administrative and judicial forums’…an employer may not defeat the right by requiring employees to pursue all work-related legal claims individually.” 

The Court’s Decision

Justice Gorsuch, writing for the majority, held that courts must enforce agreements between employers and employees to resolve claims through one-on-one arbitration. In doing so, the Court rejected the reasoning of the NLRB and lower courts like the Ninth Circuit, finding that their decisions rested on faulty readings of both the FAA and the NLRA. Beginning with the FAA, the Court noted that the Act generally compels courts to respect parties’ agreements to arbitrate and does so “pretty absolutely.” The Court also found that the FAA’s “saving clause,” which states that courts may refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for revocation of any contract,”⁶ “does not save defenses that target arbitration either by name or by more subtle methods, such as by ‘interfering with fundamental attributes of arbitration.’” Citing numerous recent decisions favoring arbitration, such as AT&T Mobility LLC v. Concepcion,⁷ the Court concluded that invalidation of class waivers based on the NLRA is one such impermissible defense. This is, the Court wrote, because “by attacking (only) the individualized nature of the arbitration proceedings, the employees’ argument seeks to interfere with one of arbitration’s fundamental attributes.” 

The majority also rejected the argument that the NLRA’s protection of “other concerted activities” overrides the FAA’s policy favoring arbitration, finding that there was no conflict between Section 7 and the FAA. Noting that Section 7’s concerted activities protection “appears at the end of a detailed list of activities speaking of ‘self-organization,’ ‘form[ing], join[ing] or assist[ing] labor organizations,’ and ‘bargain[ing] collectively,’” the Court concluded that “the term ‘other concerted activities’ should, like the terms that precede it, serve to protect things employees ‘just do’ for themselves in the course of exercising their right to free association in the workplace, rather than ‘the highly regulated, courtroom-bound activities of class and joint litigation.’” “It’s more than a little doubtful,” the Court wrote, “that Congress would have tucked into the mousehole of Section 7’s catchall term an elephant that tramples the work done by these other laws; flattens the parties’ contracted-for dispute resolution procedures; and seats that [NLRB] as supreme superintended of claims arising under a statute it doesn’t even administer.” Accordingly, the Court held, “the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written” and nothing in the NLRA “manifest[s] a clear intention to displace the Arbitration Act.” 

A Strongly Worded Dissent

In dissent, Justice Ginsburg, writing for herself and Justices Breyer, Kagan and Sotomayor, called the majority’s ruling “egregiously wrong.” The dissent asserted that the decision “subordinates employee-protective labor legislation to the Arbitration Act [and] forgets the labor market imbalance that gave rise to the [Norris-LaGuardia Act] and the NLRA, and ignores the destructive consequences of diminishing the right of employees ‘to band together in confronting an employer.’” “Suits to enforce workplace rights collectively fit comfortably under the umbrella ‘concerted activities for the purpose of…mutual aid or protection,’” Ginsburg wrote, and therefore “employer-dictated collective litigation stoppers, i.e., ‘waivers,’ are unlawful.” Ginsburg asserted that the FAA does not present an impediment to this conclusion because “[i]llegality is a traditional, generally applicable contract defense [and] by declining to enforce [] adhesive waivers, courts would place them on the same footing as any other contract provision incompatible with controlling federal law.” The dissent concluded with the allegation that “the edict that employees with wage and hours claims may seek relief only one-by-one does not come from Congress. It is the result of take-it-or-leave-it labor contracts harkening back to the type called ‘yellow dog,’ and of the readiness of this Court to enforce those unbargained-for agreements.” 

The Impact of Epic Systems for Employers

 The decision in Epic Systems confirms that Justice Scalia’s replacement with Justice Gorsuch will not alter the Supreme Court’s long line of decisions favoring enforcement of arbitration agreements as written. In response to those decisions, the use of arbitration agreements generally, and class waivers in particular, have skyrocketed in recent years. As the dissent in Epic Systems noted, one study has concluded that while only 2.1% of nonunionized employers imposed mandatory arbitration programs on employees in 1992, 53.9% do so today. Given the unequivocal ruling of the Court in Epic Systems, it seems highly likely that employers will continue to implement such programs, and will be able to include class waivers in those programs with confidence. Additionally, the Court’s suggestion that the scope of Section 7’s protections is limited to activities focusing on conduct within the workplace may be a sign that the NLRA may be interpreted more narrowly in the future. This is not to say, however, that arbitration agreements will not be subjected to continued scrutiny. As has been seen particularly in the context of sexual harassment and the #MeToo movement, the use of arbitration agreements has come into the crosshairs of legislatures and the public generally. Indeed, newly proposed laws in several states would prohibit the use of arbitration agreements to resolve sexual harassment claims, and whether such laws are preempted by the FAA remains to be decided. Accordingly, employers should continue to carefully consider all aspects of their arbitration programs and the manner in which such programs are implemented and enforced. 

Footnotes 

_{1) The Court’s decision came in three cases that were consolidated for review: Epic Systems Corp. v. Lewis, No. 16-285; Ernst & Young LLP v. Morris, No. 16-300; NLRB v. Murphy Oil USA, Inc., No. 16-207. At issue in each case were attempts by employees to assert collective action claims under the Fair Labor Standards Act despite having signed arbitration agreements waiving the right to pursue class and collective action claims. The Court decided to hear the cases together on the basis that they differed “in detail but not in substance.”
2) The full text of Section 7 states: “Employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” 29 U.S.C. § 157.
3) 357 N.L.R.B. 2277 (2012), enf. denied in relevant part, 737 F.3d 344 (5th Cir. 2013).
4) 737 F.3d 344 (5th Cir. 2013).
5) Compare Owen v. Bristol Care, Inc., 702 F. 3d 1050 (8th Cir. 2013) (enforcing class waiver); Sutherland v. Ernst & Young LLP, 726 F. 3d 290 (2d Cir. 2013) with Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016) (class waiver unenforceable); NLRB v. Alternative Entertainment, Inc., 858 F. 3d 393 (6th Cir. 2017); Morris v. Ernst & Young LLP, 834 F.3d 975 (9th Cir. 2016).
6) 9 U.S.C. § 2.
7) 563 U.S. 333 (2011).}