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SCOTUS Upholds Use of Class Action Waivers In Arbitration Agreements

The United States Supreme Court yesterday issued its much-anticipated ruling in Epic Systems Corp. v. Lewis. The 5–4 decision held that the Federal Arbitration Act protects and enforces arbitration agreements that require individualized proceedings, notwithstanding the National Labor Relations Act’s protection for employee “concerted activity.” Justice Gorsuch delivered the majority opinion, and Justice Ginsburg dissented (joined by Justices Breyer, Sotomayor, and Kagan).

Epic Systems involved three consolidated cases, two of which arose from district court orders compelling arbitration and one of which arose from an unfair labor practice charge before the National Labor Relations Board. In all three, employees signed arbitration agreements that required individualized arbitration to resolve employment disputes. The employees later sued under the Fair Labor Standards Act and state wage-hour law, alleging class and collective actions on behalf of themselves and other similarly situated employees. The employers moved to compel individualized arbitration, arguing that the FAA requires courts to enforce arbitration agreements as written, and in one case the employees separately filed a charge with the NLRB. The employees countered that the agreements were unlawful because the class-action waiver violated their NLRA-protected right to join together in concerted activity. The FAA’s savings clause, they argued, 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 Majority Enforced The Class-Action Waiver

The majority held that arbitration agreements must be enforced according to their terms, including the class-action waiver. First, the Court rejected reliance on the FAA’s savings clause, which preserves generally applicable defenses to contract formation. That clause covers defenses like fraud, duress, or unconscionability, not “defenses that target arbitration either by name or by more subtle methods, such as ‘interfer[ing] with the fundamental attributes of arbitration.’” Here, the employees did not assert a generally applicable contract defense; they objected only to the agreements’ requirement that they proceed on an individualized basis. “[B]y attacking (only) the individualized nature of the arbitration proceedings, the employees’ argument [would] interfere with one of arbitration’s fundamental attributes,” the majority explained. Mandating classwide arbitration procedures without the parties’ consent would toss aside “the virtues Congress originally saw in arbitration,” including “speed and simplicity and inexpensiveness”; “arbitration would wind up looking like the litigation it was meant to displace.”

Second, the Court held that the NLRA, which entitles workers to engage in concerted activity for the purpose of collective bargaining or other mutual aid or protection, does not override the FAA. The NLRA was enacted several years after the FAA, but the Court explained “repeals by implication [of earlier-enacted statutes] are ‘disfavored.’” The NLRA “does not express approval or disapproval or arbitration. It does not mention class or collective action procedures. It 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 “concerted activities” protected by Section 7 of the NLRA are those that workers and labor unions “just do”—such as organizing, bargaining, and the like—rather than “highly regulated, courtroom-bound ‘activities’ of class and joint litigation.” Section 7’s catchall term—“other concerted activities for the purpose of . . . other mutual aid or protection”—covers only similar activities that fall within the ambit of traditional labor law, and class litigation is far afield from those.

The majority was dismissive of plaintiffs’ arguments that the NLRA controlled. Plaintiffs’ position is “that one statute (the NLRA) steps in to dictate the procedures for claims under a different statute (the FLSA), and thereby overrides the commands of yet a third statute (the Arbitration Act). It’s a sort of interpretive triple bank shot, and just stating the theory is enough to raise a judicial eyebrow.” Worse still, the majority continued, “the employees’ theory runs afoul of the usual rule that 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.’” The majority found it implausible “that Congress would have tucked into the mousehole of Section 7’s catchall term an elephant that tramples the work done by . . . other laws.”

“Telling[ly],” the majority reasoned, “when Congress wants to mandate particular dispute resolution procedures it knows exactly how to do so,” including expressly overriding the FAA’s applicability to particular claims when it sees fit to do that. But nothing in the NLRA does what Congress has done in these other statutes. As a result, the majority saw “no conflict at all” between the FAA and the NLRA.

Third, the Court declined to defer to the NLRB’s holding in D.R. Horton, Inc., 357 N.L.R.B. 2277 (2012), that the NLRA prohibits individualized arbitration agreements. Here the NLRB sought not only to interpret the NLRA, but also the FAA. The NLRB has no power to interpret, let alone administer, the FAA. Deference was particularly unwarranted here, the Court explained, because the NLRB espoused one view on the question presented, while the United States Justice Department took the opposing view. “[I]t becomes a garble when the Executive [Branch] speaks from both sides of its mouth, articulating no single position . . . .”

In sum, the majority thought that “[t]he policy may be debatable but the law is clear.” In the FAA, “Congress has instructed that arbitration agreements . . . must be enforced as written.”

The Dissenters, Citing Policy Considerations, Would Have Invalidated The Class Waiver

The four dissenters for policy reasons would have treated class and collective actions as “rights” within the Section 7’s protections. Congress, they argued, enacted the NLRA to address historical power imbalances in the workplace and protect an employee’s right to act in concert using existing, generally available procedures. Without class and collective actions, substantive rights would go unenforced. According to the dissenters, employers commit an unfair labor practice by conditioning employment on a class arbitration waiver; such agreements therefore are unenforceable under the FAA’s savings clause.

What The Future Holds

Employers who have not yet adopted predispute arbitration agreements should consider doing so now. A well-drawn agreement will expressly require individualized dispute resolution and bar class and collective actions.

Older and short-form arbitration agreements sometimes are silent on the issue of whether class and collective cases are permitted. The Supreme Court has agreed to decide that issue next year, in Lamps Plus, Inc. v. Varela, No. 17-988. In that case the Court of Appeals for the Ninth Circuit, in an unpublished 2–1 per curiam decision, construed an arbitration agreement silent on the issue of class actions to allow them. Epic Systems may have tipped the Court’s hand about how that case will be resolved. Epic Systems described “individualized arbitration proceedings” as “one of arbitration’s fundamental attributes.” The Court rejected a rule that would “effectively permit[] any party in arbitration to demand classwide proceedings”; such a rule would violate “the traditionally individualized and informal nature of arbitration,” and “generate procedural morass.” “[C]ourts may not . . . reshape traditional individualized arbitration by mandating classwide arbitration procedures without the parties’ consent,” the Court explained. Lamps Plus therefore seems likely to supply a default rule of construction in which short-form agreements silent on the issue of class actions must be construed to forbid them.

Broad legislative proposals to overrule the Supreme Court’s recent pro-arbitration cases regularly are made at all levels of government, and surely will continue. None, however, has progressed significantly in Congress to date, except in some limited instances to preclude predispute arbitration agreements for certain claims, for example Sarbanes-Oxley Act whistleblower claims. In the meantime, state legislatures increasingly are considering, and some have enacted, bills purporting to restrict or forbid the use of predispute arbitration agreements. Those state laws will face immediate judicial attack. Arbitration proponents will contend that the FAA’s preemptive force deprives states of authority to declare unenforceable, arbitration contracts that federal law protects.

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