Monday, May 21, the Supreme Court issued an important decision that will surely affect employment relations for decades to come. In the 5-4 decision, the Court’s conservative majority ruled that companies may require their workers to accept individual arbitration clauses within employment contracts. These clauses are used as a way to limit the choices of an employee when bringing various employment disputes such as wage-and-hour disagreements, and workplace- condition and harassment claims. This opinion allows employers to require individual arbitration proceedings, without the option of seeking class action relief or collective arbitration of claims in conjunction with other employees arguing the same matter. Prior to this opinion, plaintiff counsel who was reluctant to bring a relatively small dollar wage and hour claim on behalf of a single employee, could aggregate the claims of all similarly situated employees and make the case more financially feasible. This is likely, however, to be no more.
The opinion, written by Justice Gorsuch and joined by Chief Justice Roberts, and Justices Kennedy, Thomas, and Alito, held that arbitration clauses requiring only individual arbitration, with no option of group arbitration, are valid under the Federal Arbitration Act (1925)(the “FAA”), and such clauses do not conflict with the National Labor Relations Act (1935)(the “NLRA”) or any other federal act. The FAA states that courts must enforce agreements to arbitrate, including the terms selected, unless general contractual defenses are available or if it violates some other federal law.
In September 2016, Epic Systems Corporation initiated proceedings in the Supreme Court by filing a petition for a writ of certiorari to the Seventh Circuit. This request was granted in January 2017, and arguments were held on October 2, 2017. The case consolidated Epic Systems with two other circuit decisions, all dealing with the relationship between the FAA and the NLRA. In Lewis v. Epic Systems Corp., Lewis, a technical writer for the healthcare software company, filed a class action suit with other writers. Epic Systems moved to dismiss the case and enforce the arbitration agreement. The Western District of Wisconsin denied the motion to dismiss and ruled in favor of the employees, accepting the argument that the single arbitration clause in the agreement violated the NLRA. The Seventh Circuit upheld the decision. Similarly, in Ernst & Young LLP v. Morris, the Ninth Circuit also ruled in favor of the employees; but, did so by overturning the Southern District of New York’s decision to grant a motion to dismiss the class action suit and compel the individual arbitration.
Lastly, in National Labor Relations Board v. Murphy Oil the Fifth Circuit ruled in favor of the employer by reversing a decision of the National Labor Relations Board (the “Board”) and, therefore, enforcing the single arbitration clause. Sheila Hobson and three other employees of Murphy Oil filed a suit with the Northern District of Alabama seeking declaratory judgment that the individual arbitration clauses in their employment contract violated the Fair Labor Standards Act. When the court dismissed the case at Murphy Oil’s request, Hobson filed a complaint with the Board. The Board ruled in favor of Hobson and issued a formal complaint against Murphy Oil, asserting that the NLRA protection afforded to employees for collective activity conflicted with the FAA. The company then challenged the Board ruling in the Fifth Circuit Court of Appeals and the court overruled the board and found that the NLRA did not override the FAA. The Supreme Court thus granted certiorari to “clear the confusion.”
The employees in this matter argued, as in the circuit court decisions, that the agreements involved were invalid because the requirement of individual arbitration violated the NLRA. As noted above, an arbitration clause will not be enforced if it conflicts with other federal law. According to the employees, group arbitration and class action suits are a form of “concerted activity” under the NLRA, and as result, agreements that prohibit such activities are unenforceable. The employers countered by asserting that the purpose of the FAA was to protect arbitration agreements from judicial interference. They reasoned that neither the NLRA nor any other federal law required an opposite conclusion.
Justice Gorsuch stated that the employees’ argument “sought to interfere with one of arbitration’s fundamental attributes.” Instead of arguing the unconscionability of these contracts, the employee’s argument focused on the “individualized nature” of the proceedings. This is not reason enough, in of itself, to make these agreements unenforceable. The opinion focused on Congress’s intent when enacting both statutes, as well as the notion that federal statutes should be read harmoniously whenever possible. Justice Gorsuch explained that the noted NLRA section focuses on the right to organize unions and bargain collectively. The language does not affect class or collective legal action, nor does it “hint at a clear and manifest wish to displace the Arbitration Act.” In other words, group arbitrations are not a form of “concerted activity” as argued by the employees. Since the two statutes can co-exist harmoniously, individual arbitration clauses are valid under the FAA and courts are required to enforce them.
Justice Ginsburg offered a forceful dissent, which she actually read from the bench, referring to this decision as “egregiously wrong.” Justices Breyer, Sotomayor, and Kagan joined her dissenting opinion. Justice Ginsburg emphasized the power of numbers in “concerted activity” which protects employees in these often “arm-twisted, take-it-or-leave-it contracts” which this decision allows to be enforced nation-wide. She noted that these agreements are often not a “choice” on the part of the employee, but instead a condition of their employment. Accordingly, employers can now always relegate employees to individual, low dollar damages claims without the “power of numbers” that class actions offer.
Ultimately, this decision makes it clear that employers and employees have the freedom to contract as they wish in relation to individual and group arbitrations. So long as there is no issue of unconscionability within these contracts -- an issue not addressed in this opinion -- then the fundamentals of arbitration remain intact and employers do not have to worry about judicial interference in the future.