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Supreme Court Upholds Class and Collective Action Waivers in Employment Arbitration Agreements

May 2018
Naureen Amjad


On May 21, 2018, the United States Supreme Court held in Epic Systems Corp. v. Lewis, that class and collective action waivers found within arbitration agreements are enforceable under the Federal Arbitration Act (FAA).  In the 5-4 decision, the Court held that the FAA requires arbitration agreements to be enforced on the same grounds as any other agreement and that the National Labor Relations Act (NLRA) does not contain language to except class and collective action waivers from the FAA's scope. 

Background

In 2011, the U.S. Supreme Court held in AT&T Mobility LLC v. Concepcion, 131 U.S. 1740 (2011), that the enforceability of arbitration agreements in consumer contracts could not be deemed invalid and unconscionable due to the presence of a class-action waiver.  The AT&T decision clarified that agreements to the contrary would be considered preempted by the FAA.  Since that time, most courts have upheld arbitration agreements that contained a class action waiver.  Although, a divide was created between practitioners, with some believing that Concepcion's holding was narrowly limited to consumer class actions, since the case dealt with consumers' telephone contracts with AT&T.  Others felt that the Concepcion holding could be broadly applied to cases brought by employees alleging wage and hour violations against their employers.

In 2013, the National Labor Relations Board (NLRB) found that employers violated the NLRA when requiring employees to agree to resolve work-related disputes through arbitration as a condition of employment and forego engaging in a class or collective action in court.

The U.S. Court of Appeals for the Fifth, Second and Eighth Circuits rejected the NLRB's ruling.  However, the U.S. Court Appeals for the Seventh Circuit reached the opposite conclusion on May 26, 2016 in Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016), holding that class action waivers in mandatory, pre-dispute arbitration agreements between employers and employees violate the NLRA by restraining employees' right to engage in concerted activity.  The Lewis court further held that there was no conflict between the NLRA and the FAA due to the FAA's "savings clause," which generally states that arbitration agreements are enforceable except for reasons that exist at law or equity to support revocation of a contract. The Seventh Circuit's holding in Lewis created a circuit split on the issue.  Shortly thereafter, the Ninth Circuit followed the Lewis holding in Morris v. Ernst & Young, 834 F.3d 975 (9th Cir. 2016). 

As a result of the discord amongst federal appellate courts (and the NLRB), in early 2017, the U.S. Supreme Court granted writs of certiorari on the consolidated decisions from the Fifth, Seventh and Ninth Circuit courts.  The issue presented was whether "employees and employers [should] be allowed to agree that any disputes between them will be resolved through one-on-one arbitration? Or should employees always be permitted to bring their claims in class or collective actions, no matter what they agree with their employers?"  The Supreme Court agreed with the former position and found that arbitration agreements should be enforced as written.  Through its holding, the Supreme Court accomplished three major tasks:  First, it clarified that the NLRA did not preempt the FAA.  Second, it specifically addressed an employee's right to unionize and engage in collective bargaining under Section 7 of the NLRA and found that such a right did not equip employees with the absolute right to participate in a class or collective action.  Third and finally, the Court relied on its prior Concepcion holding and found that the "savings clause" permits courts to invalidate agreements on the basis of contract defenses, not on the basis of defenses that apply only to arbitration.

Summary

This decision is being perceived as a win for employers in that they can now prevent large numbers of employees from banding together and filing a class or collective action lawsuit related to workplace issues.  Instead, such employees can now be required to submit their workplace issues to arbitration.  In light of the Supreme Court's holding, employers should strongly consider revising any arbitration agreements and/or employment agreements they currently utilize with arbitration provisions.  Likewise, for employers that do not yet utilize such agreements, it is a business decision worthy of consideration.

If you have general questions or seek a review of your arbitration agreements, please contact Naureen Amjad, a Partner and Leader of Pedersen & Houpt’s Employment Law Practice Group, at 312.261.2273 or at namjad@pedersenhoupt.com.