Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018) [click for opinion]

In these three consolidated cases, Plaintiff-Employees brought class action suits against their employers for unpaid wage claims under the Fair Labor Standards Act of 1935, despite having entered into mandatory individual arbitration agreements that waived their right to collective and class actions for any employment-related disputes.

Plaintiffs, and the National Labor Relations Board, took the position that class action waivers in individual employment contracts violate an employee’s rights to collective action under Section 7 of the National Labor Relations Act (“NLRA“). They argued that the NLRA thus overrides the Federal Arbitration Act (“FAA“) mandate, which requires that arbitration agreements be enforced as written.

The Supreme Court rejected this argument. In a 5-4 decision, with the majority opinion written by Justice Gorsuch, the court first held that the “saving clause” contained in Section 2 of the FAA did not apply. The saving clause allows a “generally applicable contract defense,” such as fraud or unconscionability, to override the presumption of enforceability of arbitration agreements. However, the court explained that the saving clause does not apply where the crux of the defense applies “only to arbitration” or arises from the fact that “an agreement to arbitrate is at issue.” Because Plaintiffs sought to hold a contract unenforceable just because it required bilateral arbitration, Plaintiffs did not offer a generally applicable contract defense necessary to invoke the saving clause.

Second, the court ruled that there was no tension between Section 7 of the NLRA and the FAA. The court held that the type of “concerted activities” protected in Section 7 of the NLRA were intended to protect employees’ rights to bargain collectively and did not include a right to class action litigation. Congress clearly instructed federal courts to enforce arbitration agreements as written under the FAA and did not intend for the NLRA to override the FAA regarding individualized arbitration provisions. The court thus concluded that individualized arbitration agreements requiring employees to waive their rights to class actions do not violate Section 7 of the NLRA and are enforceable under the FAA.

In a concurring opinion, Justice Thomas joined the majority opinion in full, and separately added that the employees could not prevail under the plain meaning of the FAA, which declares arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” According to Justice Thomas, such grounds are limited to those that concern the formation of the arbitration agreement. Because illegality under the NLRA is a public-policy defense, it “does not concern whether the contract was properly made.” Thus, Justice Thomas would have held that the FAA saving clause did not apply for this additional reason.

In a dissent by Justice Ginsburg, joined by Justices Breyer, Sotomayor and Kagan, Justice Ginsburg explained that the purpose of the NLRA was to secure to employees the right to engage in concerted activities for their mutual aid or protection. In passing this legislation, members of Congress specifically recognized that “yellow-dog contracts” —proscribing concerted activities by employees—rendered the “laboring man … absolutely helpless” by “waiv[ing] his right … to free association” and by requiring that he “singly present any grievance he has.” Congressional legislation, including the NLRA, sought to prohibit such coercive employer practices.

The dissent noted that for decades, federal courts had held that the NLRA safeguards employees from employer interference in their pursuit of joint, collective, or class suits relating to the terms and conditions of their employment. The dissent further noted that nothing in the FAA or the court’s case law requires subordination of the NLRA’s protections. Illegality is a traditional, generally applicable contract defense, and the invocation of the FAA’s saving clause would not generate a rule discriminating against arbitration. Thus, according to the dissent, all employer-imposed contractual provisions that prospectively waive employees’ rights to collective action must be invalidated, including the class-action arbitration waivers at issue.

A version of this post originally appeared in the July 2018 edition of Baker McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.

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