On May 21, 2018, a closely divided Supreme Court issued a much-anticipated decision holding that arbitration agreements containing class and collective action waivers must be enforced under the Federal Arbitration Act (the “FAA”), 9 U.S.C. 1, et seq. Writing for the Court, Justice Neil Gorsuch ruled that neither the FAA’s savings clause nor the National Labor Relations Act nullified the FAA’s broad instruction to enforce arbitration agreements. Epic Systems Corp. v. Lewis, No. 16-285; Ernst & Young LLP, et al. v. Morris, et al., No. 16-300, National Labor Relations Board v. Murphy Oil USA. Inc. et al., No. 16-307 (May 21, 2018). The Epic Systems decision resolved a deep circuit split, in which the Second, Fifth, and Eighth Circuits permitted class and collective action waivers, but the Sixth, Seventh, and Ninth Circuits had ruled that such waivers violated employees’ substantive rights under the NLRA.
The Supreme Court’s decision marks a significant win for employers who have reacted to the rise of employee class action litigation by including arbitration agreements with class and collective action waivers as conditions of employment. While there is now no question that such waivers are presumptively enforceable, employers should still carefully consider what claims may be covered by such waivers, and whether their specific agreements are subject to challenge under other, related decisions. Employers who do not currently require employees to sign pre-dispute arbitration agreements as a condition of employment should consider whether to adopt such requirements in the future, in light of this decision.
Many companies require their employees to enter into arbitration agreements as a condition of employment. While these agreements cover a wide variety of scopes and claims, they generally require employees to arbitrate any future claims against the company, rather than filing lawsuits in court. In the last 20 years or so, it has become common to include the requirement that such arbitration proceedings be bilateral – i.e. between the employee and employer – rather than on a class or collective basis. Such waivers have typically been enforced by the courts, and the National Labor Relations Board’s (“NLRB”) general counsel agreed with that position as recently as 2010.
In 2012, however, a schism appeared in the consensus. The NLRB ruled in D.R. Horton Inc., 357 NLRB No. 184 (2012), that employers violate the NLRA when they require employees to sign pre-dispute arbitration agreements containing class and collective action waivers. This finding was later overruled by the Fifth Circuit Court of Appeals, but the NLRB’s change in position was noticed by litigants across the country. In 2016, the Seventh and Ninth Circuits adopted the NLRA’s since-overruled position from D.R. Horton in Lewis v. Epic Systems Corp. and Morris v. Ernst & Young, respectively, finding that the FAA’s savings clause – which holds unenforceable any arbitration agreements if any grounds exist at law or in equity for their revocation – rendered the employers’ agreements unenforceable in light of the NLRA.
To resolve the circuit split, the Supreme Court granted certiorari and, on May 21, issued its decision.
The Supreme Court, in Justice Gorsuch’s decision, recognized that the FAA broadly and liberally protects arbitration agreements, including the parties’ choice of rules for the arbitral forum, and that the Supreme Court’s precedent supported that interpretation. The Court firmly rejected the position that the FAA’s savings clause invalidates class or collective action waivers, looking to the plain text and history of the NLRA. Justice Gorsuch noted that neither the text nor the context of the NLRA supports a finding that Section 7 was meant to authorize class or collective action lawsuits. Instead, he noted that Section 7 focuses on the “right to organize unions and bargain collectively. It may permit unions to bargain to prohibit arbitration.” (Epic Sys., 584 U.S. ___ (2018) (slip op. at 11). The Court noted, however, that the NLRA does not prohibit or mandate arbitration, does not mention class or collective actions, and certainly did not “displace the Arbitration Act . . . clearly and manifestly, as our precedents demand.” Id.
Instead, the Supreme Court held that the right to maintain class and collective actions arises from the Federal Rules of Civil Procedure and the Fair Labor Standards Act, not the NLRA. While the NLRA provides employees with certain rights in the workplace, those rights do not “leave the workplace and enter a courtroom or arbitral forum.” Nor, Justice Gorsuch wrote, could Congress have intended the NLRA to address class and collective action waivers, as the NLRA was enacted before those claims were enabled by the FRCP and FLSA: “It’s more than a little doubtful that Congress would have tucked into the mousehole of Section 7’s catchall term an elephant that tramples the work done by these other laws. . .” Id. at 15 (referring to Whitman v. American Trucking Ass’ns, Inc., 531 U.S. 457, 468 (2001) (Congress “does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions – it does not, one might say, hide elephants in mouseholes.”)).
In dissent, Justice Ginsburg argued that the rights conveyed by Section 7 of the NLRA take precedence over the FAA, noting particularly the extreme power differential between employees and their employers. The dissent argued that Congress intended to protect all types of concerted activity by passing the FLSA, not just concerted activity in the workplace, and that class and collective action waivers undermined the statute by barring employees from seeking “mutual aid and protection” from the courts in a class or collective action.
The decision comes as just the most recent in a decades-long trend of the Supreme Court broadly enforcing the terms of the FAA against the hostility of the lower federal and state courts to arbitration agreements. It also provides clarity in what had been a highly-contested area of law, and even the NLRB issued an acquiescing statement after the decision was released, stating that it “respects the Court’s decision” and agreed that “arbitration proceedings providing for individualized proceedings, and waiving the right to participate in class and collective actions, are lawful and enforceable.”
As a result, employers should consider whether to adopt condition-of-employment arbitration programs as a strategy to reduce the potential risk of class and collective action litigation, without any concern over the validity of such agreements. However, while there is now a clear presumption in favor of class and collective action waivers, arbitration agreements are still subject to challenge on traditional grounds, such as unconscionability or want of consideration.
That said, before enacting a new or enlarged arbitration program, employers should consider consulting counsel to ensure that the program is properly tailored to the needs of the company. Although arbitration has a number of benefits, it may not be right for all companies. Some of the benefits of arbitration include that it is generally (but not always) less costly for the employer than litigating in court, leads to faster results than traditional litigation, and provides a confidential forum for disputes. However, there are also potential drawbacks that employers may wish to consider before adopting a mandatory arbitration regime: arbitration can be more expensive (particularly given that the loser often is required to pay the victor’s attorney fees and that the arbitrator must be paid by the parties), arbitration is not self-executing (so companies must move to enforce the arbitration award before a court); and the right to discovery and cost-saving dispositive motions is not guaranteed in arbitral proceedings.
If you are considering implementing a condition-of-employment arbitration regime, the attorneys of Rock Hutchinson, PLLP are here to assist. We can evaluate your company’s needs, make recommendations, and even prepare draft policies for your review and implementation. Please contact us at 612-573-3688 or [email protected] if you would like to discuss the ways Rock Hutchinson may be able to help you.
 Memorandum GC 10-05, pp. 2, 5 (June 16, 2010).
 The NLRB ruled that such waivers violated the NLRA’s prohibition on actions that infringed on employees’ rights under Section 7 of the NLRA to engage in “concerted activities” in pursuit of “mutual aid or protection.” D.R. Horton Inc., 357 NLRB No. 184.