LawFlash

Supreme Court Upholds Class Waivers in Employment Arbitration Agreements

May 22, 2018

In Epic Systems Corp. v. Lewis, the US Supreme Court ruled in a 5-4 decision on May 21 that arbitration agreements with class and collective action waivers required as a condition of employment are enforceable under the Federal Arbitration Act, and nothing in the National Labor Relations Act (NLRA) overrides that result. This decision resolves a circuit court split and addresses a key concern for employers that has lingered since the National Labor Relations Board decided in 2012 that the NLRA prohibited such waivers. The decision clears a potential obstacle to enforcement of arbitration agreements with class and collective action waivers, and provides employers with another opportunity to consider whether an arbitration program is right for their organization.

The Court Continues to Enforce Arbitration Agreements in Accordance with Their Terms

The Court’s opinion in Epic Systems Corp. v. Lewis—written by Justice Neil Gorsuch, with Chief Justice John Roberts and Justices Anthony Kennedy, Clarence Thomas, and Samuel Alito joining in full—started by reviewing the origins of the Federal Arbitration Act (FAA) and the strong federal policy favoring arbitration that requires courts to enforce arbitration agreements in accordance with their terms. The Court noted that the FAA “also specifically directed [courts] to respect and enforce the parties’ chosen arbitration procedures.”

The Court rejected challenges to the arbitration agreements with class and collective action waivers under the FAA’s “savings” 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.” The employees argued that the NLRA rendered these agreements “illegal,” and that such illegality was grounds for revocation of the arbitration agreements. The Court ruled, however, that the “savings clause recognizes only defenses that apply to ‘any’ contract,” such as “fraud, duress or unconscionability.” The Court held that the employees’ argument regarding illegality was not a defense to “any” contract, but one directed only to arbitration agreements, i.e., agreements that require individual arbitration instead of class or collective arbitrations. “And by attacking (only) the individualized nature of the arbitration proceedings, the employees’ argument seeks to interfere with one of arbitration’s fundamental attributes,” that is, “the traditionally individualized and informal nature of arbitration.”

The Court relied on the rationale in AT&T Mobility LLC v. Concepcion that a defense such as unconscionability, although a generally applicable contract defense, “failed to qualify for protection under the saving clause because it interfered with a fundamental attribute of arbitration all the same.” The Court extended that rationale of Concepcion to the illegality defense proffered by the employees. “Illegality, like unconscionability, may be a traditional, generally applicable contract defense in many cases, including arbitration cases. But an argument that a contract is unenforceable just because it requires bilateral arbitration is a different creature.” As such, the Court held that the FAA required the enforcement of arbitration agreements with class and collective action waivers required as a condition of employment.

The Court then addressed whether the NLRA overrides the FAA to invalidate such agreements, and concluded that it does not. The Court was guided by the principle that it must attempt to give effect to both statutes, and a party claiming that the statutes cannot be harmonized “bears the heavy burden of showing “‘a clearly expressed congressional intention’” that such a result should follow.” The Court held that NLRA “Section 7 focuses on the right to organize unions and bargain collectively,” but “it does not express approval or disapproval of arbitration,” “does not mention class or collective action procedures,” and “does not even hint at a wish to displace the Arbitration Act—let alone accomplish that much clearly and manifestly, as our precedents demand.”

The Court also refused to accord the National Labor Relations Board’s (NLRB’s) interpretation Chevron deference. Although no party requested that the Court reconsider Chevron deference, the Court identified several reasons not to accord such deference here, including that the NLRB had no authority to interpret the FAA, the Executive branch (the NLRB and Solicitor General) submitted briefs with conflicting interpretations of the NLRA, and the case could be resolved using traditional canons of statutory construction without resort to agency deference.

Justice Thomas authored a short concurring opinion to reiterate his view that the plain language of the FAA controls this result because the savings clause is limited to contract formation defenses, and the NLRA argument based on illegality does not pertain to such a defense.

Justice Ruth Bader Ginsburg dissented, joined by Justices Stephen Breyer, Sonia Sotomayor, and Elena Kagan, characterizing the majority opinion as “egregiously wrong,” and arguing that NLRA Section 7 protects the right to pursue collective litigation over wage and hours, and that employer-dictated class and collective action waivers are unlawful. Justice Ginsburg called for legislative action to reverse the Court’s decision: “Congressional correction of the Court’s elevation of the FAA over workers’ rights to act in concert is urgently in order.”

Practical Considerations

The decision in Epic Systems continues the Court’s strong commitment to enforcing arbitration agreements in accordance with their terms under the FAA. The Court’s opinion makes clear that such agreements may include class and collective action waivers and may be a condition of employment. The Court’s decision does not require that the agreement provide the option of an opt-out. The decision also permits an arbitration agreement that requires separate proceedings for each employee’s claims.

Further, the decision provides support for arguments that state law efforts to curtail arbitration are preempted by the FAA, because such efforts conflict with the arbitration agreement’s terms, do not apply to “any” contract, or interfere with a fundamental attribute of arbitration.

Please join Morgan Lewis on June 1, 2018, at 12:30 pm EDT, 9:30 am PDT, for a webinar that examines drafting, implementing, and enforcing arbitration agreements in the wake of Epic Systems. Register here.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Dallas
Allyson N. Ho

Los Angeles 
John S. Battenfeld

New York
Samuel S. Shaulson
Kenneth J. Turnbull 

Orange County 
Barbara J. Miller

Philadelphia 
Michael J. Puma

Princeton 
Thomas A. Linthorst
Richard G. Rosenblatt

Silicon Valley 
Melinda S. Riechert