TAKEAWAYS 

  • The U.S. Supreme Court held that arbitration agreements governed by the Federal Arbitration Act (FAA) may lawfully prohibit collective and class actions in employment disputes.
  • State laws, such as the California Private Attorney General’s Act, still allow for collective actions that cannot be superseded by a private agreement between an employer and an employee.
  • There is legislative activity at both the state and federal level to limit the scope and enforcement of arbitration agreements arising from the employment relationship.

In Epic Systems v. Lewis, the Supreme Court narrowly upheld the enforceability of pre-dispute arbitration agreements that require employees to bring employment claims individually instead of collectively. In a win for employers, the Court ruled on May 21 that the NLRA’s protection of employees’ right to engage in “concerted activities for … mutual aid or protection” did not extend to class or collective actions. The FAA therefore mandates that courts enforce such arbitration agreements as written.

This decision resolves a circuit split that evolved when the National Labor Relations Board (NLRB) during the Obama administration took the position that class action waivers violated the National Labor Relations Act (NLRA). The NLRA generally protects all U.S. non-supervisory employees, even non-unionized employees, who work in interstate commerce. Before the Supreme Court were three Circuit decisions, two of which agreed with the NLRB’s position and refused to uphold the class action waiver in a pre-dispute arbitration agreement. Each of the cases involved complaints by employees that they were underpaid in violation of the Fair Labor Standards Act and analogous state laws.

The 7th Circuit had held that such arbitration agreements violated the NLRA and were unenforceable under the FAA. The lower court found that “other concerted activities” had long been held to include resort to administrative and judicial forums, and thus rendered such collective action waivers illegal. And while the FAA mandates the enforcement of arbitration agreements, the FAA states that such agreements are enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.” The “saving clause” applies in this case, said the court: “Because the NLRA renders Epic’s arbitration provision illegal, the FAA does not mandate its enforcement.”

Agreeing with 7th Circuit, the 9th Circuit explained that the problem had nothing to do with arbitration, but with the ban on collective action in any forum: “It would equally violate the NLRA for [the employer] to require its employees to sign a contract requiring the resolution of all work-related disputes in court and in ‘separate proceedings.’” The FAA’s saving clause, therefore, allows the illegal term to be severed from the arbitration agreement. The 9th Circuit emphasized that Section 7 of the NLRA conveys a substantive right to collective action, not a procedural one, and that substantive rights cannot be waived in arbitration agreements. “[W]hen an arbitration contract professes to waive a substantive federal right, the saving clause of the FAA prevents the enforcement of that waiver.”

The Supreme Court circumvented the reasoning of these circuit courts by finding that the NLRA does not provide a right to class or collective action in the first place, adopting the 5th Circuit’s position on the matter. “The NLRA secures to employees rights to organize unions and bargain collectively,” declared Justice Gorsuch, “but it says nothing about how judges and arbitrators must try legal disputes that leave the workplace and enter the courtroom or arbitral forum.” There is no issue, then, with enforcing an arbitration agreement under the FAA that requires employees to act individually in court or arbitration.

Concepcion Expanded, FAA Augmented Again

Addressing the parties’ illegality argument, the Court declared that, even if the NLRA rendered class and collective action waivers illegal, the FAA’s saving clause would offer no refuge. Applying its holding in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the Court explained that the saving clause renders no aid to “defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” The saving clause does not save defenses that “interfer[e] with fundamental attributes of arbitration.” Justice Gorsuch explains, “[The employees] don’t suggest that their arbitration agreements were extracted, say, by an act of fraud or duress or in some other unconscionable way that would render any contract unenforceable. Instead, they object to their agreements precisely because they require individualized arbitration proceedings instead of class or collective ones. And by attacking (only) the individualized nature of the arbitration proceedings, the employees’ argument seeks to interfere with one of arbitration’s fundamental attributes.”

Writing for the four dissenters, Justice Ginsburg proposed a distinction between the unconscionability defense at issue in Concepcion and the illegality defense in Epic Systems. The saving clause would apply here, she wrote, because, unlike in Concepcion, “the Court is not asked to apply a generally applicable contract defense to generate a rule discriminating against arbitration.” The NLRA requires invalidation of all employer-imposed class waivers, irrespective of forum. “By declining to enforce those adhesive waivers, courts would place them on the same footing as any other contract provision incompatible with controlling federal law.”

The majority acknowledged that Congress can and does statutorily limit the FAA without amending the FAA itself, but fundamentally disagreed with the dissent on the breadth of the saving clause. It is clear from both Concepcion and Epic Systems that the Court views arbitration as having an “individualized nature” which is protected by the FAA. The saving clause will not empower a contract defense aimed thereto, “whether it sounds in illegality or unconscionability.” The Court continues to take an expansive view of the FAA’s enforceability provisions and a narrow view of its saving clause, a good result for employers as long as this jurisprudential trend does not lead to a major legislative overhaul. For now, the “liberal federal policy favoring arbitration agreements” is more pronounced than ever.

No Effect on PAGA

Even though employers can now be confident in the enforceability of class waivers in arbitration clauses, California employers still must contend with collective employee actions under the Private Attorney General Act (PAGA). Epic Systems has no apparent effect on the California Supreme Court’s 2014 ruling in Iskanian v. CLS Transp. L.A., LLC, 59 Cal.4th 348 (2014) that the FAA has no preemptive effect on PAGA because the FAA’s purpose is specific to the resolution of private disputes, and a PAGA claim is by nature a dispute between an employer and the state. SCOTUS declined to review Iskanian.

Under PAGA, an aggrieved employee may file a lawsuit as a proxy of the state’s labor law enforcement agencies and seek civil penalties for Labor Code violations on behalf of herself, other employees and the state. California courts have held that arbitration clauses in employment agreements do not govern PAGA disputes because the state is the real party in interest in such proceedings, and the state is not a party to the arbitration agreement. However, the state high court has granted review in Lawson v. ZB, N.A., S246711 (2018) in which it will decide if a representative action under PAGA that seeks recovery of individualized lost wages as civil penalties under Labor Code section 558 falls within the preemptive scope of the FAA and is therefore subject to any arbitration agreements to which the employees are party. Even if the court decides in the affirmative, however, the decision would do nothing to limit the collective nature of the claims, only the forum in which they are heard, and only regarding claims for individualized lost wages.

Congressional Efforts to Amend the Arbitration Landscape

Two bills are pending in Congress aimed at amending the FAA. The first is entitled “Ending Forced Arbitration of Sexual Harassment Act” (S.2203), which would render unenforceable predispute agreements requiring arbitration of a dispute arising from conduct that would form the basis of a claim based on sex under title VII of the Civil Rights Act of 1964—notably including workplace sexual harassment. The bill currently has bipartisan support, and is in committee. Related bills in the House are also in committee.

The second bill, the “Arbitration Fairness Act of 2018” (S.2591), would explicitly roll back Supreme Court jurisprudence on the FAA. It declares that the FAA was intended to apply to commercial disputes between entities of similar sophistication and bargaining power, and that the broad scope the statute currently enjoys is counter to Congressional intent. The bill would render unenforceable predispute agreements requiring arbitration of employment, consumer, antitrust and civil rights disputes. Although the bill has broad support among Democrats, political analysts opine that it does not have sufficient support to become law under the current Congress and White House.

Next Steps for Employers

Although there are ongoing efforts on both the state and federal level to limit the impact and effect of class action waivers in arbitration agreements, under current law most employers would be well advised to implement an arbitration agreement that includes a class action waiver with its employees. While there are certain disadvantages to arbitration—such as limited appeal rights and, by way of example, in California, the employer’s obligation to pay for the additional costs of arbitration—most employers would prefer to litigate matters in an arbitral forum than in court. Now that class action waivers are clearly enforceable, there is even a greater benefit for most employers to make agreements to arbitrate a standard part of their employment contracts.

The Supreme Court may soon decide, however, that such a clause is not necessary to prohibit collective action in an arbitral setting. In Lamps Plus Inc. v. Varela, No. 17-988, the Court has agreed to consider whether an arbitration agreement silent on the issue allows an employee to bring a collective arbitration action. Due to the Court’s insistence that a “fundamental attribute” of arbitration is its “individualized nature,” the reasonable judicial prognosticator would predict another win for employers before long.