May 21, 2018 U.S. Supreme Court OKs Class Action Waivers in Mandatory Employment Arbitration Agreements

Earlier today, the United States Supreme Court held that class action waivers in mandatory employment arbitration agreements are valid and enforceable, rejecting arguments that such waivers violate the National Labor Relations Act (NLRA).  The decision gives the green light to employers who wish to shield themselves from class action litigation by requiring their employees to arbitrate employment claims on an individual basis. 

Analysis

Today’s Supreme Court decision covered three consolidated cases: Epic Systems Corporation v. Lewis; Ernst & Young LLP v. Morris; and National Labor Relations Board v. Murphy Oil USA, Inc.  In each case, employees signed arbitration agreements requiring them to arbitrate employment disputes individually, thus waiving their right to bring class and collective actions in court.  The employee-plaintiffs nevertheless brought class and/or collective claims against their employers under the federal Fair Labor Standards Act and various state laws.

The employers moved to enforce the arbitration agreements, citing as authority the Federal Arbitration Act (FAA), which generally requires courts to enforce arbitration agreements as written.  The employees countered that the FAA’s “savings clause” renders an arbitration agreement unenforceable if the agreement violates some other law and, by requiring claims to be arbitrated individually, the agreements violated Section 7 of the NLRA, which protects the right of employees to engage in “concerted activities.”

The lower courts reached different conclusions as to whether the arbitration agreements should be enforced, creating a split of authority.  The Second, Fifth, and Eighth Circuit Courts of Appeal held that class and collective action waivers do not violate the NLRA, while the Seventh and Ninth Circuits held that they do.  (The Ninth Circuit covers California and eight other western states.)

In today’s decision, the Supreme Court resolved the circuit split by holding class and collective action waivers do not violate the NLRA and therefore are enforceable.  Addressing the employees’ arguments, the court held that the FAA’s savings clause allows courts to refuse to enforce arbitration agreements based only on generally applicable contract defenses, such as fraud, duress, or unconscionability, and does not allow courts to deny enforcement based on judicial or state policies disfavoring enforcement.  The court further held that while Section 7 of the NLRA guarantees the right of employees to engage in “concerted activity,” that phrase should properly be understood in the context of union organizing campaigns and collective bargaining.  The court found it unlikely that Congress had intended Section 7 to confer a right to participate in class or collective actions against employers, since class and collective actions were virtually unknown when the NLRA was adopted in 1935.

What This Means for Employers

Today’s decision is welcome news for employers, many of whom already require their employees to enter into arbitration agreements as a condition of employment.  But employers should move cautiously.  Although arbitration agreements with class and collective action waivers are now generally enforceable, courts can still deny enforcement in cases of fraud, duress, or unconscionability.  Courts will closely scrutinize arbitration agreements to ensure they are both procedurally and substantively conscionable before granting enforcement, and there is a growing body of case law, particularly in California, regarding what terms agreements should and should not include.

In addition, today’s decision leaves in place California’s prohibition against requiring employees to waive their right to bring representative actions under the California Labor Code Private Attorneys General Act (PAGA).  The PAGA law allows an employee to bring a PAGA representative action on behalf of the employee and other “aggrieved employees” to recover civil penalties on behalf of the state for violations of the California Labor Code.   An arbitration agreement that purport to waive an employee’s right to bring a representative PAGA action may be challenged on grounds that it renders the entire agreement unconscionable.

For these reasons, employers should work closely with counsel when considering whether to implement an arbitration agreement program, and those employers that choose to move forward with such a program should ensure employment arbitration agreements are carefully drafted, and frequently reviewed, to maximize the likelihood that courts will enforce them.

This E-Update was authored by Aaron Buckley.  For more information, please contact Mr. Buckley or any other Paul, Plevin attorney by calling (619) 237-5200.