Supreme Court Upholds Individual Arbitration Clauses In Employment Contracts

Mandatory arbitration clauses in employment contracts are increasingly a fact of workplace life.  What happens, though, when an employee signs an employment agreement requiring that any job-related disputes be submitted to individual arbitration, rather than class- or collective-action lawsuits?  Do longstanding federal labor laws protecting workers’ right to engage in “concerted activities for the purpose of . . . mutual aid or protection” render these arbitration clauses unenforceable?

On Monday, in Epic Systems Corp. v. Lewis, a sharply divided Supreme Court ruled, 5-4, that the answer is “no.”  The pros and cons of class-waiver arbitration clauses, the Court said, are “surely debatable” as a policy matter, but the law is clear: agreements requiring employees to bring their disputes in individual arbitration are enforceable.

The Majority’s Reasoning

Writing for the majority, Justice Gorsuch (joined by Chief Justice Roberts and Justices Kennedy, Thomas, and Alito) began with the language of the 1925 Federal Arbitration Act (FAA), which generally treats arbitration agreements as “valid, irrevocable, and enforceable.”  The FAA contains a saving clause, however, under which an agreement violating “such grounds as exist at law or in equity for the revocation of any contract” will not be enforced.  9 U.S.C. § 2.

Drawing heavily on its 2011 precedent in AT&T Mobility LLC v. Concepcion, the Court interpreted the FAA’s reference to “any contract” as limiting defenses that may be raised to those that are generally applicable to any other type of contract (such as fraud, duress, or unconscionability), not those that would interfere with the fundamental attributes of arbitration.

The Court then rejected the employees’ argument that the labor laws (specifically, the National Labor Relations Act (NLRA) and the Norris-La Guardia Act (NLGA)) contained a clear congressional command not to enforce class-waiver arbitration clauses.  Consistent with the well-established doctrine that courts must seek to harmonize seemingly conflicting statutes, the Court explained that the NLRA and NLGA do not override the FAA, because they were silent on the subject of arbitration and collective action.  This silence was particularly notable, given that Congress has “spoken often and clearly to the procedures for resolving ‘actions,’ ‘claims,’ ‘charges,’ and ‘cases[]’” in other employment laws and has spoken clearly to override arbitration language in other statutes (e.g. those involving consumer credit and motor vehicle franchise transactions).  In short, the notion that the legislature concealed an invalidation of all arbitration agreements in the catchall language of Section 7 of the NLRA was too much for the Court to accept.

Justice Gorsuch further concluded that the National Labor Relations Board’s (NLRB) 2012 interpretation invalidating class-waiver arbitration clauses was not entitled to any administrative deference.  For one thing, the Court observed, the NLRB has no authority to administer the FAA, so its interpretation cannot be binding.  Furthermore, the NLRB’s General Counsel had taken a conflicting position just two years earlier, so it was not even clear what the agency’s view was.

Finally, the Court concluded, a “mountain of precedent” rejecting judicially created exceptions to the FAA outweighed the challengers’ arguments.  No amount of legislative history could overcome this reasoning, because “legislative history is not the law.”  Rather, it is up to Congress to amend the judgment if it so desires.

In a brief concurring opinion, Justice Thomas noted that the employees’ argument boiled down to one of contractual illegality, i.e., a public-policy defense that does not apply to contract formation.  Therefore, the agreements requiring arbitration must be enforceable.

Justice Ginsburg’s Dissent

Justice Ginsburg (joined by Justices Breyer, Sotomayor, and Kagan) issued a withering dissent in which she memorably asserted that, “Forced to face their employers without company, employees ordinarily are no match for the enterprise that hires them.”

Calling the decision “egregiously wrong” in light of what she argued were (1) the broad intent to protect workers evidenced by the NLRA and NLGA, (2) the NLRB’s longstanding interpretation that class or joint suits are “concerted activity” protected under the NLRA, (3) the FAA’s legislative history suggesting that the law only applied to commercial contracts between merchants (not employment contracts), and (4) established principles of statutory interpretation that more specific and subsequently enacted laws prevail over more general and previously enacted laws, respectively, Justice Ginsburg asserted that the “inevitable result” of the Court’s ruling is “the underenforcement of federal and state statutes designed to advance the well-being of vulnerable workers.”

As with the Court’s opinion, the dissent argued that the ruling may be changed by legislative action.  (No such action is expected, however, between now and the end of this session of Congress next January.)

Practical Implications

Employers are free to include arbitration clauses in their employment agreements, both for new hires and for existing employees.  There are several features of arbitration that make it an attractive option.  It is often both quicker and cheaper to reach resolution relative to litigation. Arbitrators’ awards are effectively the last word on the subject, as judicial review on appeal is extremely narrow and limited.  Moreover, because proceedings are generally confidential, arbitration has the added benefit for employers of greatly reducing unwanted publicity.

Waiver-of-class-action arbitration clauses, however, are not necessarily ideal for employers.  As the dissent observed, arbitrators’ decisions are not binding on other litigants.  This means that, for example, five employees forced to arbitrate separately against an employer for the same wage-and-hour issue may obtain five inconsistent awards: employers may prevail in some cases, while employees win substantial damages and attorney’s fees in others.  In short, arbitration is—as its name suggests—highly arbitrary.  On the other hand, plaintiffs’ attorneys who would otherwise be able to sue (and collect often exorbitant fee awards) on behalf of hundreds or thousands of plaintiffs in a single class action would have to locate individual plaintiffs if they wish to represent them all simultaneously in individual arbitrations.

Employers seeking to clarify the language of their arbitration clauses, as well as to better understand the benefits and risks of class-waiver arbitration clauses, may wish to consult an attorney.

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