U.S. Supreme Court Approves Use of Class Waivers in Employment Agreements

On May 21, 2018, the U.S. Supreme Court held in Epic Systems Corp. v. Lewis that employment agreements containing waivers of the right to bring class or collective actions over employment-related disputes are enforceable under the Federal Arbitration Act (FAA). In so doing, the Court rejected the National Labor Relation Board’s position that such waivers violate the National Labor Relations Act (NLRA) – a position subject to much controversy in the courts and federal agencies.

Background: In D.R. Horton, the Board first articulated its position that arbitration agreements containing class waivers prevented employees from engaging in concerted (i.e. group) activities regarding the terms and conditions of employment – a right that is protected by the NLRA. The Board’s position was rejected by the U.S. Court of Appeals in the Fifth Circuit in the D.R. Horton case, but the Board nonetheless continued to maintain this position in other cases, notably in NLRB v. Murphy Oil USA, Inc., et al., Ernst & Young LLP et al. v. Morris et al., and Epic Systems Corp. v. Lewis. Other federal appeals courts subsequently weighed in, with the Second and Eighth Circuits joining the Fifth Circuit, while the Sixth, Seventh and Ninth Circuits ruled in favor of the Board.

This issue also was contentious within the federal government. The Obama DOJ had previously filed a brief with the Supreme Court in support of the Board’s position. On June 16, 2017, however, the Trump DOJ filed a brief reversing the Obama DOJ’s position, stating that such class waivers could not be precluded by the NLRA, and should be enforced under the Federal Arbitration Act. In so doing, the DOJ took a contrary position to its sister agency, the Board.

The Supreme Court granted certiorari in the three cases mentioned above. In the consolidated cases before the Supreme Court, employees had contractually agreed to arbitration as the exclusive method to resolve any disputes with their employers. The arbitration agreements further specified that the arbitration would be individualized with claims “pertaining to different [e]mployees [to] be heard in separate proceedings.”

The Supreme Court’s Ruling: The divided (5-4) Supreme Court held agreements to arbitrate claims individually were enforceable under the Federal Arbitration Act and that Congress did not, by virtue of the NLRA, intend to invalidate such individual agreements.  The majority based its decision on the following.

First, the “savings clause” that makes arbitration agreements enforceable except “upon any grounds as exist at law or in equity for revocation of any contract” did not create a ground under the NLRA to nullify individual arbitration agreements.  Instead, this clause targets contractual defenses to enforceability, not statutory ones.

Second, the majority rejected the employees’ position that Congress, through Section 7 of the NLRA, intended to outlaw individual arbitration agreements by virtue of conferring on employees the right to engage in “other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The majority interpreted this “mutual aid and protection clause” not as expansively embracing any collective activity of employees but as being defined by virtue of the activities that preceded it; that is “to serve to protect things employees ‘just do’ for themselves in the course of exercising their right to free association in the workplace, rather than the ‘highly regulated, courtroom-bound ‘activities’ of class and joint litigation.”  Congress, the majority noted, knows how to mandate particular dispute resolution procedures explicitly, as demonstrated by other statutes that so specify, so a decision to preclude a particular resolution process could not be inferred from silence.

Finally, in rejecting the employees’ argument that the NLRB’s interpretation was entitled to deference, the Court reasoned that deference to administrative agencies is based on the agency construing a statute for which Congress has delegated it authority.  “Here, though, the Board hasn’t just sought to interpret its statute, the NLRA, in isolation; it has sought to interpret this statute in a way that limits the work of a second statute, the Arbitration Act.  And on no account might we agree that Congress implicitly delegated to an agency authority to address the meaning of a second statute it does not administer.”  Further undercutting arguments for deference was the fact that the interpretation that the employees sought to be given force was not “discovered” by the Board until 2012, was not enforced by any court until 2016, and was not even subject to a unified defense by the Executive Branch in the case before the Court (with the briefs submitted by the NLRB and the DOJ being at odds).  In such cases, the Court opined, deference will not be given to the agency’s interpretation.

The majority characterized the dissent’s position as amounting to an argument that legislative history of the NLRA and the policies animating the law require that class arbitration be permitted.  With regard to the former, the majority reasoned that legislative history is not the law and, in any event, Congress never debated the right to file class actions when considering the passage of the NLRA.  With regard to policy, (“that we should read a class and collective action right into the NLRA to promote the enforcement of wage and hour laws”),the majority expressed puzzlement why the NLRA should be construed to prohibit mandatory individual arbitration of such claims when the FLSA, which permits collective actions, also permits the waiver of that collective action right in favor of individualized action.  But regardless, “this Court in not free to substitute its preferred economic policies for those chosen by the people’s representatives.”

Lessons Learned: The Supreme Court’s ruling means that employers may continue to include and enforce waivers of class or collective actions in their arbitration agreements. To the extent that employers removed such provisions from their agreements in light of the prior confusion over this issue in the courts, they can now include them with confidence.

We further note that the Supreme Court took a much narrower view of the concept of concerted activities that are protected under the NLRA. This ruling suggests that the broad interpretation of this term that has been taken by the Board may be subject to some skepticism by the Court in future rulings.