United States Supreme Court Poised to Issue Definitive Ruling in Employment Arbitration/Class Action Waiver Cases

April 24, 2017

On Friday, January 13, 2017, the United States Supreme Court granted certiorari in three separate cases involving the legality of employee arbitration agreements containing class action waivers under the National Labor Relations Act (NLRA). The National Labor Relations Board (NLRB) has consistently taken the position that the ability to pursue legal relief on a class-wide basis is protected “concerted activity” under the NLRA. Federal circuit courts have split on the issue, with several concluding that the Federal Arbitration Act (FAA) expressly sanctions such agreements. The United States Supreme Court has consolidated the three appeals, indicating that it intends to issue a definitive ruling on the issue.

Arbitration agreements containing class action waivers are generally enforceable

Many employers require their employees to sign arbitration agreements as a condition of employment. These agreements generally limit an employee’s ability to bring employment-related lawsuits in state or federal courts and require an employee to submit any employment-related dispute to binding arbitration. In Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), the United States Supreme Court ruled that under the Federal Arbitration Act, employee arbitration agreements are enforceable in both state and federal courts. The agreement in that case provided: “I agree that I will settle any and all previously unasserted claims, disputes or controversies arising out of or relating to my application or candidacy for employment, employment and/or cessation of employment with Circuit City, exclusively by final and binding arbitration before a neutral Arbitrator…” The Court held that the Federal Arbitration Act evidences a federal policy favoring arbitration and the prompt resolution of claims. While the agreement in Circuit City Stores did not address class action lawsuits, by its terms, it arguably was broad enough to cover them.

Following Circuit City Stores, the United States Supreme Court upheld arbitration agreements containing class action waivers in a number of contexts. For instance, in AT&T Mobility v. Concepcion563 U.S. 333 (2011), the Court upheld a class action waiver in a consumer contract, ruling that the Federal Arbitration Act preempts state laws that prohibit contracts from disallowing class-wide arbitration. Then, in American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), the Court held that a class action waiver contained in a merchant agreement with a credit card company was enforceable and could not be invalidated on the ground that the plaintiff’s cost of individually arbitrating a federal statutory claim would exceed the potential recovery. In American Express, the Court held that courts must “rigorously enforce arbitration agreements according to their terms.” But, the United States Supreme Court recognized an exception to this rule in CompuCredit Corp. v. Greenwood, 132 S. Ct. 665, 669 (2012), where it held that arbitration agreements must be enforced unless “the FAA’s mandate has been overridden by a contrary congressional command.”

However, the United States Supreme Court has not directly addressed the issue of whether arbitration agreements in employment agreements that contain class action waivers are enforceable under federal labor law.

NLRB deems class action waivers a violation of the NLRA

In contrast, the NLRB has repeatedly ruled on this issue and taken the position that class and collective action waivers in employment agreements are unlawful under federal labor laws. For instance, in D.R. Horton, Inc., 2012 WL 36274 (N.L.R.B. Jan. 3, 2012), the Board ruled that Sections 7 and 8 of the NLRA prohibit an employer from “requir[ing] employees covered by the Act, as a condition of their employment, to sign an agreement that precludes them from filing joint, class, or collective claims addressing their wages, hours or their working conditions against the employer in any forum, arbitral or judicial.”

Section 7 of the NLRA provides that “[e]mployees shall have the right to self-organization . . . and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” And under Section 8(a) of the NLRA, it is an unfair labor practice for an employer to “interfere with, restrain, or coerce employees” in the exercise of their Section 7 rights. D.R. Horton found the United States Supreme Court’s decision in AT&T Mobility inapplicable because it did not address the NLRA or the employment context. The NLRB has reiterated this position in numerous subsequent decisions.

Federal circuit courts have reached opposite conclusions

As a result of the NLRB’s position, there have been several cases in federal court in which class action waivers contained in employment agreements have been challenged by the NLRB and employees. Federal courts have not been consistent in ruling on this issue.

Three federal courts of appeals—the Eighth Circuit, Second Circuit, and Fifth Circuit— have held that an agreement requiring an employee to arbitrate claims against an employer on an individual basis is enforceable under the FAA and does not violate the NLRA. These courts have concluded that the NLRA does not directly address arbitration agreements and there is nothing in its legislative history indicating Congress intended it to do so. In contrast, two federal circuit courts—the Ninth Circuit and Seventh Circuit (the latter of which governs Wisconsin)—have ruled that class action waivers in employee arbitration agreements violate Section 7 of the NLRA by preventing employees from taking advantage of collective procedures otherwise available.

Supreme Court grants certiorari in three cases

In Lewis v. Epic Systems Corp., 823 F.3d 1147 (2016), the employer (Epic) required some employees to agree to bring any wage-and-hour claims against the company only through individual arbitration. The agreement did not permit collective arbitration or collective action in any other forum. The plaintiff (Lewis) sued Epic, claiming that it unlawfully deprived him of overtime pay under the Fair Labor Standards Act. Epic moved to compel arbitration, and Lewis argued that the provision violated the NLRA because it interfered with his ability to engage in concerted activities for the mutual aid and protection of other employees. The district court agreed, and Epic appealed to the Seventh Circuit. The Seventh Circuit affirmed, ruling that it has long been the law that the right to engage in “concerted activities” under Section 7 of the NLRA includes the right to “resort to administrative and judicial forums,” even when the employee acts alone, so long as he intends to “induce group activity” or acts for the benefit of other employees.

The Ninth Circuit reached a similar result in Morris v. Ernst & Young, LLP, 834 F.3d 975 (9th Cir. 2016). There, two former employees filed a class action lawsuit, claiming that they and similarly situated employees were misclassified under the Fair Labor Standards Act. Each employee was forced to sign an arbitration agreement that contained a “concerted action waiver” and that required them to arbitrate only as individuals in “separate proceedings.” The employer moved to compel arbitration, and the district court granted the motion. The plaintiffs appealed, and the Ninth Circuit reversed, concluding that Section 7 and Section 8 of the NLRA “establish the right of employees to pursue work-related legal claims, and to do so together.”

But, the Fifth Circuit reached a different result in Murphy Oil, U.S.A., Inc. v. NLRB, 808 F.3d 1013 (5th Cir. 2015), holding, based on prior circuit court precedent, that the employer did not violate the NLRA by requiring employees to sign arbitration agreements that included waivers of class and concerted actions. The Fifth Circuit had previously held in D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013), that the NLRA did not trump the Federal Arbitration Act because the NLRA was enacted in 1935, “prior to the advent in 1966 of modern class action practice.” The court found “limited force” to the NLRB’s position because it would require concluding that the NLRA protects a right that did not exist when it was enacted.

Petitions for certiorari were filed in all three cases. On Friday, January 12, 2017, the United States Supreme Court granted the petitions, consolidated the cases, and scheduled the consolidated cases for one hour of oral argument on a date to be determined.

Bottom line

The fact that the United States Supreme Court granted certiorari in three separate cases involving the same legal issue and then consolidated them indicates that it intends to issue a definitive ruling on the issue. However, with the death of Justice Antonin Scalia, the Court currently consists of only 8 members. Oral argument has not been scheduled yet. It is unclear whether Justice Scalia’s replacement will be confirmed before these cases are heard. Thus, despite what appears to be the Court’s intent to definitely rule on the arbitration agreement/class action waiver issue, it is possible that these cases will result in a 4-4 split among the justices. If this occurs, then the effect is that each of the lower court decisions will be affirmed with a per curiam opinion. Hopefully that does not occur and employers will obtain a final ruling on this issue.

Update: Shortly before this article went to print, the United States Supreme Court informed the attorneys in all three cases that the Court would not hold oral argument until its 2017 term, which will begin in October. This should provide plenty of time for Justice Scalia’s replacement to be confirmed.

This article, slightly modified to note recent updates, was featured in the March 2017 issue of the Wisconsin Employment Law Letter, which is co-edited by Axley Brynelson Attorneys Saul Glazer and Michael Modl and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.