On May 21, 2018, the United States Supreme Court clarified that class action waivers in employment arbitration agreements are enforceable under the Federal Arbitration Act, as set forth in the decision of three consolidated cases: Epic Systems Corp. v. Lewis, No. 16-285, Ernst & Young LLP v. Morris, No. 16-300, and NLRB v. Murphy Oil USA, No. 16-307.
At issue was whether the National Labor Relations Act’s protection of employees’ “right . . . to engage in other concerted activities for . . . mutual aid and protection” renders invalid the Federal Arbitration Act’s mandate to enforce arbitration agreements according to their terms on the theory that a class action lawsuit would constitute “concerted activity for mutual aid and protection.”
The employment agreements at the heart of each case required the employees to arbitrate their work-related disputes on an individual basis only – waiving the right to bring a class action. The employees sued, seeking to bring both individual and class action claims, despite having signed the waivers in their mandatory arbitration agreements. Central to their argument was the notion that a class action waiver violated the right to engage in concerted activities under the NLRA Section 7. In response, the employers argued that the FAA favors enforcement of mandatory arbitration and class action waiver agreements, and that class actions are not “concerted activity” to be protected under the NLRA.
In a 5-4 decision with the majority opinion authored by Justice Gorsuch, the majority of the Court held that the NLRA does not override the FAA’s protection of arbitration and class action waiver agreements. The majority focused on its interpretation of the NLRA as a statute focused primarily on protection of union and collective bargaining activities, and not applying broadly outside that context. The opinion stated that the NLRA’s phrase “other concerted activities” “focuses on the right to organize unions and bargain collectively,” and that it is not warranted to dramatically expand the meaning of that phrase to also encompass class action lawsuits, which are not within the true scope of the NLRA.
The majority noted that it was significant that the provision “does not express approval or disapproval of arbitration” and “does not mention class or collective action procedures.” The NLRA “does not even hint at a wish to displace the Arbitration Act—let alone accomplish that much clearly and manifestly, as our precedents demand." "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 Arbitration Act.
The Court relied on AT&T Mobility LLC v. Concepcion, where the Court had previously held that allowing “any party in arbitration to demand classwide proceedings despite the traditionally individualized and informal nature of arbitration . .. would sacrific[e] the principal advantage of arbitration—its informality—and mak[e] the process slower, more costly, and more likely to generate procedural morass than final judgment." The Court explained that, pursuant to Concepcion, the FAA’s savings clause allows an employee to bring up contract defenses such as duress or fraud, but “the clause offers no refuge for ‘defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.”
The Court’s 5-4 decision not only clarified the scope of the NLRA as it relates to the FAA, but also effectively nullified the National Labor Relations Board’s (“NLRB”) 2012 decision, D.R. Horton, Inc., 357 N.L.R.B. 2277, which concluded that employers violate the NLRA when they require employees, as a condition of employment, to agree to resolve work-related disputes pursuant to an arbitration provision containing a class or collective action waiver. It also clarified a Circuit split between the Fifth, Second and Eighth Circuit on one hand, which enforced arbitration agreements requiring employees to submit to individual arbitration (as opposed to class or collective claims in Court), and the Seventh and Ninth Circuit on the other (which agreed with the NLRB’s interpretation of the NLRA and FAA.
What Does This Mean for Employers?
This new Supreme Court opinion vindicates employers’ use of arbitration provisions that specify individual arbitration and waive collective and class claims. Now that this is clarified, employers should take time to focus on the current terms of the arbitration agreement they have in place to ensure that it would be upheld for being neither substantively nor procedurally unconscionable.