Employment Law Report

Scotus Has Spoken: Arbitration Contracts Barring Class Actions are Lawful

By R. Joseph Stennis, Jr.

In a narrow 5 – 4 ruling, the United States Supreme Court (“SCOTUS”) finally put to rest yesterday an antagonistic class action waiver issue that has been brewing in various federal circuit courts for the past six years. In  the opinion, (written by Trump Administration appointee Justice Neil Gorsuch), the Court upheld the use and enforceability of class action waiver language contained in employment arbitration agreements.   Relying heavily on the language contained in the Federal Arbitration Act (“FAA”), the Court reasoned that “Congress has instructed federal courts [by way of the FAA] to enforce arbitration agreements according to their terms – including terms providing for individualized proceedings.”  The Court rejected the notion that arbitration agreements violate the ‘concerted activities’ clause of the National Labor Relations Act (“NLRA”) by concluding, “[the NLRA] does not mention class or collective action procedures.  It does not even hint at a wish to displace the Arbitration Act.”

Background

Last year, SCOTUS agreed to decide whether arbitration agreements that prohibit employees from pursuing class and collective remedies are enforceable.  At the time the Court took this issue up, various Federal Circuits were divided on the issue.  To address the inconsistent rulings, SCOTUS granted certiorari in three cases: Epic Sys. Corp. v. Lewis from the Seventh Circuit; Ernst & Young LLP v. Morris, from the Ninth Circuit; and NLRB v. Murphy Oil, USA, from the Fifth Circuit.  The dispute pitted the Savings Clause from the FAA, 9 U.S.C. §2, (which allows invalidation of arbitration agreements only “upon such grounds as exist at law or in equity for the revocation of any contract”) against employees’ rights to engage in protected, concerted activity under the NLRA, 29 U.S.C. §157.

The National Labor Relations Board (“NLRB”) has previously argued that arbitration agreement provisions requiring employees to waive their rights to pursue class and/or collective actions violate an employees’ right to engage in protected, concerted activity under the NLRA. In May 2016, the Seventh Circuit agreed with the NLRB and concluded in Epic Sys. Corp. v. Lewis, 823 F.3d 1147 (7th Cir. 2016), that an arbitration agreement prohibiting collective action violates Section 7 of the NLRA and is unenforceable under the FAA.  Shortly thereafter in August of 2016, the Ninth Circuit concurred in Morris v. Ernst & Young U.S. LLP, 834 F.3d 975 (9th Cir. 2016). The Ninth Circuit concluded that employees’ substantive rights to pursue collective remedies under the NLRA cannot be waived in an arbitration agreement.  Conversely, in Murphy Oil USA, Inc. v. NLRB, 808 F.3d 1013 (5th Cir. 2015), the Fifth Circuit held that the FAA’s policy favoring arbitration trumps any rights employees have to engage in concerted activity under the NLRA, including pursuing class or collective actions against employers.  From  the Fifth Circuit’s perspective, the use of class or collective action procedures is not a substantive, but rather procedural, right.   The Second and Eighth Circuits agreed with the Fifth Circuit.

SCOTUS Ruling Key Highlights

In support of the Court’s majority analysis and conclusion that the FAA only allows for individual claims in arbitration, Judge Gorsuch concluded that if employees were given the opportunity to join together and assert claims collectively, “the virtues [that] Congress originally saw in arbitration, its speed and simplicity and inexpensiveness, would be shorn away and arbitration would wind up looking like the litigation it was meant to displace.” Also the Court was not persuaded by the argument that the Savings Clause of the FAA applies because the class action waivers language contained in the agreements  are ‘illegal’ pursuant to the NLRA and should therefore be revoked.  Relying in part on the 2011 SCOTUS case of AT&T Mobility LLC v. Concepcion, the Court concluded that the Savings Clause permits courts to invalidate such agreements on the basis of standard contract defenses such as fraud or duress but not on an argument that the agreements “require individualized arbitration proceedings instead of class or collective ones.”  Further, the Court concluded that interference with the individualized characteristic of an arbitration would be interference with “one of arbitration’s fundamental attributes.”

Also, the Court rejected the argument that class action waivers are invalid pursuant to Section 7 of the NLRA. On this issue, Judge Gorsuch wrote “Section 7 focuses on the right to organize unions and bargain collectively.  “It may permit unions to bargain to prohibit arbitration…But it does not express approval or disapproval of arbitration.  It does not mention class action or collective action procedures.  It does not even hint at a wish to displace the  [FAA]  – let alone accomplish that much clearly and manifestly, as our precedents demand.”  Thus, the Court reversed the judgments in Epic Systems and Ernst & Young and remanded the two cases for further proceedings consistent with the Court’s opinion.   The Court affirmed the judgment in Murphy Oil.

What are Employers to do next?

If you are an employer that utilizes arbitration agreements, now is an excellent time to review them to ensure that you are taking full advantage of the holding discussed in this SCOTUS ruling. If your organization is contemplating the use and implementation of arbitration agreements for the first time, our firm can assist in drafting such documents.   Arbitration can be an effective way to address employment disputes.  Now that SCOTUS has clarified that arbitration agreements can include class action waivers, it makes good business sense to review and revise your arbitration agreements.  If you need assistance with your arbitration or employment agreements, please contact us at Wyatt, Tarrant & Combs, LLP.  Our team can help your company obtain maximum benefit of this new decision.

R. Joseph Stennis, Jr.
R. Joseph “Joe” Stennis is a member of the Firm’s Litigation & Dispute Resolution Service Team.  Joe’s primary focus areas are business and employment litigation matters.  Joe represents public and private sector employers in all aspects of employment law, including matters involving wrongful termination, employment based torts, and employment discrimination under Title VII.  He routinely represents and counsels clients on employment related matters before the Equal Employment Opportunity Commission, Kentucky Commission on Human Rights, and in federal and state court. Joe also... Read More