On May 21, in a 5-4 opinion, the U.S. Supreme Court ruled that arbitration agreements in which an employee waives the right to pursue his or her employment claims in a class or collective action are enforceable under the Federal Arbitration Act (FAA). The holding in Epic Systems Corp. v. Lewis, No. 16-285, resolves a circuit court split on whether class action waivers in arbitration agreements violate the National Labor Relations Act (NLRA). Justice Gorsuch delivered the opinion of the Court, rejecting three primary arguments made by employees to undermine the validity of class action waivers under the FAA.
Arbitration agreements requiring employees to pursue claims involving their employment relationships in private arbitration rather than in court previously have been found to be enforceable under the FAA. The circuit courts, however, have split on the issue of whether arbitration agreements prohibiting employees from participating in class or collective actions against their employers violate the NLRA. The Sixth, Seventh and Ninth Circuits have sided with employees, finding that arbitration agreements containing class action waivers violate the NLRA. Conversely, the Second, Fifth and Eighth Circuits have sided with employers, finding that private arbitration agreements in which employees waive the right to participate in class or collective actions are enforceable under the FAA. The Epic Systems case served as a battle between the competing interests of the FAA’s pro-arbitration policy and the NLRA’s collective bargaining provisions.
Court Rejects Arguments Posed by Employees
The employee-appellees made three arguments to support their claim that arbitration agreements containing class action waivers are unenforceable. First, they argued that class action waivers are invalid under the FAA’s saving clause, which allows courts to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.” The employees argued that an agreement requiring individualized arbitration proceedings violates the NLRA by barring employees from engaging in “concerted activity” in the form of class or collective actions and therefore these arbitration agreements are invalid under the saving clause.
The Court rejected this argument, concluding that the FAA’s saving clause only invalidates arbitration agreements according to general contract principles, such as fraud, duress and unconscionability. Here, the employees did not suggest that they were forced to sign the arbitration agreements by an act of fraud, duress or any other unconscionable conduct. Thus, the saving clause did not render the arbitration agreements unenforceable.
In this regard, it is fitting that the majority’s decision was written by Justice Gorsuch, who occupies the seat previously held by the late Justice Scalia. One of the most influential arbitration decisions in Supreme Court jurisprudence is Justice Scalia’s majority opinion in AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), in which the Supreme Court invalidated California case law that banned class action waivers in arbitration clauses. Concepcion held that such a ban was hostile to the pro-arbitration policy of the FAA. Justice Gorsuch highlighted the case’s continued importance, writing: “Concepcion’s essential insight remains: courts may not allow a contract defense to reshape traditional individualized arbitration by mandating classwide arbitration procedures without the parties’ consent.”
Second, the employees asserted that, regardless of whether the FAA’s saving clause was implicated, Section 7 of the NLRA overrides the FAA and renders the arbitration agreements unenforceable. The Court quickly dismissed this argument, noting that if Congress had intended for the NLRA to override the FAA, that intention would have been “clear and manifest.” According to the Court:
Section 7 [of the NLRA] focuses on the right to organize unions and bargain collectively. It may permit unions to bargain to prohibit arbitration. But it 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 [FAA] — let alone accomplish that much clearly and manifestly, as our precedents demand.
As a last ditch effort, the employees contended that the Court should give Chevron deference to the NLRB’s opinion in D.R. Horton Inc., which held that arbitration agreements containing class action waivers violate the NLRA. In Chevron, U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837 (1984), the Court held that a federal agency’s interpretation of an ambiguity in a federal statute is entitled to deference. Like the employees’ other arguments, the Court summarily rejected this argument, finding that the NLRB exceeded its authority when it interpreted the NLRA in a way that limited the FAA. The Court stated: “[O]n no account might we agree that Congress implicitly delegated to an agency authority to address the meaning of a second statute it did not administer.”
Concluding that arbitration agreements containing class action waivers do not violate the NLRA, the Court stated:
The policy may be debatable but the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written. While Congress is of course always free to amend this judgment, we see nothing suggesting it did so in the NLRA — much less that it manifested a clear intention to displace the [FAA].
Justice Ginsberg’s Dissent
Justice Ginsberg, joined by Justices Breyer, Sotomayor and Kagan, dissented, focusing on the reason for the enactment of the NLRA — protection of concerted activity by employees. The dissent reasoned that class action waivers are unfair labor practices outlawed by the NLRA and therefore are unenforceable in court. Expressing concern that the cost of bringing individual claims would far outweigh their potential recoveries, Justice Ginsburg warned that the result of the Court’s decision “will be the underenforcement of federal and state statutes designed to advance the well-being of vulnerable workers.” She added that, while “in recent years the Court’s [FAA] decisions have taken many wrong turns,” not even Concepcion required this result because the NLRA “neither discriminates against arbitration on its face nor by covert operation . . . . The NLRA should qualify as ‘an implied repeal’ of the FAA, to the extent of any genuine conflict.”
What This Means for Employers
There are advantages and disadvantages to mandating arbitration of employment disputes. On the one hand, arbitration is supposed to be, and initially was, a more informal and streamlined process for adjudicating disputes. We have found, however, that arbitrations can be as costly, or even more expensive, than the judicial process. Moreover, arbitrators often are reluctant to settle or dismiss a case before a hearing, and arbitration decisions are final and not subject to review.
The Court’s decision permitting arbitration agreements to include a waiver of class and collective action claims may tip the scale for employers that are considering whether to require arbitration of employment claims as a condition of employment. In making this decision, employers should be mindful of state statutes prohibiting agreements that require arbitration of class and collective actions. California already has passed a statute of this nature — the Private Attorney General Act. New York also recently passed legislation amending the Civil Practice Law and Rules to render void agreements requiring the submission of sexual harassment claims to mandatory binding arbitration. While it is unclear whether these statutes will be considered to be preempted by the FAA, this area of the law continues to evolve.
Given the numerous factors in deciding whether to mandate arbitration of employment matters, we recommend that employers consult with employment counsel before reaching any decision. Careful drafting of arbitration agreements is critical to maximizing the benefits to the employer, and minimizing the cost and risk of unexpected outcomes.
For those employers that have an arbitration agreement in place already, we recommend that these agreements be revised to include a waiver of class and collective action claims.