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U.S. SUPREME COURT BLESSES ARBITRATION AGREEMENTS WITH CLASS ACTION WAIVERS


In Epic Systems Corp. v. Lewis, the U.S. Supreme Court held 5-to-4 on May 21, 2018 that class action waivers set out in arbitration agreements are alive and well despite claims that they interfere with employee rights under Section 7 of the National Labor Relations Act (“NLRA”). Putting policy considerations aside, Justice Gorsuch wrote in the blockbuster decision that the matter was clear “as a matter of law.” In the Federal Arbitration Act (“FAA”), Congress has directed federal courts “to enforce arbitration agreements according to their terms – including terms providing for individualized proceedings.” In reaching this decision, the Supreme Court opened the door, once again, to the use of properly drafted arbitration agreements that preclude employees from bringing or participating in class or collective action proceedings.

1. Overview Of The Three Court Of Appeal Decisions

The three cases reviewed by the Supreme Court each involved contracts between an employer and employee that provided for individualized arbitration proceedings to resolve employment disputes. Despite these agreements, each employee sought to litigate Fair Labor Standards Act (“FLSA”) and related state law claims through class or collective actions in federal court. They sought to extricate themselves from the obligation to arbitrate their claims on an individual basis by contending that, by requiring individualized proceedings, the agreements violated the NLRA.

The employers disagreed. They countered that the FAA protects agreements requiring arbitration from judicial interference. Furthermore, neither the saving clause in the FAA nor the NLRA demands a different conclusion. The Supreme Court held that Congress has instructed courts to enforce arbitration agreements providing for individualized proceedings. Neither the saving clause nor the NLRA suggests otherwise.

In declining to read a new right to bring class actions into the NLRA, the Supreme Court resolved a conflict among the Fifth, Seventh and Ninth Circuit Court of Appeals. It reversed the decisions of the Ninth Circuit in Ernst & Young LLP v. Morris and the Seventh Circuit in Epic Systems Corp. v. Lewis, while affirming the judgment of the Fifth Circuit in NLRB v. Murphy Oil USA, Inc.

The Supreme 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.”

a. The FAA Saving Clause

In its analysis, the Supreme Court examined the FAA 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.” This recognizes only “generally applicable contract defenses, such as fraud, duress or unconscionability. It does not permit defenses targeting arbitration either by name or by more subtle methods, such as by interfering with “fundamental attributes of arbitration.” The court determined that by challenging the agreements because they require individualized arbitration instead of class or collective proceedings, “the employees seek to interfere with one of these fundamental attributes.”

b. The NLRA Does Not Bar Class Action Waivers

Likewise, the Supreme Court rejected the employees’ NLRA claims. They asked the court to infer that class and collective actions are “concerted activities” protected by Section 7 of the NLRA, which guarantees employees “the right to self-organization, to form, join, or assist labor organizations, to bargain collectively …, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” Finding that Section 7 focuses on the right to organize unions and bargain collectively, the court observed that it does not mention class or collective action procedures or even hint at a clear and manifest wish to displace the FAA.

Here, the Supreme Court found it possible to give effect to both federal laws in issue, the FAA and the NLRA. It concluded that the NLRA does not prevent the use of class action waivers that restrict employees to arbitrating disputes in their individual capacity rather than in a class or collective proceeding.

2. The Ninth Circuit’s Decision In Morris

The Court gave close attention to the Ninth Circuit decision in Ernst & Young LLP v. Morris, 834 F.3d 975 (2016), where a junior accountant, Stephen Morris, entered into an agreement providing that the employer and Morris would arbitrate any disputes that might arise between them. The agreement specified individualized arbitration, with claims “pertaining to different employees to be heard in separate proceedings.” After his employment ended, and despite having agreed to arbitrate claims against the firm, Morris sued Ernst & Young in federal court. He alleged that the firm had misclassified its junior accountants as professional employees and violated the FLSA and California law by paying them salaries without overtime pay. Although the arbitration agreement provided for individualized proceedings, Morris sought to litigate the federal claims on behalf of a nationwide class under the FLSA’s collective action provision, 29 U.S.C. § 216(b). He also sought to pursue the state law claim as a class action under Federal Rule of Civil Procedure 23.

Ernst & Young replied with a motion to compel arbitration. The district court granted the request, but the Ninth Circuit reversed this judgment. The Ninth Circuit recognized that the FAA generally requires courts to enforce arbitration agreements as written, but reasoned that the statute’s “saving clause,” 9 U.S.C. § 2, removes this obligation, if an arbitration agreement violates some other federal law. It then concluded that an agreement requiring individualized arbitration proceedings violates the NLRA (29 U.S.C. § 157) by barring employees from engaging in the “concerted activity” of pursuing claims as a class or collective action.

3. The Supreme Court Disagreed With The Ninth Circuit

In expressing disagreement with the Ninth Circuit, the Supreme Court determined that the saving clause in the FAA did not support the claim that the agreement for individualized arbitration violated the NLRA. In the course of announcing its conclusion the Supreme Court issued several important reminders to lower courts regarding the value of arbitration, which it viewed as a means of resolving employment disputes in a convenient, efficient and fair way. For example, the Supreme Court reiterated:

(a) The NLRA does not guarantee class or collective action procedures in disputes before judges or arbitrators.

(b) Arbitrations offer “the promise of quicker, more informal, and often cheaper resolutions for everyone involved.”

(c) Congress directed courts to abandon their hostility and instead treat arbitration agreements as “valid, irrevocable, and enforceable.”

(d) There is an unmistakably “clear congressional purpose that the arbitration procedure, when selected by the parties to a contract, be speedy and not subject to delay and obstruction in the courts.”

(e) Congress directed the courts “to respect and enforce the parties’ chosen arbitration procedures,” e.g., § 3 provides for a stay of litigation pending arbitration “in accordance with the terms of the agreement.”

(f) The FAA’s “saving clause recognizes only defenses that apply to “any” contract and establishes a sort of “equal-treatment” rule for arbitration contracts, permitting agreements to arbitrate to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability, but offering 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.” It does not save defenses that target arbitration either by name or by more subtle methods, such as by interfering with “fundamental attributes” of arbitration. The Supreme Court noted that the employees’ argument stumbled because they did not suggest their arbitration agreements were extracted by an act of fraud or duress or in some unconscionable way that would render any contract unenforceable. Instead, they objected to their agreements precisely because they require individualized arbitration proceedings instead of class or collective ones. And by attacking (only) the individualized nature of the arbitration proceedings, the employees’ argument seeks to interfere with one of arbitration’s fundamental attributes.

(g) Allowing any party in arbitration to demand class-wide proceedings despite the traditionally individualized and informal nature of arbitration would sacrifice the principal advantage of arbitration – it’s informality – and make the process slower, more costly, and more likely to generate procedural morass than fiscal judgment. Based on the Supreme Court’s earlier decisions and Epic Systems, courts may not allow a contract defense to reshape traditional individualized arbitration by mandating class-wide arbitration procedures without the parties’ consent.

4. Does Arbitration Make Sense?

In evaluating the Epic Systems decision, it is important that employers consider the pros and cons of arbitration agreements generally and then separately analyze the issues associated with class action waivers. For example, some of the potential cons often associated with arbitration agreements include the inability to appeal unfavorable decisions, the need for the employer to incur the costs of the arbitrator, the inability to effectively prevent PAGA claims from being pursued despite a class and collective action waiver, and the strategy of some plaintiff lawyers to seek to leverage the costs of multiple arbitrations against the employer. And, while it can be argued that arbitration is faster and less expensive than litigation in court, that is not always true.

It appears that the interest in utilizing arbitration agreements will increase as a result of the clear path created by Epic Systems. Yet, if history suggests anything, it can be predicted that while the proponents of arbitration will tout the advantages of the arbitration forum, opponents of arbitration will decry that it undercuts the right to a jury trial. These opponents will continue to mount attacks against arbitration agreements in court and in the legislatures. Each side has its own messaging, but it is now clear that the U.S. Supreme Court and many other courts have recognized that arbitration can benefit employees and employers by providing a fair, efficient, relatively quick and less expensive means of resolving many workplace disputes.

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