Employers With Arbitration Clauses Win – Part One: The U.S. Supreme Court Embraces Arbitration Agreements with Class Action Waivers

Katherine M. Flett

By Katherine M. Flett

arbitrationThe U.S. Supreme Court upheld the legality of class action waivers in employee arbitration agreements by issuing a 5-4 decision in Epic Systems Corporation v. Lewis on March 21, 2018.

In short, employers can require employees to arbitrate claims on an individual basis. This much-anticipated decision allows employers to use arbitration agreements as a tool to avoid costly class action claims with more certainty that they will be enforced by the courts.

Brief History of Arbitration Clauses and Class Action Waivers in the Employment Context

The Federal Arbitration Act (“FAA”) was enacted in 1925 in response to hostility toward arbitration agreements. The FAA provides that a written agreement to submit a controversy arising out of the agreement to arbitration is to be enforced unless “grounds exist at law or in equity for the revocation of any contract.” Since the enactment of the FAA, the Supreme Court has consistently recognized the establishment of a federal policy supporting arbitration agreements.

However, in 2012, the National Labor Relations (“NLRB”) found in D.R. Horton, Inc., that mandatory arbitration agreements with class action waivers were violative of employees’ rights under Section 7 of the National Labor Relations Act (“NLRA”), which guarantees employees the right to self-organize, bargain collectively, and “engage in activities for the purpose of collective bargaining or other mutual aid or protection.” Following the NLRB’s decision, a split among the circuits developed. While the Second, Fifth and Eighth Circuits rejected the NLRB’s reasoning in D.R. Horton, the Seventh and Ninth Circuits sided with the NLRB and refused to enforce employee arbitration agreements with class action waivers.

Epic Systems Corporation v. Lewis

On May 21, 2018, the Supreme Court resolved the circuit split and upheld the use of class action waivers in arbitration agreements in Epic Systems Corp. v. Lewis.  Epic Systems, which was decided along with two sister cases, involved employees seeking class action litigation despite having employment contracts with provisions that required individualized arbitration proceedings. The following are the three key arguments by employees and the Court’s decisions:

Argument #1: 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,” applied because the NLRA rendered class action waivers illegal in D.R. Horton.

Decision: The majority decision, written by Justice Gorsuch, stated that the savings clause was inapplicable because it only permits arbitration agreements to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability, none of which were raised by the employees in these cases. Instead, the employees protested the nature of the individualized arbitration proceedings. The Court concluded that this was simply an objection to a fundamental attribute of arbitration which is not subject to challenge under the savings clause.

Argument #2: The NLRA’s Section 7 right to engage in concerted activity should override the FAA.

Decision: The Court recognized that the FAA established “a liberal federal policy favoring arbitration agreements,” and noted that it was not until 2012, almost eighty years after the FAA came to be, that the NLRB began to argue that the NRLA’s right to concerted action trumped the FAA and prevented arbitration clauses that limit class action claims. The Court’s majority read the NLRA’s “concerted activities” provision as giving employees the right to unionize and bargain collectively, but not to avoid the FAA or ignore arbitration clauses.

Argument #3: Under the Chevron doctrine, the Court owed deference to the NLRB’s most recent interpretation of the law in D.R. Horton as displacing the FAA.

Decision: The Court held that, while the Chevron doctrine allows for deference to an agency’s interpretation of a statute which the agency administers, the NLRB was not merely seeking deference as to its interpretation of the NLRA. Rather, the NLRB was seeking to impose its interpretation of the NLRA in a way that attempted to limit the FAA, a separate federal statute that the NLRB does not administer. Therefore, the Court held that deference to the NLRB’s interpretation of the broad scope of the NLRA as overriding the FAA was not required under Chevron.

As such, the Court resolved the circuit split and agreed with the Second, Fifth, and Eighth Circuits, holding that the NLRA does not prohibit the use of class action waivers in arbitration agreements within the employment context.

The Dissent

The Court recognized that the law might not be good policy, but its job was to interpret the laws. “You might wonder if the balance Congress struck in 1925 between arbitration and litigation should be revisited in light of more contemporary arguments. You might even ask if the [FAA] was good policy when enacted. But all the same, you might find it difficult to see how to avoid the statute’s application.”

The dissenting opinion, written by Justice Ginsburg, criticizes the majority opinion as undermining the NLRA, which was designed to give employees an equal place at the table when setting the terms and conditions of employment.

The dissent points out that arbitration clauses with class action waivers may have a chilling effect on employment claims because a single employee may be “disarmed in dealing with an employer.” The dissent further protests that the majority decision ignores “the destructive consequences of diminishing the right of employees to band together in confronting an employer” and points out the possibility of inconsistent outcomes of individual arbitrations.

What Does Epic Systems Mean for Employers?

The Epic Systems decision will have significant implications for large employers in that it provides employers an instrument to limit expensive and prolonged class action litigation. The ability to prevent high dollar collaborative actions bears a great deal of appeal. However, employers still need to ensure that their arbitration agreements are well-written and satisfy the FAA, as well as any other state, local, or administrative laws that may apply.

For smaller employers, it is not so clear. While arbitration programs are generally good for large employers, they may increase the cost for smaller employers without providing the necessary benefits.

Employers who do not use arbitration clauses, or who use them but who otherwise have not considered whether they should include class waivers in their arbitration agreements, are encouraged to contact one of Danna McKitrick’s experienced employment lawyers in light of the Epic Systems decision.

Click here to read Employers With Arbitration Clauses Win – Part Two: Factors Employers Should Consider When Determining Whether to Incorporate an Employee Arbitration Program by Ruth A. Binger which outlines factors employers should consider when determining whether to incorporate an arbitration program.

Click here to read the Epic Systems Corporation v. Lewis decision

Posted by Attorney Katherine M. Flett. Flett is a member of the litigation team focusing on assisting clients with matters relating to business, civil and commercial litigation.

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