On May 21, 2018, the United States Supreme Court issued its much anticipated decision in Epic Systems Corp. v. Lewis. In a 5-4 decision written by the newest jurist, Justice Gorsuch, the Court declares that employers can require employees to arbitrate their employment disputes individually and waive their rights to resolve those disputes through class or collective actions.
The case was a consolidation of three cases (Epic Systems Corp. v. Lewis, Ernst & Young LLP v. Morris, and National Labor Relations Board v. Murphy Oil USA, Inc.). In each case, the employees brought a class action under the federal Fair Labor Standards Act (“FLSA”) and related state law against their employer on behalf of themselves and similarly situated employees for wage and hour violations. However, in each of the cases, the employees had entered into an agreement with their employer providing for individualized arbitration proceedings to resolve employment disputes between the parties. Although the Federal Arbitration Act (“FAA”) generally requires courts to enforce arbitration agreements as written, the employees argued that the FAA’s “savings clause” removes this obligation if an arbitration agreement violates some other federal law and that, by requiring individualized proceedings, the agreements they signed violated the National Labor Relations Act (“NLRA”).
Each of the employers countered that the FAA protects agreements requiring arbitration from judicial interference and that neither the FAA’s saving clause nor the NLRA demands a different conclusion. After a detailed analysis, the U.S. Supreme Court agreed.
The FAA’s Savings Clause Recognizes Only General Contract Defenses Which the Employees Did Not Raise.
The employees argued that the FAA’s savings clause permits courts to refrain from enforcing arbitration agreements if the agreements violate some other federal law, like the NLRA. However, the Supreme Court held that the FAA’s savings clause —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,” recognizes only “‘generally applicable contract defenses, such as fraud, duress, or unconscionability,’” (citing AT&T Mobility LLC v. Concepcion, 563 U. S. 333, 339), not defenses targeting arbitration either by name or by more subtle methods, such as by “interfer[ing] with fundamental attributes of arbitration.” (Id. at 344.) (emphasis added.)
The Court held that “this is where the employees’ argument stumbles” because they didn’t argue that their arbitration agreements were extracted, say, by an act of fraud or duress or in some other unconscionable way that would render any contract unenforceable. Instead, they object to their agreements precisely because they require individualized arbitration proceedings instead of class or collective ones. And by attacking (only) the individualized nature of the arbitration proceedings, the employees’ argument seeks to interfere with one of arbitration’s fundamental attributes.
Section 7 of the NLRA Does Not Encompass the Right to Class or Collective Actions.
The employees also mistakenly claimed that, even if the FAA normally requires enforcement of arbitration agreements like theirs, the NLRA overrides that guidance and renders their agreements unlawful. The employees argued that class and collective actions are “concerted activities” protected by Section 7 of the NLRA, which guarantees employees the right to self-organization, to form, join, or assist labor organizations, to bargain collectively, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection. But the Court pointed out that Section 7 focuses on the right to organize unions and bargain collectively, and “does not mention class or collective action procedures or even hint at a clear and manifest wish to displace the Arbitration Act.”
The Court found that it is unlikely that Congress wished to confer a right to class or collective actions in Section 7, since those procedures were hardly known when the NLRA was adopted in 1935. As the Court pointed out, the Federal Rule of Civil Procedure 23 didn’t create the modern class action until 1966; class arbitration didn’t emerge until later still; and even the Fair Labor Standards Act’s collective action provision postdated Section 7 by years.
The Court rejected the employees’ argument that the catchall term at the end of Section 7 that provides for “other concerted activities for the purpose of . . . other mutual aid or protection” can be read to include class and collective legal actions. The Court concluded that the catchall term should be understood to protect the same kind of 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.”
The Court went on to point out that the NLRA’s structure underscores the same conclusion. After speaking of various “concerted activities” in Section 7, the NLRA establishes a detailed regulatory regime applicable to each item on the list. It even sets rules for adjudicatory proceedings under the NLRA itself. However, the Court noted that “…missing entirely from this careful regime is any hint about what rules should govern the adjudication of class or collective actions in court or arbitration.”
The Court rejected the employees’ argument that the NLRA does not discuss class and collective action procedures because it means to confer a right to use existing procedures provided by statute or rule. As the Court pointed out, the NLRA does not say even that much. And the Court held that, “…if employees do take existing rules as they find them, they must take them subject to those rules’ inherent limitations, including the principle that parties may depart from them in favor of individualized arbitration.” (emphasis added.)
Individualized Arbitration Agreements are Enforceable under the FLSA.
The Court pointed out that the employees’ underlying claims involve their wages and arise under the FLSA not under the NLRA. The FLSA allows employees to sue on behalf of themselves and other similarly situated employees just as the employees had done in these cases. Yet, as the Court calls out, the employees do not argue that the FLSA overcomes the FAA to permit their class and collective actions, and asks why not? Presumably the Court concludes, because the Court made clear decades ago that “…an identical collective action scheme (in fact, one borrowed from the FLSA) does not displace the Arbitration Act or prohibit individualized arbitration proceedings.” (citing Gilmer v. Interstate/Johnson Lane Corp., 500 U. S. 20, 32 (1991).)
The Court takes real issue with the employees’ attempt to bootstrap the NLRA into a claim that falls squarely within the four corners of the FLSA in order to then try and avoid the dictates of the FAA. It underscores how “[e]very circuit to consider the question” has held that the FLSA allows agreements for individualized arbitration, and goes on to find that “…[f]aced with that obstacle, the employees are left to cast about elsewhere for help. And so they have cast in this direction, suggesting that one statute (the NLRA) steps in to dictate the procedures for claims under a different statute (the FLSA), and thereby overrides the commands of yet a third statute (the Arbitration Act). It’s a sort of interpretive triple bank shot, and just stating the theory is enough to raise a judicial eyebrow.” (emphasis added.)
The Court concludes its decision by discussing the many cases it has heard over the years in which it has rejected every attempt to conjure conflicts between the FAA and other federal statutes. In this large body of case law, the Court points out that the following two principles remain true:
- The Court has made clear that even a statute’s express provision for collective legal actions does not necessarily mean that it precludes individual attempts at conciliation through arbitration.
- The Court has stressed that the absence of any specific statutory discussion of arbitration or class actions is an important and telling clue that Congress has not displaced the FAA.
The Court ultimately held that Congress has instructed in the FAA that arbitration agreements providing for individualized proceedings must be enforced, and neither the FAA’s savings clause nor the NLRA suggests otherwise.
Takeaway for California Employers.
Prior to the U.S. Supreme Court’s Epic Systems Corp. decision, the California Supreme Court approved class action waivers in employment arbitration agreements. In its Iskanian v. CLS Transportation decision, the California Supreme Court held that class-action waivers in arbitration agreements are enforceable under the FAA. However, in the same decision, the California Supreme Court held that actions under the California’s Private Attorneys General Act (“PAGA”) are not subject to waiver. The Court concluded that “…the rule against PAGA waivers does not frustrate the FAA’s objective because…the FAA aims to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action is a dispute between an employer and the Labor Workplace Development Agency.”
Given the California Supreme Court’s interpretation of the FAA, it does appear that the U.S. Supreme Court’s decision in Epic Systems Corp. will change the legal landscape in California. Under this new U.S. Supreme Court decision, class-action waivers in arbitration agreements have become enforceable again, but PAGA waivers will remain unenforceable – unless and until we get a different ruling from the California or the U.S. Supreme Court.
The Labor and Employment attorneys at Weintraub Tobin are happy to assist in the review and drafting for employment arbitration agreements. Feel free to contact us.