SCOTUS: Arbitration Agreements with Class Action Waivers Must Be Enforced as Written, and NLRA Does Not Command Otherwise | Practical Law

SCOTUS: Arbitration Agreements with Class Action Waivers Must Be Enforced as Written, and NLRA Does Not Command Otherwise | Practical Law

In Epic Systems Corp. v. Lewis, the US Supreme Court held that arbitration agreements with class and collective action waivers are not prohibited under Section 7 of the National Labor Relations Act (NLRA) and must be enforced as written under the Federal Arbitration Act (FAA).

SCOTUS: Arbitration Agreements with Class Action Waivers Must Be Enforced as Written, and NLRA Does Not Command Otherwise

by Practical Law Labor & Employment
In Epic Systems Corp. v. Lewis, the US Supreme Court held that arbitration agreements with class and collective action waivers are not prohibited under Section 7 of the National Labor Relations Act (NLRA) and must be enforced as written under the Federal Arbitration Act (FAA).
On May 21, 2018, in Epic Systems Corp. v. Lewis, the US Supreme Court held that the Federal Arbitration Act's (FAA) saving clause does not provide a basis for refusing to enforce arbitration agreements with class or collective action waivers, and that Section 7 of the NLRA does not reflect Congressional intent to displace the FAA or confer a right to class or collective actions ( (U.S. May 21, 2018)).

Background

In Lewis v. Epic Systems Corp., an employee brought a putative collective and class action against an employer, alleging that the employer violated the FLSA and Wisconsin law by misclassifying him and his fellow employees and therefore depriving them of overtime pay. The district court denied the employer's motion to dismiss and to compel individual arbitration. The employer appealed. The Seventh Circuit affirmed (823 F.3d 1147 (7th Cir. 2016); see Legal Update, Seventh Circuit Pans Arbitration Pact with Class Action Waivers Based on NLRA, Creates Circuit Split).
In Morris v. Ernst & Young, LLP, employees brought a similar putative collective and class action against an employer under the FLSA and California law. The district court granted the employer's motion to compel individual arbitration and dismissed the case. On appeal, the Ninth Circuit reversed and remanded (834 F.3d 975 (9th Cir. 2016); see Legal Update, Ninth Circuit Holds that Mandatory Arbitration Agreements with Class Action Waivers Violate NLRA, Advances Circuit Split).
In Murphy Oil USA, Inc. v. NLRB, an employer filed a petition for review of order of the Board, finding that the employer had unlawfully required employees to sign arbitration agreements waiving their right to pursue class and collective actions. The Fifth Circuit granted in part and denied in part the petition (808 F.3d 1013 (5th Cir. 2015); see Legal Update, Fifth Circuit Continues to Reject NLRB's Analysis of Mandatory Arbitration Agreements; NLRB Shows No Sign of Acquiescing).
In each of these three cases, although they had entered into arbitration agreements with their employers, the employees sought to litigate FLSA and related state law claims through class or collective actions in federal court, arguing that:
  • The "saving clause" of the FAA removes the obligation to enforce arbitration agreements as written if an arbitration agreement violates some other federal law.
  • By requiring individualized proceedings, their arbitration agreements violated the NLRA.
The employers responded that:
  • The FAA protects agreements requiring arbitration from judicial interference.
  • Neither the saving clause of the FAA nor the NLRA demands a different conclusion.
The US Supreme Court granted certiorari in each case.

Outcome

In the majority opinion delivered by Justice Gorsuch, the Supreme Court, affirmed in part, reversed in part, and remanded in part holding that:
  • The FAA's saving clause does not provide a basis for refusal to enforce arbitration agreements waiving collective action procedures for claims under the FLSA.
  • Section 7 of the NLRA does not reflect an intent of Congress to displace the FAA and outlaw class and collective action waivers.
  • The NLRB's conclusion is not entitled to Chevron deference (Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984)).
The Supreme Court noted that:
  • The FAA's 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" (9 U.S.C. § 2).
  • However, the savings clause recognizes only "generally applicable contract defenses, such as fraud, duress, or unconscionability," not defenses targeting arbitration either by name or by more subtle methods, such as by "interfer[ing] with fundamental attributes of arbitration" (AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339-44 (2011)).
The Supreme Court found that:
  • Arbitration agreements providing for individualized proceedings must be enforced, and neither the FAA's saving clause nor the NLRA suggest otherwise.
  • The NLRA does not override the FAA's requirement to enforce arbitration agreements because class and collective actions are not "concerted activities" protected by Section 7 of the NLRA.
  • Section 7 focuses on the right to organize unions and bargain collectively and does not mention class or collective action procedures or displacement of the FAA. Further, it is unlikely that Congress wished to confer a right to class or collective actions in Section 7, since these were unknown when the NLRA was adopted.
  • Section 7 establishes a detailed regulatory regime applicable to each of the "concerted activities" on its list, but it does not do the same for class or collective actions in court or arbitration. Further, in for example 29 U.S.C. §§ 216(b), Congress provides exactly how to specify certain dispute resolution procedures or how to override the Arbitration Act (15 U.S.C. § 1226(a)(2)). However, Congress has done nothing like that in the NLRA.
  • The employees' underlying causes of action arise under the FLSA, which permits collective action. However, the employees do not suggest that the FLSA displaces the FAA, most likely because the court has already held in Gilmer v. Interstate/Johnson Lane Corp. that an identical collective action scheme does not prohibit individualized arbitration proceedings (500 U.S. 20, 32 (1991)).
  • Precedent confirms the court's holding. The court has rejected many efforts to manufacture conflicts between the FAA and other federal statutes (see, for example American Express Co. v. Italian Colors Restaurant (570 U.S. 228 (2013); Legal Update, Supreme Court Approves Contractual Waiver of Class Arbitration).
  • Section 7 precedent has generally involved efforts related to organizing and collective bargaining in the workplace, not the treatment of class or collective action procedures in court or arbitration (see, for example, NLRB v. Washington Aluminum Co., (370 U.S. 9 (1962)).
Justice Thomas filed a concurring opinion. Justice Ginsburg filed a dissenting opinion, in which Justices Breyer, Sotomayor, and Kagan joined.

Practical Implications

Until this decision, employers faced uncertainty regarding the enforceability of class action waivers in arbitration agreements (and risked an ULP finding even just by maintaining an agreement like this). The Supreme Court's decision resolves the split of authority among various circuits and the NLRB. For its part, the NLRB has issued a news release stating that it "respects the Court's decision" and "is committed to expeditiously resolving," in accordance with the Supreme Court's decision, the 55 pending cases it has with allegations that employers violated the NLRA by maintaining or enforcing arbitration agreements with class and collective action waivers.
For additional information and practical implications, see Article, Expert Q&A on Class Action Waivers in the Employment Context.