U.S. Supreme Court Holds Employers May Require Individual Arbitration of Employment Disputes

Published by Jeffrey A. Mandell, Meg Vergeront on

In a case that began in Verona, Wisconsin, the U.S. Supreme Court held earlier this week that the National Labor Relations Act (“NLRA”) does not prohibit employment agreements requiring arbitration of grievances on an individual basis. See Epic Systems Corp. v. Lewis, No. 16-285 (May 21, 2018). Epic Systems extends a string of cases over the past decade upholding arbitration requirements over various challenges. See, e.g., Stolt-Nielsen; Concepcion; Oxford Health Plans; Italian Colors.

The Federal Arbitration Act (“FAA”) generally requires enforcement of arbitration agreements—even those that prohibit participation in class actions by mandating arbitration on an individual basis. Epic Systems resolves a split among the federal appellate courts about whether contracts mandating individual arbitration of employment disputes violate the NLRA. After the National Labor Relations Board (“NLRB”) ruled in 2012 that that such contracts are inconsistent with the NLRA, the Sixth, Seventh, and Ninth Circuit Courts of Appeal followed suit, either deferring to the NLRB’s determination or independently reasoning to the same conclusion. The Second, Fifth, and Eighth Circuits, on the other hand, found such contracts enforceable.

Advocates for Lewis and other employees challenging individual arbitration agreements argued that class action waivers were unenforceable under the FAA’s “saving clause,” which prohibits enforcement of arbitration agreements that violate federal law. They argued that arbitration agreements prohibiting collective legal action violate section 7 of the NLRA, which allows workers “to bargain collectively . . . and to engage in other concerted activities for the purpose of . . . other mutual aid or protection.” 29 U.S.C. § 157. Alternatively, they suggested that even if the FAA’s “saving clause” does not apply, the NLRA “overrides” the FAA and makes individual arbitration requirements unlawful.

Advocates for employers, on the other hand, asserted that the NLRA and FAA do not conflict, arguing that neither the text nor the underlying purpose of the NLRA prohibit class action waivers. Alternatively, even if the NLRA and FAA did conflict, the employers argued that the FAA should control because it is the more specific statute, Congress had a history of specifically overriding the FAA only with express, clear language, and because “the enforceability of class waivers forms the core of the FAA, while such waivers are at most a peripheral concern of the NLRA.”

Decision

In a 5-4 decision written by Justice Neil Gorsuch, the Court rejected the employees’ arguments. First, the majority held the FAA’s “saving clause” was inapplicable. “[D]efenses that apply only to arbitration” do not trigger the “saving clause,” which “permits agreements to arbitrate to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability.” Epic Systems, slip op. at 7 (internal quotation marks omitted). Given that the central challenge to the agreements was over “(only) the individualized nature” of the mandated arbitration procedure, not to the underlying validity of the provision requiring arbitration, the Court found the FAA’s “saving clause” did not apply. Id.

Second, the Court refused to view the NLRA as conflicting with and “overriding” the FAA. Longstanding precedent places a heavy burden on parties who argue that two federal statutes conflict and cannot be harmonized. See id. at 10. The majority found no “clearly expressed congressional intention” that the NLRA override the FAA regarding arbitration agreements, in contrast to examples where Congress unambiguously created statutory exceptions to the FAA’s general policy of enforcing arbitration agreements. Id. (quoting Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528, 533 (1995)). And it found no reason to defer to the NLRB’s statutory interpretation when that would impair the application of the FAA, which is beyond the NLRB’s subject matter expertise. See id. at 19–21.

Dissent

Justice Ruth Bader Ginsburg, writing for herself and three other Justices, dissented, calling the decision “egregiously wrong.” Id. at 2 (Ginsburg, J., dissenting). The dissent argues that the NLRA protects more than just traditional collective bargaining. This is consistent with Justice Stephen Breyer’s comment during oral argument that the NLRA represents “the entire heart of the New Deal.” Focusing on the phrase “other concerted activities for the purpose of . . . mutual aid and protection,” the dissent posits that the NLRA contemplates and protects the “right to engage in collective employment litigation.” Id. at 9 (Ginsburg, J., dissenting). It criticizes the majority’s reasoning in concluding that the NLRA did not protect collective employment litigation, pointing out the majority relied heavily on a canon of statutory interpretation, which it argues is appropriate only where congressional intent is unclear. See id. at 12 (Ginsburg, J., dissenting). Finding a clear congressional mandate to protect employees’ rights to act collectively, the dissent argues that resorting to canons of interpretation was improper and that the Court erred in construing the application of the NLRA so narrowly.

Take Away

Epic Systems Corp. v. Lewis makes clear that the NLRA does not invalidate collective legal action waivers in employment arbitration agreements, presenting employers with an even wider array of options when creating and implementing employee agreements. It also underscores that only in exceptional cases will another federal law invalidate an agreement to arbitrate. Combined with the Supreme Court’s other recent arbitration decisions, Epic Systems further cements the enforceability of arbitration requirements, even when the parties to such agreements lack equal bargaining power. Congress may revisit the policy decisions underlying the FAA, see id. at 6, 25 (Op. of the Court); id. at 2 (Ginsburg, J., dissenting), but unless and until that happens, employers have broad power to limit employees’ options in redressing complaints about the conditions of their employment.

Law Clerk Collin Weyers assisted with researching and writing this post.

Filed Under: employment law

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