High Court Upholds Class Action Waivers in Arbitration Agreements
On May 21, 2018, the United States Supreme Court issued its long-awaited decision upholding class action waivers in employment arbitration agreements governed by the Federal Arbitration Act (“FAA”). The Court held that the National Labor Relations Act (“NLRA”), which guarantees employees the right to engage in union organizing and collective bargaining as well as other “collective activity,” does not give employees the right to file class claims in arbitration when an arbitration agreement expressly forbids it. The Court accordingly held that the right to engage in such activity under the NLRA was not a ground for invalidating an arbitration agreement under the FAA. (Epic Systems Corp. v. Lewis, No. 16-285).
The importance of this decision to employers doing business in California as well as nationally cannot be understated. Employers may now confidently implement an employment arbitration agreement containing a class action waiver as a means of converting primarily wage and hour class actions to individual claims. This is achieved by the “class action waiver” itself, which usually provides parties will not “join or consolidate claims submitted for arbitration with those of any other persons,” and that “no form of class, collective, or representative action shall be maintained without the mutual consent of the parties.” For those employers that have already adopted such waivers, the decision provides a welcome respite from the attacks on such agreements that have been made in recent years, and greater assurance that such waivers will be enforced in pending and future cases.
The case arose out of three separate proceedings that resulted in separate decisions by three different federal courts of appeal: Epic Systems Corp. v. Lewis (7th Circuit), Ernst and Young LLP v. Morris (9th Circuit), and NLRB v. Murphy Oil USA, Inc. (5th Circuit). In each of them, the appellate courts evaluated the legality of arbitration agreements containing clauses requiring that the claims of “different employees be heard in separate proceedings,” and that waived employees’ rights to “participate in or receive money or any other relief from any class, collective, or representative proceeding.” In the Epic Systems and Ernst & Young cases, the appellate courts held that employees retained the right to file collective actions under the federal Fair Labor Standards Act (“FLSA”) notwithstanding the FAA’s requirement that arbitration agreements be enforced “in accordance with their terms” (i.e., as individual proceedings.) In the Murphy Oil case, in which the National Labor Relations Board (“NLRB”) represented the employees’ position, the Fifth Circuit held that employees did not have such a right, thereby setting up the “conflict between the Circuit Courts” that gave the Supreme Court the authority to decide the issue.
In its opinion, the Supreme Court first reiterated the principal purpose of the FAA, which is to require a speedy procedure when selected by the parties without subjecting them to “delay and obstruction in the courts.” The Court relied on a long line of cases holding that the FAA “specifically directed the courts to respect and enforce the parties’ chosen arbitration procedures,” and to order arbitration in the manner that the parties provided. It further stated that when parties contract for arbitration under a certain set of rules, “the law seems to protect [the rules] absolutely.” In reviewing this legal framework, the Court cited to its 2011 decision in AT&T Mobility LLC v. Concepcion, which held that parties to a consumer arbitration agreement could be required to arbitrate on an individual basis as opposed to a class basis when that is what the agreement provides.
The overriding legal issue in Epic Systems was whether the right to file class actions fell within the FAA’s “savings clause,” which provides that an arbitration agreement can be invalidated on any ground “as exists at law or in equity for the revocation of any contract.“ The employees’ principal contention was that class waivers are unenforceable because they interfere with employees’ rights to engage in concerted activity protected by the NLRA, thereby establishing a basis which “exists at law” for the their invalidation. However, Justice Neil Gorsuch, who authored the Court’s opinion, concluded that this FAA “savings clause” language recognized only defenses that generally apply to “any” contract, such as fraud, duress or unconscionability, and that the defense founded on the right to engage in collective action under the NLRA did not meet that criteria. The Court reasoned that the agreements in issue could not be found unenforceable “just because they required bilateral (as opposed to class) arbitration,” and that the defense based on the alleged right to file class claims under the NLRA was not one that is “generally applicable to all contracts” and “impermissibly disfavors arbitration.”
The Court then reviewed the language of the NLRA the employees were relying upon, which in relevant part grants workers the right to self-organization, to form, join or assist labor organizations, . . . and to “engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The Court observed that this language, contained in Section 7 of the NLRA, “does not express approval or disapproval of arbitration,” and does not mention class or collective action procedures. Nor, wrote the Court, did it even hint at an intent to “displace the Arbitration Act,” which is required to preclude arbitration under the FAA.
Rather, the Court held that the catchall language at the end of Section 7, guaranteeing employees the right to engage in “other concerted activities for the purpose of collective bargaining or other mutual aid or protection,” must be read to include only conduct similar in nature to the subject that preceded it (consisting of “self-organization” and “forming or joining” labor unions), and that it therefore served to protect “only things employees do for themselves in the course of exercising their right to free association in the workplace” as opposed to “courtroom-bound activities of class or joint litigation.” The Court also noted that until the NLRB issued its landmark decision in the D.R. Horton case in 2012, no one even contended that Section 7 guaranteed employees the right to file class and collective actions. Borrowing a well-used phrase from past cases, the Court stated that Congress does not alter the fundamental details of a regulatory scheme (such as the NLRA) in vague terms or ancillary provisions, and does not “hide elephants in mouse holes.” It went on to state that it was “more than a little doubtful that Congress would have tucked into the mouse hole of Section 7’s catch-all term an elephant that “flattens the parties’ contracted-for dispute resolution procedures.”
Finally, the Court dismissed a companion challenge to the class action waivers based on the Norris LaGuardia Act, which outlaws “yellow dog” contracts prohibiting employees from joining labor unions or otherwise acting collectively to confront their employer. The Court declined to read into the law what it viewed as a novel right to class action procedures that the NLRB's own General Counsel had disclaimed as recently as 2010, thus citing shifts in NLRB policy over the years as undermining its position. Because the NLRA did not manifest a clear intention to displace the FAA, the Court found that the class action waivers were enforceable as written.
In dissent, Justice Ruth Bader Ginsburg and three other Justices chastised the majority for refusing to acknowledge the primary purpose of the NLRA and argued that one of its main protections would be gutted by the Court’s decision. They stated that the NLRB and federal courts have understood Section 7’s concerted activities clause to protect a myriad of ways in which employees may join together to advance their shared interests, and that gathering together for the purpose of engaging in litigation has been recognized as one of them. (Indeed, in a 2011 case brought by Tom Brady against the National Football League, one court stated that a “lawsuit brought by a group of employees in good faith to achieve more favorable terms and conditions of employment is “concerted activity” under Section 7 . . .,” Brady v. National Football League (8th Circuit)). Justice Ginsburg also stated in her dissent that the Court’s decision should not affect the right to bring “disparate impact” claims under Title VII and other statutes, while concluding that waivers of the right to seek class relief as to other legal claims constituted an “illegal promise.”
What This Mean for Employees
As noted above, the Court’s decision will predictably provide greater certainty to California employers that class action waivers in their employment arbitration agreements will be enforced. However, a couple of caveats are in order. First, at the present, such a waiver cannot affect a representative claim for civil penalties under the Private Attorney General Act (“PAGA”), because the Supreme Court of California has held that a PAGA claim is tantamount to a law enforcement action which cannot be affected by private agreements (Iskanian v. CLS Transp. Los Angeles, LLC). In addition, the Epic Systems decision only applies to agreements governed by the FAA, which requires that arbitration agreements “evidence a transaction in interstate commerce” in order for that statute to apply (although the FAA does not apply to workers who are “in the flow” of commerce such as truckers who cross state lines.) While the required showing for meeting this standard is normally minimal, employers should always ensure that some evidence of a relationship to interstate commerce — be it the interstate shipments handled by the employee, the persons or companies they deal with, or the like — be established so that a court can conclude that some linkage to interstate commerce applies. Some courts have refused to enforce class action waivers on the ground that this requirement was not met, thereby resulting in the parties’ agreement being governed by state law in which a more strict showing for the enforcement of class waivers is required.
Lastly, even with such pro-arbitration decisions as Epic Systems, employers must continue to consider whether mandatory arbitration of employment claims is right for them. An arbitration agreement must, in California, comply with standards of fairness under California law pursuant to the Armendariz ruling. Even if used in only a single-employee case, the arbitrator’s fees (which employers are required to pay for) can run well into the mid-five figure (or higher) range, and the absence of any meaningful right to appeal an adverse award can heighten the stakes of winning before the arbitrator. On the other hand, employers who favor arbitration value its speed and efficiency compared to judicial litigation, thus resulting in lower litigation costs in most cases, and (most importantly) the ability to have their disputes decided by a qualified trained neutral instead of by twelve jurors who have no training in or knowledge of the law, and who often end up serving as the result of the employee’s attorney’s use of “peremptory challenges” by which they can exclude anyone with managerial or business experience without even giving a reason. These factors require each employer to carefully consider the advantages and disadvantages of the arbitration process, so that they can determine whether it is suitable for their business.