The US Supreme Court issued a highly anticipated decision on May 21, 2018 in Epic Systems Corp. v. Lewis, holding that class action waivers in arbitration agreements are fully enforceable, notwithstanding the right to engage in concerted activity under the National Labor Relations Act (NLRA). With a 5-4 opinion authored by Justice Neil Gorsuch, an ideologically divided Supreme Court resolved a circuit court split in favor of class and collective action waivers, allowing employers to require workers to arbitrate claims on an individual rather than group basis. Although employers now have a tool to effectively eliminate most employment class actions through the use of arbitration agreements, several other important nuances remain to be considered before rolling out an arbitration program. But the Supreme Court’s decision is nevertheless a clear win for employers seeking to avoid the expense and disruption of class litigation. And the Court’s broad opinion lends support to the enforcement of employment arbitration agreements in other contexts, notwithstanding state laws that might otherwise impede arbitration.
How Did We Get Here? The Standoff Between The Federal Arbitration Act And The National Labor Relations Act
In 2011, the Supreme Court upheld class action waivers in the context of consumer arbitration agreements in AT&T Mobility v. Concepcion. The following year, however, the National Labor Relations Board (NLRB) took the opposite tack in its D.R. Horton decision, finding that class action waivers in the employment context improperly interfered with employees’ rights to engage in concerted activity under Section 7 of the NLRA. The D.R. Horton decision put in jeopardy employment arbitration agreements containing class action waivers, notwithstanding the strong Congressional preference for arbitration under the Federal Arbitration Act (FAA).
Following D.R. Horton, the Second, Fifth and Eighth Circuits issued opinions disagreeing with the NLRB’s reasoning, and holding that class action waivers are enforceable, while the Seventh and Ninth Circuits agreed with the NLRB and held that class actions waivers violate the NLRA by improperly interfering with employees’ rights to concerted action. In January 2017, the US Supreme Court granted petitions for certiorari in and consolidated three cases from the Fifth, Seventh and Ninth Circuits embodying this split: NLRB v. Murphy Oil USA, Epic Systems Corp. v. Lewis and Ernst & Young v. Morris. The Supreme Court heard oral argument in the consolidated appeal in October 2017.
The Supreme Court’s Decision In Epic Systems
In no uncertain terms, the just-issued Epic Systems decision makes clear that arbitration agreements may require employees to waive the right to assert class claims. The Court wrote that through the FAA, “Congress has instructed federal courts to enforce arbitration agreements according to their terms—including terms providing for individualized proceedings.” The Court also held that the FAA’s “savings clause,” which states that arbitration agreements are “enforceable save upon such grounds as exist at law or in equity for the revocation of any contract,” does not require a different result.
Because Congress did not express through the NLRA any intention to regulate whether arbitration may be conducted on an individual or group basis, the Court found the FAA’s savings clause inapplicable to the dispute. And while the Court recognized that class waivers in arbitration agreements may still be challenged under “generally applicable contract defenses, such as fraud, duress, or unconscionability,” such clauses may no longer be challenged on the basis that they require individual rather than group proceedings.
The Court also rejected the argument that the NLRA conflicts with the FAA and overrides its provisions: “[f]ar from conflicting, the Arbitration Act and the NLRA have long enjoyed separate spheres of influence and neither permits this Court to declare the parties’ agreements unlawful.” The Court observed that the NLRA is quiet on the issue of class proceedings and “does not express approval or disapproval of arbitration.” According to the majority, there is not even a “whisper” in the NLRA regarding class action standards or procedures. So, while the NLRA protects employees’ right to engage in “concerted activities,” the Court held that “concerted activities” does not mean the right to assert class and collective actions.
Not surprisingly, the four liberal justices dissented in an opinion written by Justice Ruth Bader Ginsburg. The dissent called the majority’s decision “egregiously wrong” and expressed concern that employees will now be disinclined to pursue small-value claims.
What Does The Court’s Decision Mean For Employers?
It is obviously good news for employers who already have arbitration agreements with class action waivers in place. Now, as long as such arbitration agreements are “fair,” they (and their class waivers) will be enforced. Conversely, arbitration agreements that are one-sided or that prevent claimants from vindicating their rights will still face challenges and judicial scrutiny on state law contract defense grounds. Companies therefore should not read the Supreme Court’s decision as carte blanche to ignore employee rights in drafting arbitration agreements.
Employers with arbitration agreements that are silent on the issue of class or collective arbitration should consider including class waivers in their agreements. Agreements that do not explicitly state that class or collective proceedings are impermissible face differing judicial interpretation, and may result in what many consider to be the worst of all worlds—class claims being litigated in arbitration.
California employers face additional decisions. Many arbitration agreements attempt to satisfy California law by allowing employees to “opt out” of arbitration as a way of making the agreements more “conscionable” or fair. These opt out provisions arise out of a line of California state court cases that held that forcing existing employees to arbitrate amounted to unfair coercion, for it is one thing to tell an applicant to agree to arbitration on a take it or leave it basis, but it is quite another to require an existing employee to find a new job if he or she does not want to agree to arbitration. After the Supreme Court’s decision in Epic Systems, employers in California may become more aggressive, choosing to make their arbitration agreements mandatory for all employees.
The decision also may impact representative actions under the California Private Attorneys General Act (PAGA). Although the decision did not address PAGA claims, the majority not only narrowly interpreted the FAA’s saving clause in Epic Systems, but also squarely rejected public policy arguments against arbitration:
Just as judicial antagonism toward arbitration before the Arbitration Act’s enactment “manifested itself in a great variety of devices and formulas declaring arbitration against public policy,” Concepcion teaches that we must be alert to new devices and formulas that would achieve much the same result today.
The California and Ninth Circuit opinions that have held that PAGA claims are not subject to mandatory arbitration on public policy grounds are therefore subject to reexamination following Epic Systems.
Companies that do not have arbitration programs should reevaluate now that the legal uncertainty as to class and collective action waivers is gone. Besides avoiding class claims, arbitration agreements significantly reduce the risk of “runaway” jury verdicts, often an employee plaintiff’s greatest source of leverage. Arbitration also provides a more confidential forum for the resolution of employment disputes (even though, and contrary to popular belief, arbitration is not naturally or entirely confidential). And arbitration is typically less burdensome on employers, in terms of discovery and litigation disruption.
For companies operating in California that are still reeling from the Dynamex decision, Epic Systems is welcome relief as using arbitration agreements with class waivers will be one important means to mitigate the impact of Dynamex.
But arbitration is not without its downsides. Employers typically pay most, if not all, of the fees and costs of arbitration, which can be significant. And some plaintiffs’ counsel pursue a “death by a thousand cuts” strategy of filing large numbers of individual arbitration cases to exert settlement pressure on companies. Arbitration proceedings also typically require a hearing, are less likely to be decided by a dispositive motion than court proceedings, and have limited appeal options. Moreover, at least for now, California employers should still assume that they will have to face PAGA representative actions even if they institute arbitration agreements with class waivers.
The Supreme Court’s Epic Systems decision is great news for employers seeking to implement and enforce arbitration agreements with class waivers. But there are still other considerations to weigh when deciding whether to use arbitration agreements. Just as the provisions of any arbitration agreement need to be given careful consideration, so does the decision to adopt one in the first place.