On May 21, 2018, the United States Supreme Court held, in a 5-4 decision, that arbitration agreements which mandate individualized resolution of claims (as opposed to class or collective resolution) are enforceable under the Federal Arbitration Act ("FAA"). In doing so, the Court rejected the argument that such "class action waivers" violate Section 7 of the National Labor Relations Act ("NLRA"), which generally protects employees' rights to act "in concert" with one another.
The Court addressed a split created by decisions from three Federal Circuit Courts of Appeal: Epic Systems Corp v. Lewis (7th Circuit), Ernst & Young v. Morris (9th Circuit) and National Labor Relations Board v. Murphy Oil USA (5th Circuit). All three cases involved employees who sought to bring collective or class actions under the Fair Labor Standards Act (the "FLSA"), and their respective employers who sought to enforce pre-dispute arbitration agreements which waived such collective actions and mandated "one-on-one" arbitration of wage disputes. In support of their position, the employees argued that the class and collective action waivers were illegal because they violated the NLRA's prohibition on barring employees from engaging in "concerted activities."
In their first argument, the employees asserted that the NLRA served as a basis for the Court to invoke the FAA's "saving clause," which allows a court to invalidate an agreement to arbitrate "upon such grounds as exist at law or in equity for the revocation of any contract." Justice Gorsuch, writing for the majority in a textualist approach, determined that "revocation of any contract" means what it says: that the saving clause applies only to generally applicable contract defenses that would apply to any contract, not to defenses that are unique to arbitration contracts. Here, the alleged "illegality" was based only on the argument that Section 7 of the NLRA prohibited the waiver of the right to proceed collectively in arbitration, which is a "defense" tailored only to a specific type of contract, not a generally applicable contract defense. Discussing the precedent of AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the Court held that the employees' argument seeks to interfere with one of the fundamental attributes of the arbitration proceeding - individualized resolution - and, thus, impermissibly disfavors arbitration.
In their second argument, the employees asserted that the NLRA served as an independent basis on which the Court should invalidate the arbitration agreements at issue as violating federal law. The Majority, through a similarly textualist interpretation of the law, dismissed the second argument by holding that Section 7 of the NLRA, which prohibits an employer from interfering with the concerted activities of its employees, concerns the right for employees to unionize and bargain collectively, and does not purport to govern the procedural details of civil actions under the FLSA. The Majority determined that Section 7 may permit a union to collectively bargain a prohibition on arbitration clauses. It does not, however, confer a clear and unmistakable right for employees to seek class-wide resolution of their claims outside of the realm of union formation and/or collective bargaining. Accordingly, the Majority held that Section 7 of the NLRA did not (and could not) provide a basis to invalidate the arbitration agreements at issue.
What Employers Should Know Now
This decision provides much needed clarity for employers. In light of this ruling, companies without arbitration agreements containing class and collective action waivers, might reconsider whether implementing such an arbitration agreement makes sense based upon the specific needs of the company.