SULLIVAN & CROMWELL LLP
May 23, 2018
Epic Systems Corp. v. Lewis
U.S. Supreme Court Holds That Class-Action Waivers in Employment
Arbitration Agreements Are Enforceable Under Federal Law.
SUMMARY
In the consolidated cases of Epic Systems Corp. v. Lewis, Ernst & Young LLP v. Morris, and National
Labor Relations Board v. Murphy Oil USA, Inc.,
the U.S. Supreme Court held on Monday that arbitration
agreements in which an employee agrees to arbitrate any claims against an employer on an individual—
rather than on a class or collective—basis, are enforceable and do not violate the National Labor
Relations Act (“NLRA”). In reaching its decision, the Court held that Congress, through the Federal
Arbitration Act (“FAA”), “has instructed federal courts to enforce arbitration agreements according to their
terms—including terms providing for individualized proceedings,” and that nothing in the NLRA overcame
this principle.
1
2
The decision resolves a conflict in the courts of appeals and provides clarity to employers
that have entered into arbitration agreements with employees that contain class- or collective-action
waivers. The decision may lead to more employers considering the use of such agreements.
PROCEEDINGS BELOW
In 2012, the National Labor Relations Board (“NLRB”) issued its decision in D.R. Horton, Inc., 357
N.L.R.B. 2277 (2012), finding for the first time that individual employment arbitration agreements run afoul
of the NLRA, and that the NLRA overcomes the FAA. A split then developed among the federal courts of
appeals—some of which adopted the NLRB’s new position that class- and collective-action waivers in
employment agreements are unlawful, while others maintained that they are valid. Compare Murphy Oil
USA, Inc. v. NLRB, 808 F.3d 1013, 1016 (5th Cir. 2015) (upholding class- and collective-action waivers in
employment arbitration agreements), with Lewis v. Epic Sys. Corp., 823 F.3d 1147, 1151, 1155 (7th Cir.
2016) (NLRA rendered class and collective action waivers in employment arbitration agreements
unenforceable) and Morris v. Ernst & Young, LLP, 834 F.3d 975, 983 (9th Cir. 2016) (same).
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The Supreme Court granted certiorari and consolidated three cases to resolve the split. The litigation had
an unusual element in that lawyers for the federal government appeared on both sides. During the
Obama administration, the Department of Justice filed a brief supporting the employees, but reversed
course under the Trump administration and argued on behalf of the employers. The NLRB’s general
counsel argued for the employees.
THE SUPREME COURT’S DECISION
In a 5-4 decision for the Court authored by Justice Gorsuch, the Supreme Court held that “Congress has
instructed that arbitration agreements . . . must be enforced as written” and that class- and collectiveaction
waivers
in
employment
arbitration
agreements
are permissible
under
the
NLRA.
3
The Court began by reviewing the FAA’s “liberal federal policy favoring arbitration agreements” and the
requirement that courts “rigorously . . . enforce arbitration agreements according to their terms, including
terms that specify with whom the parties choose to arbitrate their disputes and the rules under which that
arbitration will be conducted.” It explained that the FAA “specifically direct[s] [courts] to respect and
enforce the parties’ chosen arbitration procedures.”
4
The Court then rejected each of the arguments raised by the NLRB and the individual employees. First,
the Court held that the FAA’s “saving clause”—which provides that arbitration agreements are
presumptively enforceable “save upon such grounds as exist at law or in equity for the revocation of any
contract”—does not “offer[] . . . refuge for defenses that apply only to arbitration or that derive their
meaning from the fact that an agreement to arbitrate is at issue.” In other words, because this argument
specifically singled out “individualized arbitration proceedings” as invalid, the “saving clause” was not
implicated, and there was no “generally applicable contract defense[]” to overcome the presumption of
enforceability.
5
Second, the Court rejected the argument that the NLRA and the FAA conflict and that, because the NLRA
(1935) was enacted after the FAA (1925), it should control. The NLRB and the individual employees
argued that the NLRA constituted a “clear and manifest congressional command to displace the [FAA].”
The Court disagreed, stating that it is not at “liberty to pick and choose among congressional enactments”
and must “strive ‘to give effect to both.’” It further explained that there is a “‘strong presumption’ that
repeals by implication are ‘disfavored’ and that ‘Congress will specifically address’ preexisting law when it
wishes to suspend its normal operations in a later statute.” Section 7 of the NLRA, for example, focuses
on the right to organize unions and bargain collectively, and so “does not even hint at a wish to displace
the Arbitration Act.” Accordingly, the Court found that “the absence of any specific statutory discussion of
arbitration or class actions is an important and telling clue that Congress has not displaced the Arbitration
Act.” As stated by the majority, “Congress ‘does not alter the fundamental details of a regulatory scheme
in vague terms or ancillary provisions—it does not, one might say, hide elephants in mouseholes.’”
6
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Finally, the Court declined to give Chevron deference to the NLRB’s interpretation of the NLRA in D.R.
Horton, Inc. The Court observed that D.R. Horton, Inc. was an outlier in Board precedent, as it “for the
first time in the 77 years since the NLRA’s adoption [] asserted that the NLRA effectively nullifies the
Arbitration Act in cases like ours.” The Court also reasoned that the NLRB “sought to interpret [the
NLRA] in a way that limits the work of a second statute, the Arbitration Act,” and that, although Chevron
deference is premised in part on the notion that “‘policy choices’ should be left to the Executive Branch,”
“here the Executive seems to be of two minds, for we have received competing briefs from the [NLRB]
and the United States (through the Solicitor General).” The Court noted that none of the parties
challenged the doctrine of deference to administrative determinations established in Chevron, but that the
NLRB’s interpretation of the FAA was not entitled to such deference in any event.
7
Justice Thomas concurred in the majority opinion, but wrote separately to add that the FAA’s saving
clause means that the only grounds for revoking an arbitration contract are “those that concern the
formation of the arbitration agreement,” such as fraud or adhesion. The employees’ argument that the
arbitration agreements are unenforceable under the NLRA is a public-policy defense, not an argument
that “concern[s] the formation of the arbitration agreement.”
8
Justice Ginsburg, joined by Justices Breyer, Sotomayor, and Kagan, dissented, arguing that the Court
paid “scant heed” to NLRB precedent that “the NLRA safeguards employees from employer interference
when they pursue joint, collective, and class suits related to the terms and conditions of their
employment.” She opined that the number of suits brought by employees is likely to decrease in light of
the decision based on the “[e]xpenses entailed in mounting individual claims . . . far outweigh[ing]
potential recoveries,” “[f]ear of retaliation,” and “the slim relief obtainable” in individual suits. She argued
that, as a result of the Court’s decision, “employers, aware that employees will be disinclined to pursue
small-value claims when confined to proceeding one-by-one, will no doubt perceive that the cost-benefit
balance of underpaying workers tips heavily in favor of skirting legal obligations.”
The majority,
responding to this argument, noted that “the dissent retreats to policy arguments.”
9
Justice Ginsburg
further stated that “[c]ongressional correction” of the court’s decision is “urgently in order.”
10
11
IMPLICATIONS
The decision provides employers and employees guidance regarding the legality of class- and collectiveaction
waivers
in
their
employment
documents
and
policies.
On Monday, the NLRB issued a statement saying that it “respects the Court’s decision, which clearly
establishes that arbitration agreements providing for individualized proceedings, and waiving the right to
participate in class or collective actions, are lawful and enforceable.” The NLRB also stated that it
currently has 55 pending cases with allegations that employers violated the NLRA because their
arbitration agreements contained class waivers, adding that it is "committed to expeditiously resolving
these cases in accordance with the Supreme Court’s decision.”
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Epic Systems Corp. v. Lewis
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SULLIVAN & CROMWELL LLP
In addition, employers currently facing class or collective actions in federal or state courts may be able to
compel individual arbitrations if the employees previously entered into agreements waiving their rights to
participate in class or collective actions.
The decision also has effects in state and local jurisdictions. For example, in July 2017, the New York
Appellate Division for the First Department held that “arbitration provisions . . . , which prohibit class,
collective, or representative claims, violate the National Labor Relations Act (NLRA) and thus, that those
provisions are unenforceable.”
13
That decision will no longer be controlling law.
Nonetheless, it is not possible to predict how Congress will react to the Court’s opinion. In December
2017, for example, Senators Lindsey Graham (R–S.C.) and Kirsten Gillibrand (D–N.Y.) introduced a bill
that would prohibit clauses in employment agreements requiring mandatory arbitration to resolve claims
of sexual harassment or other discrimination. Because the Court’s decision rested on statutory, rather
than Constitutional grounds, Congress could effectively reverse the Court’s decision by enacting new
legislation. This is what happened after the Supreme Court decided Ledbetter v. Goodyear Tire &
Rubber Co., 550 U.S. 618 (2007), which held that the statute of limitations for presenting equal-pay
discrimination claims began on the date the employer first made an illegal payment decision, not on the
date of the last paycheck.
The decision may also signal a narrowing of the Supreme Court’s interpretation of Section 7 of the NLRA.
The Court explained that “Section 7 focuses on the right to organize unions and bargain collectively,” and
that its protection of “other concerted activities” should be read as referring to activities that are “like the
terms that precede it.” In other words, Section 7 serves “to protect things employees ‘just do’ for
themselves in the course of exercising their right to free association in the workplace, rather than ‘the
highly regulated, courtroom-bound activities of class and joint litigation.’” The majority concluded by
criticizing the dissent for “impos[ing] a vast construction on Section 7’s language.”
14
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Copyright © Sullivan & Cromwell LLP 2018
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Epic Systems Corp. v. Lewis
May 23, 2018
SULLIVAN & CROMWELL LLP
ENDNOTES
1
Epic Sys. Corp. v. Lewis, 584 U.S. __, No. 16-285 (May 21, 2018).
2
Epic Sys. Corp., slip op. at 2.
3
Id. at 25.
4
Id. at 5 (citations and quotations omitted).
5
Id. at 5-8 (citations and quotations omitted).
6
Id. at 4, 9-19 (citations and quotations omitted).
7
Id. at 19-21 (citations and quotations omitted).
8
I at 1-2 (Thomas, J., concurring).
9
Id. at 2, 10-11, 27-28 (Ginsburg, J., dissenting).
10
Epic Sys. Corp., slip op. at 24.
11
Id. at 2 (Ginsburg, J., dissenting).
12
Supreme Court Issues Decision in NLRB v. Murphy Oil USA, NLRB (May 21, 2018),
https://www.nlrb.gov/news-outreach/news-story/supreme-court-issues-decision-nlrb-v-murphy-oilusa.
13
Gold v. N.Y. Life Ins. Co., 153 A.D.3d 216, 221 (N.Y. 1st Dep’t 2017).
14
Epic Sys. Corp., slip op. at 12, 23.
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Epic Systems Corp. v. Lewis
May 23, 2018
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Epic Systems Corp. v. Lewis
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