A Split U.S. Supreme Court Upholds Class Waivers in Individual Employment Agreements, Highlighting the Role of Congress in the Class Waiver Fight
A Split U.S. Supreme Court Upholds Class Waivers in Individual Employment Agreements, Highlighting the Role of Congress in the Class Waiver Fight

The viability of class waivers in employment agreements has been a closely watched battle in the courts since the National Labor Relations Board (NLRB) ruled in D. R. Horton, Inc. and Michael Cuda, Case 12–CA–25764, 357 NLRB No. 184 (2012) that class waivers in individual employment agreements violate the National Labor Relations Act (NLRA) by preventing employees from engaging in concerted action related to their employment. Faced with an Executive Branch that was “speaki[ng] from both sides of its mouth” on this issue and a Congress that recently overturned another executive agency’s attempt to ban the use of class waivers, the U.S. Supreme Court just made it clear that those seeking to prevent the use of class waivers in arbitration agreements subject to the Federal Arbitration Act (FAA) (not only in the employment context) need to look to the political branches and ultimately Congress for a clear and explicit directive that such waivers are off limits.

The Supreme Court heard consolidated arguments last Fall in Epic Systems Corp. v. Lewis (No. 16-285), NLRB v. Murphy Oil (No. 16-307) and Ernst & Young LLP, et al.v. Morris (No. 16-300), three cases representing a circuit split that developed on this issue. And on May 21, 2018, a divided Court (5-4) held in Epic Systems Corp. v. Lewis, 584 U. S. ____ (2018) that there is no ambiguity about whether or not the NLRA prevents employers and employees from agreeing to resolve employment related disputes through individual arbitration and to preclude the possibility for class or collective procedures – the NLRA does no such thing. The majority essentially laid out a roadmap for Congress if it should choose to prevent the use of class waivers and spelled out clearly for plaintiffs that challenges to the FAA and class waivers based on arguably conflicting federal statutes will fail in the absence of explicit discussion of arbitration and class actions in the statute at issue. We highlight key components of the Court’s reasoning below.

The FAA Savings Clause Cannot Save Plaintiffs

The Epic Systems majority flatly rejected plaintiffs’ attempt to cast the class waivers in the arbitration agreements as “illegal” and thereby grounds to void the agreements under the FAA’s savings clause, which permits arbitration agreements to be voided “upon such grounds as exist at law or in equity for the revocation of any contract.” Relying on AT&T Mobility v. Concepcion, the majority made clear that circumscribing class procedures in the arbitration context cannot be the sole basis of a claim of illegality:

illegality, like unconscionability, may be a traditional, generally applicable contract defense in many cases, including arbitration cases. But an argument that a contract is unenforceable just because it requires bilateral arbitration is a different creature. A defense of that kind, Concepcion tells us, is one that impermissibly disfavors arbitration whether it sounds in illegality or unconscionability.”

The majority went on to address plaintiffs’ further claims that the NLRA conflicts with FAA, requiring the FAA to yield.

Limits on the Reach of the NLRA

Whether or not it is good policy to permit arbitration agreements that contain class waivers in the employment context may be a debatable question, but it was of no import in resolving this case – that is the stance taken by the Epic Systems majority. What mattered is whether the NLRA reaches that question and, if so, does it conflict with the FAA’s requirements to enforce arbitration agreements. The majority found that the NLRA does not even touch upon the issue of individual arbitration and class procedures; therefore, there was no conflict with the FAA: “[t]he NLRA secures to employees rights to organize unions and bargain collectively, but it says nothing about how judges and arbitrators must try legal disputes that leave the workplace and enter the courtroom or arbitral forum….Far from conflicting, the Arbitration Act and the NLRA have long enjoyed separate spheres of influence.”

The Epic Systems majority noted that in protecting the right to organize unions and collective bargaining, Section 7 “may permit unions to bargain to prohibit arbitration.” But, the NLRA does not speak to approval or disapproval of arbitration, class or collective actions, nor “even hint at” overriding the FAA. With the detailed procedures outlined in Section 7 regarding specific concerted activities, such as labor organization practices, collective bargainin, picketing, and strikes, the absence of any discussion in Section 7 of courtroom or arbitral forum procedures was telling. As was the fact that class and collective procedures under Federal Rule of Civil Procedure 23, the Fair Labor Standards Act (FLSA) and class arbitration all post-dated the implementation of the NLRA, which makes it “pretty unlikely” that Section 7 grants employees a right to class and collective actions in the eyes of the majority.

Stop Looking for Elephants in Mouseholes

The majority chastised the plaintiffs’ reliance on the NLRA instead of the FLSA, which does specifically permit collective procedures, noting that the Court already had held that another collective action structure based on the FLSA’s does not prohibit individual arbitration or butt heads with the FAA. In another opinion recently issued by the unanimous U.S. Supreme Court, the defendant offered tortured interpretations of a provision of the Securities Litigation Uniform Standards Act of 1998 (SLUSA) in an attempt to justify stripping state courts of their longstanding concurrent jurisdiction over certain class actions brought under federal securities law. The Justices reminded the parties that “Congress does not ‘hide elephants in mouseholes,’” and any change in the power granted to state courts for 65 years would certainly have been more directly accomplished by Congress than in the convoluted manner that the defendant interpreted SLUSA. The majority in Epic Systems reminded the employee plaintiffs and dissenting Justices of the same, stressing that the High Court has never read the NLRA as granting a right to class actions “and for three quarters of a century neither did the National Labor Relations Board:”

Perhaps worse still, the employees’ theory runs afoul of the usual rule that 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.” Union organization and collective bargaining in the workplace are the bread and butter of the NLRA, while the particulars of dispute resolution procedures in Article III courts or arbitration proceedings are usually left to other statutes and rules— not least the Federal Rules of Civil Procedure, the Arbitration Act, and the 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; flattens the parties’ contracted-for dispute resolution procedures; and seats the Board as supreme superintendent of claims arising under a statute it doesn’t even administer.

Plaintiffs stretched too far in trying to find solace in the NLRA: “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)….[is] a sort of interpretive triple bank shot, and just stating the theory is enough to raise a judicial eyebrow.”

No Deference Due When the Executive Speaks from Both Sides of its Mouth

Over the course of the D.R. Horton saga, the NLRB held its ground. The Fifth Circuit Court of Appeals struck down the NLRB’s decision in D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013), and while this was a significant victory for employers, the NLRB asserted that it was not bound by Circuit Court of Appeals opinions and it would continue to strike down class waivers unless and until the U.S. Supreme Court ruled against it on the issue. The agency reiterated its firm position several times, and explicitly reaffirmed its D.R. Horton ruling in Murphy Oil (2014). The Fifth Circuit struck down the NLRB’s Murphy Oil decision, as well, while the Seventh and Ninth Circuits subsequently sided with the NLRB and held that the class waivers at issue in Epic Systems and Morris violated the NLRA. Before the Supreme Court, the plaintiffs argued that the Court must defer to the NLRB’s interpretation of the NLRA under Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984). However, Chevron deference was not forthcoming from the majority.

There were several reasons the Epic Systems majority refused to tip its hat to the NLRB’s newly articulated hostility towards arbitration agreements and class waivers. The majority proclaimed that reconciling potentially conflicting statutes falls within the purview of the courts and not agencies. The conflicting positions taken by the NLRB itself and the Office of the Solicitor General were also justification for withholding deference from the agency. Up until and including a 2010 judgment by the NLRB’s general counsel, the agency had found that the NLRA and FAA “coexist peaceably,” the majority noted, calling out plaintiffs for cherry-picking which of the recent conflicting NLRB positions the Court should honor. Further, Chevron proffered that deference is appropriate because “policy choices” should be left to the Executive Branch. However, the about-face taken by the Office of the Solicitor General in this case left the Court without a consistent position advanced by the Executive for consideration:

here the Executive seems of two minds, for we have received competing briefs from the Board and from the United States (through the Solicitor General) disputing the meaning of the NLRA. And whatever argument might be mustered for deferring to the Executive on grounds of political accountability, surely it becomes a garble when the Executive speaks from both sides of its mouth, articulating no single position on which it might be held accountable.

The Executive’s “disavowal” of the NLRB’s D.R. Horton position certainly helped put the nail in the coffin on deferral. The majority found further that there was no ambiguity regarding the operation of the NLRA and FAA after analyzing the statutes using the traditional principles of statutory construction. Accordingly, the majority rejected the notion that Chevron deference to the NLRB’s interpretation of the statutes was appropriate.

Look to Congress not the Court

The Epic Systems Dissent criticized the majority for overriding the policy judgments of Congress, but the majority maintained that it was in fact honoring them by giving effect to the FAA. Highlighting how contentious this issue is in the political arena, the majority pointed to the fact that Congress immediately repealed the Consumer Financial Protection Bureau’s (CFPB) rule that attempted to ban the use of class waivers in certain consumer finance arbitration agreements. The “Court is not free to substitute its preferred economic policies for those chosen by the people’s representatives,” the majority declared. Despite the growing political tensions on the subject, the “Court’s duty [is] to interpret Congress’s statutes as a harmonious whole rather than at war with one another.” Ultimately, the majority found that there was no difficulty in reading the NLRA and the FAA harmoniously.

Attempts to find conflicts between the FAA and other federal statutes will continue to meet with resistance by the current Supreme Court, as they have in the recent past. The Epic Systems majority noted that “[i]n fact, this Court has rejected every such effort to date (save one temporary exception since overruled), with statutes ranging from the Sherman and Clayton Acts to the Age Discrimination in Employment Act, the Credit Repair Organizations Act, the Securities Act of 1933, the Securities Exchange Act of 1934, and the Racketeer Influenced and Corrupt Organizations Act.” What will it take for the High Court to find an arbitration agreement class waiver unenforceable?  It will have to come close to, if not actually be, a specific statement in an Act of Congress: “we’ve 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 Arbitration Act.” Companies can take some solace in the Court majority’s firm stance on enforcing arbitration agreements and class waivers. But, they should expect the challenges to keep coming and plaintiff-side interests no doubt will continue to exert pressure to drive changes through the political and rulemaking processes.

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