In an Epic Decision for Employers, the Supreme Court Holds that Class Action Waivers in Employment Arbitration Agreements are Enforceable

In an Epic Decision for Employers, the Supreme Court Holds that Class Action Waivers in Employment Arbitration Agreements are Enforceable

The Supreme Court of the United States recently ruled in favor of employers in upholding class action waivers contained in arbitration agreements. In Epic Systems v. Lewis, the Supreme Court held that employers can require employees to arbitrate disputes with the employer individually and waive their right to pursue or participate in class or collective actions against their employer.

At issue in Epic Systems was whether the Federal Arbitration Act’s (“FAA”) mandate to enforce arbitration agreements according to their terms was displaced by Section 7 of the National Labor Relations Act (“NLRA”), which grants employees “the right … to engage in other concerted activities for … mutual aid or protection.” In other words, whether the NLRA’s protection of “other concerted activities” created a substantive right to pursue group legal action that invalidated the agreement.

The FAA was originally enacted in 1925 with the general intent to “reverse the longstanding judicial hostility to arbitration agreements” and to place private arbitration agreements “upon the same footing as other contracts.” (Gilmer v. Interstate/Johnson Lane Corp. (1991) 500 U.S. 20, 24.) The FAA manifests “a liberal federal policy favoring arbitration agreements.” (Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp. (1983) 460 U.S. 1, 24.) It further requires that “questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration.” (Id.)

The Court’s opinion resolved three cases that were argued together—Epic Systems Corp v. Lewis; Ernst & Young LLP v. Morris; and National Labor Relations Board v. Murphy Oil USA. Each of the cases involved an employer and employee entered into a contract providing for individual arbitration to resolve employment disputes between the parties. In each case, however, the employee sought to litigate the Fair Labor Standards Act and related state law claims through class or collective actions in federal court. In D. R. Horton, Inc., 357 N. L. R. B. 2277, the National Labor Relation Board (NLRB) took the position that class waivers in arbitration agreements violate employees’ rights to “engage in concerted action for mutual aid or protection.”

The employees argued that the “saving clause” of the FAA, 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,” precludes enforcement of class waivers because the NLRA protects their right to act collectively. The employers countered that the Federal Arbitration Act protects agreements requiring arbitration from judicial interference and that neither the saving clause nor the NLRA demands a different conclusion.

The Seventh Circuit in Lewis and the Ninth Circuit in Morris agreed with the NLRB and the individual employees; the Fifth Circuit rejected the NLRB’s position in Murphy Oil. Ruling 5-4 in favor of the employers, the Supreme Court rejected the position of the NLRB, requiring employees who have signed arbitration agreements with their employers containing class action waivers to take their disputes to an arbitrator individually rather than as part of a class or collective action.  The majority opinion, authored by Justice Neil M. Gorsuch, was joined by Chief Justice John G. Roberts Jr. and Justices Anthony M. Kennedy, Clarence Thomas and Samuel A. Alito Jr.

The majority held that the general residual phrase “other concerted activities” did not displace the FAA and did not guarantee employees the right to pursue group legal action against their employer in court or in arbitration. Instead, this phrase guaranteed employees the right to join together in the workplace to address working conditions among themselves and with their employer.

The Court’s opinion notably discussed Congress’ ability to pass new legislation to reach a different result.  In her dissent, Justice Ruth Bader Ginsburg urged Congress to address the matter. Even if Congress does not act, the Court’s rejection of the NLRA-based challenge does not mean that class action waivers will now be enforced uniformly. The Court acknowledged the FAA’s statutory exception, which permits arbitration agreements to be invalidated “upon such grounds as exist at law or in equity for the revocation of any contract.” While that exception was inapplicable in the present case, general state-law contract doctrines such as unconscionability, will continue to be debated in disputes over arbitration agreements.

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