Supreme Court OKs Class Action Waiver Provisions in Arbitration Agreements Required by Employers

On Monday, the U.S. Supreme Court ruled 5-4 that it is legal for an employer to require its employees, as a condition of their continued employment, to agree to arbitrate claims against the company through one-on-one arbitrations, and thus to give up their right to pursue claims as a class. A copy of the decision can be found here.

Facts of the Consolidated Cases

The decision was a consolidation of three cases: Epic Systems Corp. v. Lewis, Ernst & Young LLP v. Morris, and National Labor Relations Board v. Murphy Oil USA, Inc. The majority opinion, penned by Justice Gorsuch and joined by the conservative members of the Court, details the facts of just one of the three cases in its opinion, but all three cases involved similar fact patterns. In each case, an employee who was subject to an agreement to individually arbitrate claims against his employer, brought claims in federal court alleging violations of the Fair Labor Standards Act (FLSA), and sought to bring those claims as a class action. The majority explains that Stephen Morris was a junior accountant at Ernst & Young who entered into an agreement providing that he and the company would arbitrate any disputes that might arise between them and specified that the arbitration must be “individualized,” with “claims pertaining to different [e]mployees [to] be heard in separate proceedings.” Slip Opinion, at 2. Morris then sued Ernst & Young in federal court on behalf of himself and all others similarly situated, alleging that the company had misclassified all of its junior accountants as professionally exempt from overtime provisions of the FLSA, the law that requires (among other things) all non-exempt workers to be paid time-and-a-half for all hours worked over forty in one week.

The dissenting opinion, written by Justice Ginsburg and joined by the liberal members of the Court, adds a few interesting details, speaking to the question of whether such agreements were genuinely bilateral. For example, both Epic Systems Corporation and Ernst & Young e-mailed their employees the arbitration agreements at issue and didn’t require the employees to agree with any affirmative act other than continuing to work for the companies. Specifically, Ernst & Young’s e-mail stated that the employees’ “continued employment would indicate their assent” to the agreement’s terms. Id. Remaining silent on these issues, the majority opinion provided tacit approval of the method by which these companies obtained their employees’ consent to the arbitration agreements.

The Court’s Reasoning

The reasoning behind the Court’s opinion involves the interplay of two federal laws: the Federal Arbitration Act (FAA), passed in 1925, which generally requires courts to enforce arbitration agreements as written, and the National Labor Relations Act (NLRA), which was passed in 1935 and secures to employees rights, which include the right to organize unions and bargain collectively.

The employees in each of the three cases argued that, even though the FAA generally requires courts to enforce arbitration agreements as written, the FAA contains a “saving clause,” which removes that requirement if an arbitration agreement violates some other federal law. Here, the employees argued, the contracts violate the NLRA, and thus should be unenforceable under the “saving clause” of the FAA. Specifically, the employees argued that class and collective actions qualify as “other concerted activities” protected by §7 of the NLRA. That section guarantees employees “the right to self-organization, to form, join, or assist labor organizations, to bargain collectively . . . , and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection,” 29 U. S. C. §157 (emphasis added). This was also the position of the National Labor Relations Board (NLRB).

The majority rejected that position for several reasons. First, it reasoned that the saving clause allows courts to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.” Slip Opinion, at 6 (emphasis added) (citing § 2 Federal Arbitration Act). The Supreme Court explained that the saving clause recognizes only generally applicable defenses that apply to “any” contract, like fraud or duress. Here, the Supreme Court held, the employees’ argument must be rejected because their cited grounds for revocation of the contracts at issue attack only the individualized nature of the arbitration agreements, which is not an attack that could be launched against any contract. Id., at 7. The dissent disagreed, arguing that the employees’ cited grounds for the revocation of these contracts is the contracts’ illegality, which, like fraud and duress, is a valid ground for the revocation of any contract. Slip Opinion, Dissent, at 24.

Next, the majority reasoned that when confronted with two Acts of Congress allegedly touching on the same topic, it was duty bound to read them in harmony if possible, rather than find conflict. Slip Opinion, at 10. Examining both statutes, the Court held that there was no “clear and manifest” intention for the NLRA to displace the FAA in the way the employees suggested. Id. The NLRA does not mention class or collective action procedures, and the Court declined to “manufacture” a conflict between the two statutes. Syllabus, at 3.

The Court further determined that the catchall term “other concerted activities for the purpose of . . . other mutual aid or protection,” which appears at the end of a detailed list of activities in Section 7 of the NLRA, should be understood to protect the same kinds of things as those listed directly before it. In other words, the protected activities were only things that employees “just do for themselves in the course of exercising their right to free association in the workplace, rather than the highly regulated, courtroom-bound activities of class and joint litigation.” Slip Opinion, at 12 (internal quotations omitted). In response, the dissent pointed out that it was “far from apparent why joining hands in litigation would not qualify as ‘things employees just do for themselves.’” Slip Opinion, Dissent, at 12.

While the Policy Is “Debatable” the Court Held That the Law Is “Clear”

The dissent noted that “[t]he inevitable result of today’s decision will be the underenforcement of federal and state statutes designed to advance the well-being of vulnerable workers” because class actions help overcome the problem that small-dollar-amount recoveries do not provide enough incentive for any one person to bring a solo action to protect his or her rights. Thus, the dissent argued that “[e]mployers, aware that employees will be disinclined to pursue small-value claims when confined to proceeding one-by-one, will no doubt perceive that the cost-benefit balance of underpaying workers tips heavily in favor of skirting legal obligations.” Slip Opinion, Dissent, at 28. The majority acknowledged these realities, but also noted that class actions can be abused, as it is “well known that [class action claims] can unfairly place pressure on the [employer-defendant] to settle even unmeritorious claims.” Slip Opinion, at 24 (internal quotations omitted). Justice Gorsuch summed up the majority’s opinion of these issues as follows: “As a matter of policy these questions are surely debatable. But as a matter of law the answer is clear.”

What to Do Now

There are pros and cons as to implementing mandatory arbitration agreements for employees. While these agreements, properly drafted, can avoid juries and expedite dispute resolution, they also offer less recourse for addressing discovery disputes and limited appeal rights. For those choosing to utilize such agreements, appropriate waiver language should be added and/or revised to prohibit class-wide arbitrations consistent with the Supreme Court’s opinion here.