“Strength in Numbers” Gets Weakened: The Supreme Court Allows Employers to Enforce Individual Arbitration Provisions

Lani Durio, Matthew S. Veech

July 6, 2018

In recent years, a circuit split has developed as to whether employers may require employees to litigate disputes in individual, one-on-one arbitration, or whether employees should be permitted to universally pursue employment related claims through collective or class action proceedings. On May 21, the Supreme Court provided an answer, affirmatively resolving this circuit split and rejecting arguments that individualized arbitration provisions violate the Federal Arbitration Act and the National Labor Relations Act.

Prior to the Supreme Court’s ruling in Epic Systems v. Lewis, some federal appellate courts held an employee’s agreement to submit to individual arbitration (often called a class action waiver) was unenforceable. To these courts, individualized arbitration provisions violated the NLRA, which guarantees employees “the right to self-organization, . . . to bargain collectively, . . . and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” These courts reasoned that class action waivers and single-party arbitration clauses prohibit the application of the NLRA’s guarantee of collective activities. Other courts held the opposite—class action waivers are permissible under both the Arbitration Act and the NLRA.

The Supreme Court granted review of the split, ultimately ruling this May.

Relying on the text of the Arbitration Act and congressional intent, the Supreme Court favored the employer’s position, concluding that class action waivers are enforceable. The Court explained that Congress passed the Arbitration Act in an effort to encourage arbitration—an alternative that is often quicker, more informal, and less expensive than court. Under the Arbitration Act, courts are directed to treat arbitration agreements as “valid, irrevocable, and enforceable” and, perhaps most importantly, to “rigorously” enforce such agreements to their express terms.

Despite this general rule of enforceability, under the Arbitration Act’s savings clause, courts may refuse to enforce an arbitration agreement “upon such grounds as exist at law or in equity for the revocation of any contract.”

In Epic Systems, the employees argued the NLRA (and its guarantee of collective activity) renders their class action waivers illegal, thus triggering the savings clause in the Arbitration Act. But the Supreme Court was not persuaded, explaining the savings clause recognizes only defenses that apply to all contracts, not defenses specific to arbitration agreements. To the Court, this is where the “employees’ argument stumble[d].” The employees were not suggesting their arbitration agreements were executed by some act of fraud or duress, or in some other unconscionable manner that would render any contract unenforceable. Rather, the employees objected to the enforcement of their agreements “precisely because they requir[e] individualized arbitration proceedings instead of class or collective ones.”

According to the Court, neither the savings clause nor any other provision in the Arbitration Act supported the employees’ position, and even if it did, the Court was persuaded by congressional intent. The NLRA was adopted in 1935 (ten years after the Arbitration Act) but lacks any mention of arbitration, class actions, or any other collective litigation procedure. To the Court, this further illuminated Congressional intent to encourage arbitration procedures and enforce arbitration agreements as written. According to the Court, had Congress wished to override the Arbitration Act in its passing of the NLRA, it could have done so in the text of the statute, but Congress elected otherwise.

Despite this precedent, employers currently using class action waivers should ensure their arbitration provisions are executed by employees without any semblance of fraud or duress. Employers should also review their provisions for any language that could be considered unconscionable.  Employers that have yet to implement class action waivers should consider the benefits of adopting such provisions, particularly in light of the Supreme Court’s pro-employer support in Epic Systems.