by Janet Landry Smith
Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
Last month, the Supreme Court ruled by a 5-4 vote that arbitration agreements containing a waiver of class and collective proceedings are enforceable, settling an issue that has divided courts for the past six years. The decision represents a victory for employers who have arbitration agreements with these waivers, as it reduces their risk of having to litigate employment claims on class or collective bases.
The three cases at issue, Epic Systems, Morris, and Murphy Oil[1], which the Court consolidated, required the Court to interpret two federal statutes enacted nearly a century ago—the National Labor Relations Act (“NLRA”) and the Federal Arbitration Act (“FAA”). The FAA requires that courts enforce agreements to arbitrate, including the terms of arbitration the parties select, and the NLRA provides that employees shall have the right to “engage in concerted activities” for the purpose of their “mutual aid or protection.” But as Justice Gorsuch noted in the majority decision, it was only in 2012—for the first time in 77 years since the NLRA’s adoption—that the NLRB indicated the NLRA “effectively nullifies the” FAA in cases involving arbitration agreements containing a waiver of class or collective proceedings.
That case in 2012 was In re D.R. Horton, Inc., 357 NLRB No. 184 (2012) in which the NLRB ruled that employers cannot use class action waivers in arbitration agreements for those employees covered by the National Labor Relations Act (“NLRA.”) The Board ruled that such waivers limit an employee’s rights under the NLRA to engage in “concerted activities,” as described in the Act, to pursue their “mutual aid or protection,” and constitute an unfair labor practice under Section 8 of the NLRA. D.R. Horton and amici argued that this holding clashed with Supreme Court precedent under the Federal Arbitration Act (“FAA”), approving class action waivers. Specifically, the Supreme Court made clear in cases, such as AT&T Mobility LLC v. Concepcion that the purpose of the FAA is to ensure the enforcement of arbitration agreements “according to their terms.” (emphasis added).
The NLRB attempted to distinguish the prior cases, arguing that those cases did not involve the NLRA, and therefore were inapplicable. While most federal courts disagreed with the Board’s decision, others fell in line, creating a circuit split between the Seventh, Ninth, and Sixth Circuits on the side of the Board, and the Fifth, Second, and Eight Circuits coming out against the Board’s decision. Specifically, the Fifth Circuit refused to enforce the Board’s D.R. Horton decision, causing many lower federal courts to follow suit.
This division among circuits created great uncertainty for employers, as national and regional employers found their practices subject to conflicting precedent. For years, courts were split between decisions such as Murphy Oil, in which the Fifth Circuit again refused to enforce the Board’s decision on arbitration clauses prohibiting employees from banding together, and other decisions including Epic Systems and Morris, where the Seventh and Ninth Circuits, respectfully, upheld the Board’s findings.
To resolve this circuit split, the Supreme Court agreed to take up the matter, by consolidating appeals filed in Murphy Oil, Epic Systems, and Morris. In each case, the employer and employees had contracted for individualized arbitration proceedings to resolve employment disputes. Nonetheless, the party employees sought to litigate their wage claims through class or collective actions in federal court. The employers argued that, under the terms of the arbitration agreements, the employees needed to go to individual arbitrators. The employees, on the other hand, claimed that the FAA’s “savings clause” removed the Court’s obligation to enforce the arbitration agreement as written.
In Justice Gorsuch’s May 21, 2018 majority decision, joined by Chief Justice Roberts and Justices Kennedy, Thomas, and Alito, the Court noted that Congress enacted the FAA “in response to a perception that courts were unduly hostile to arbitration,” and “specifically directed them to respect and enforce the parties’ chosen arbitration procedures,” including to “use individualized rather than class or collective action procedures.”
Contrary to the employees’ claim that, even if the FAA requires enforcement of arbitration agreements like theirs, the NLRA overrides that guidance and renders their agreements unlawful, the Court found nothing indicating that Congress intended for the NLRA to displace the FAA’s enforcement requirement. Citing to a long line of cases that the FAA’s enforcement requirement can be displaced by another federal statute only with “clear and manifest” intention by Congress to do so, the Court held the NLRA contained not so much as a “hint at a wish to displace the Arbitration Act” let alone clear and manifest intent. There is no mention of arbitration or class or collective actions in the NLRA, and while Section 7 focuses on the right to organize unions and bargain collectively, the Court noted it provides for collaboration on workplace issues, rather than a right to class or collective procedures for dispute resolution.
The Court also entertained whether the FAA’s savings clause—allowing courts to refuse to enforce arbitration agreements ‘upon such grounds as exist at law or in equity for the revocation of any contract’—creates an exception on the basis that the NLRA renders class and collective action waivers illegal. However, Justice Gorsuch reasoned that the savings clause permits courts to invalidate agreements on the basis of state contract-law defenses of general applicability, and the challenge to a class waiver is not a defense of general applicability.
Based on the foregoing, the Court reversed the Seventh and Sixth Circuits’ judgments in Epic Systems and Morris, and remanded the two cases for further proceedings consistent with the Court’s opinion. The Court affirmed the Fifth Circuit’s judgment in Murphy Oil.
Writing for the Dissent, Justice Ginsberg called on Congress to address the matter. She was joined by Justices Breyer, Sotomayor, and Kagen, in calling the majority opinion “egregiously wrong.” Justice Thomas also filed a concurring opinion.
Despite this victory for arbitration agreements containing class action waivers, employers should note that arbitration agreements are still subject to challenge. For example, under the FAA savings clause, traditional contract defenses, such as unconscionability, may render class or collective waivers unenforceable. Employers should ensure their arbitration agreements and programs are carefully crafted to avoid issues on these grounds. The Supreme Court’s decision offers insights on how employers should draft arbitration agreements, and the validity of such agreements currently in place.
Janet Landry Smith represents employers in all areas of labor and employment law at the law firm Ogletree Deakins Nash Smoak & Stewart PLLC. She can be reached at janet.smith@ogletree.com
[1] Lewis v. Epic Systems Corporation, 823 F.3d 1147 (7th Cir. 2016); Morris v. Ernst & Young LLP, 834 F.3d 975 (9th Cir. 2016); Murphy Oil USA, Inc. v. N.L.R.B., 808 F.3d 1013 (5th Cir. 2015).