Sean R. Keegan, Babst Calland Clements & Zomnir

The U.S. Supreme Court’s recent decision in Epic Systems v. Lewis is a win for employers who have included or wish to include class action waivers in arbitration agreements that employees are required to sign as a condition of employment. On May 21, the Supreme Court rejected the existing position of the National Labor Relations Board (NLRB), which had held that arbitration agreements waiving the right to pursue class or collective actions violated federal labor law. The Supreme Court overturned the NLRB and held that the Federal Arbitration Act (FAA) requires such mandatory arbitration agreements to be enforced according to their terms. Following this decision, individual arbitration provisions may preclude employees from pursuing class or collective actions to resolve employment disputes.

The Supreme Court held that Congress has instructed in the Federal Arbitration Act that arbitration agreements providing for individualized proceedings must be enforced, and neither the Federal Arbitration Act’s saving clause nor the National Labor Relations Act suggests otherwise. Prior to Epic Systems, the NLRB had interpreted Section 7 of the National Labor Relations Act to encompass the right to bring a class or collective action, as it gives employees the right to organize, bargain collectively and engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection. Consequently, the NLRB’s position was that an employment agreement that required employees to resolve their workplace disputes (such as wage and hour and discrimination claims) by arbitration on an individual basis was an unfair labor practice under Section 8 of the National Labor Relations Act.

Before the Epic Systems decision there was a split in the circuit courts. Some circuits agreed with the NLRB’s interpretation or thought themselves obliged to defer to it under Chevron, while others, including the Fifth Circuit, disagreed with the interpretation. To clear the confusion, the Supreme Court granted certiorari in three consolidated cases—the U.S. Court of Appeals for the Seventh Circuit’s Epic Systems, the U.S. Court of Appeals for Ninth Circuit’s Ernst & Young v. Morris and the U.S. Court of Appeals for the Fifth Circuit’s NLRB v. Murphy Oil USA.

The employment agreements in each of the three consolidated cases required the employees to arbitrate their work-related disputes on an individual basis. The Supreme Court, noting that the three cases differed in factual detail but not in substance of the legal question presented, specifically examined the facts in Ernst & Young. The employment agreement at issue in Ernst & Young provided that a junior accountant and Ernst & Young were required to arbitrate any disputes between them and specified individualized arbitration “with claims pertaining to different employees to be heard in separate proceedings.”

Despite the arbitration provisions, the junior accountant sued Ernst & Young in federal court for violations of the Fair Labor Standards Act and California law. The junior accountant sought to litigate the federal claim on behalf of a nationwide class under the Fair Labor Standards Act’s collective action provision. The district court granted Ernst & Young’s motion to compel arbitration, but the Ninth Circuit reversed the district court’s decision holding that the Federal Arbitration Act’s saving clause removed the obligation to enforce arbitration agreements if it violates some other federal law. Consistent with the NLRB’s position, the Ninth Circuit concluded that an agreement requiring individualized arbitration proceedings violates the National Labor Relations Act by barring employees from engaging in the concerted activity or pursuing claims as a class or collective action.

Accordingly, the issue before the Supreme Court was whether the Federal Arbitration Act’s mandate to enforce arbitration agreements according to their terms was displaced by Section 7 of the National Labor Relations Act. The Supreme Court, in an opinion by Justice Neil Gorsuch, rejected the NLRB’s approach that had been adopted by the Ninth Circuit (and the Seventh Circuit) and held that in the Federal Arbitration Act, Congress has clearly instructed federal courts to enforce arbitration agreements according to their terms—including terms providing for individualized proceedings.

According to the court, the Federal Arbitration Act’s saving 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 defenses that apply to “any” contract. The employees failed to suggest their arbitration agreements were extracted in a way that would render any contract unenforceable, such as an act of fraud or duress, and instead relied on Section 7 of the National Labor Relations Act which only targeted individualized arbitration. The court held that the saving clause offers no refuge for defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue, and “this means the saving clause does not save defenses that target arbitration either by name or by more subtle methods, such as by interfering with fundamental attributes of arbitration.”

The Supreme Court also held that the National Labor Relations Act does not reflect a clearly expressed and manifest congressional intention to displace the Federal Arbitration Act and to outlaw class and collective action waiver. According to the court, the National Labor Relations Act does not express approval or disapproval of arbitration, and it does not even hint at a wish to displace the Federal Arbitration Act.

Federal courts are already starting to apply the holding of Epic Systems. Three days after the Supreme Court’s opinion was issued, a judge in the Eastern District of Michigan applied the ruling to split a proposed class action and send one of the two plaintiffs into arbitration. Judge Nancy Edmunds held that following Epic Systems, “courts must enforce arbitration agreements providing for individualized proceedings like the one at issue in this case,” and the class waiver in question was enforceable in Williams v. Dearborn Motors 1, No. 17-12724 (E.D. Mich. May 24, 2018).

As a result of the Supreme Court’s decision, employers now know that individual arbitration provisions that require an employee to waive their right to collective and class actions are facially permissible, subject to other considerations such as the particular language of the agreement and the defenses that apply to any contract. Employers that use such a provision are more likely to be able to resolve disputes individually outside of court, even if the situation affects many employees, effectively preventing its non-union workers from banding together in disputes over pay and conditions in the workplace.

Although facially the decision appears to protect employers from costly litigation and uphold their expectations, it remains to be seen whether individualized arbitration will offer a net benefit to employers. The decision may protect employers from the costs of litigation, but arbitration has its own costs and an increase in demand for the services of arbitrators may cause a related increase in arbitration costs. Employers that use an individual arbitration provision can avoid expensive class action suits in state or federal court, but a wave of related individual arbitration claims may bring its own challenges, including inconsistent results.

Even considering Epic Systems, not all employers will want to include individual arbitration provisions in their employment agreements going forwardEmployers that include such provisions may subject themselves to multiple one-on-one arbitrations rather than one collective action. Based on their company size, employers will have to consider whether the costs of one-on-one arbitrations versus a single collective action makes financial sense. In addition, prospective employees may exercise their right to seek employment elsewhere if they find individual arbitration provisions an unacceptable condition of employment. Epic Systems holds that these class action waivers are an option, but individual employers will still have to determine whether such a waiver is the best choice for their business.

Sean R. Keegan is an associate in the litigation and employment and labor services groups of Babst Calland Clements & Zomnir. Contact him at 412-773-8721 or skeegan@babstcalland.com