chevron-down Created with Sketch Beta.
November 28, 2017 Articles

Supreme Court Hears Arguments on Class Action Waivers

By Laura M. Wong-Pan

On October 2, 2017, the U.S. Supreme Court heard oral argument in three consolidated cases, each of which involved the issue of whether employees may be required to waive their rights to commence class or collective action proceedings, either in a judicial or arbitral forum, as a condition of employment.

The Supreme Court’s decision is expected to resolve an existing split among the circuit courts on this issue. The three cases are National Labor Relations Board v. Murphy Oil USA Inc., No. 16-307 (a Fifth Circuit case), Epic Systems Corp. v. Lewis, No. 16-285 (a Seventh Circuit case), and Ernst & Young LLP, v. Morris, No. 16-300 (a Ninth Circuit case).

Each of the circuit court decisions calls into question the validity of individual employment agreements signed by employees as a condition of their employment. In each case, the agreements resulted in a waiver of the opportunity to commence a collective or class action proceeding and instead required employees to individually submit their work-related disputes to binding arbitration on an individual basis.

In recent years, there has been a proliferation of employment agreements with class action waivers. This decision could nullify those agreements, opening the doors for class action lawsuits that were previously resolved administratively or through individual arbitration proceedings.

Background Leading to the Circuit Split
In Murphy Oil USA, Inc., Sheila Hobson and three fellow employees brought an action against their employer, Murphy Oil, alleging violations of the Fair Labor Standards Act (FLSA), 29 U.S.C. § 8. While the employer’s motion to dismiss was pending, Murphy Oil employees filed an unfair labor practice charge with the National Labor Relations Board (NLRB). The charge alleged that the agreements the employees were required to sign, which compelled arbitration of the FLSA dispute, violated their rights under section 7 of the National Labor Relations Act (NLRA), 29 U.S.C. § 157. Section 7, by its terms, guarantees the right “to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.”

The NLRB sided with the employees in Murphy Oil USA, Inc., 10-CA-038804, 36 NLRB No. 72 (Oct. 28, 2014). Murphy Oil appealed the NLRB decision to the Fifth Circuit Court of Appeals. The circuit court’s three-judge panel unanimously reversed the NLRB decision, in Murphy Oil USA Inc., v. NLRB, 808 F.3d 1013 (5th Cir. 2015). The panel concluded that “Murphy Oil committed no unfair labor practice by requiring employees to relinquish their right to pursue class or collective claims in all forums. . . .”

Decisions emanating from the Seventh Circuit in Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016), and from the Ninth Circuit in Morris v. Ernst and & Young, LLP, 874 F.3d 975 (9th Cir. 2016), reached the opposite conclusion.

In those cases, employees also brought federal court claims of FLSA violations, after having signed agreements containing class action waivers. The Seventh and Ninth Circuits affirmed the decisions of the respective district courts, siding with the employees. Both circuit courts concluded that the waiver clauses in the employment agreements restrained employees’ exercise of section 7 rights, including the right to act in concert to pursue work-related legal claims as a group.

Petitions for a writ of certiorari in all three actions were subsequently granted by the Supreme Court.

Justices Challenge Employers’ Contentions
At the oral argument on October 2, 2017, the attorney for Murphy’s Oil and Epic Systems, Paul D. Clement, urged the Court to adopt a more narrow definition of the section 7 “mutual aid or protection” language than that followed by the NLRB, arguing that section 7 protects concerted activities within the physical workplace, rather than efforts to pursue joint grievances in a court.

Challenging that argument, Justice Ginsburg commented that the text of section 7 does not explicitly state that the right to engage in concert for “mutual aid and protection” is limited to the workplace setting. Justice Kagan referenced the Court’s prior decision in Eastex v. NLRB, 437 U.S. 556 (1978), which held that the “mutual aid and protection clause swept further than the workplace itself, as long as the ultimate goals were workplace-related.”

In Eastex, the Court had ruled that employees engaged in concerted activity when they distributed a newsletter with articles encouraging employees to contact legislators to oppose a proposed change to the state constitution. The Court, in that case, read the “mutual aid and protection” language broadly, to include efforts outside the workplace to improve employee working conditions.

The employers argued that section 7 only prevents retaliation for filing a lawsuit and that the employer may lawfully move to dismiss based on the terms of the arbitration agreement. Relying on American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), the employers contended that the Federal Arbitration Act’s (FAA’s) presumption in favor of the enforceability of arbitration agreements is not trumped by the NLRA, in the absence of clear evidence of congressional intent.

Justice Ginsburg compared the arbitration agreement to a “yellow dog” contract, in which employees are required to forgo the collective rights to form and join unions. However, employers’ counsel pointed out that the class action waiver does not require employees to relinquish a substantive right, such as the right to form and join unions.

The ability to pursue a claim as a group may be viewed as a procedural right inasmuch as it defines the avenue for pursuit of a wage-and-hour claim, rather than the right to do so. The employers noted that both the FAA and the NLRA permit parties to agree to submit disputes to arbitration, rather than going to court.

The Solicitor General Argues Against the NLRB
In an unusual twist, for the second time in seven days, the Justice Department took a position that contradicted that of a federal agency charged with enforcement of the very statute at issue.

The solicitor general initially filed a petition for a writ of certiorari on behalf of the NLRB. In that petition, the solicitor general argued on behalf of the NLRB that the proposition that employees may not be forced to waive their right to join with others in pursuing work-related claims is “soundly anchored in decisions of this Court. . . .” Those decisions hold that even voluntarily negotiated arbitration agreements are unlawful if they interfere with employees’ rights to engage in concerted activity.

Notwithstanding the “soundly anchored” language in the petition, the Justice Department reversed position with the advent of the new administration. In its amicus curiae brief, filed June 16, 2017, the solicitor general argued that the Court should rule in favor of the employers and against the NLRB.

Echoing the employers’ argument, the Justice Department agreed that the ability to access collective class action procedures to litigate FLSA claims is a procedural option but not a substantive section 7 right. Because there were no substantive rights at stake, the arbitration agreements were enforceable under section 2 of the FAA.

Justices Question NLRB Attorney
The NLRB’s general counsel, Richard F. Griffin Jr., conceded that a judicial collective or class action waiver does not violate the NLRA, as long as employees may instead demand a collective or class action arbitration. An employer may not “bar employees from pursuing their legal claims collectively in any forum, arbitral or judicial,” according to the NLRB.

On questioning by Justice Breyer, NLRB counsel agreed that the NLRA allows two workers to “join together to go into a judicial or administrative forum for the purpose of improving working conditions,” and the signed agreements result in a waiver of that statutory right. However, as long as an alternative forum is available, the waiver is legitimate under the NLRA. The Murphy Oil agreement had prohibited collective or class action complaints in any forum.

Both Chief Justice Roberts and Justice Alito challenged the NLRB’s position that employees have a protected right to pursue a collective or class action, but not in court. Chief Justice Roberts raised a hypothetical situation in which the arbitration rules might prohibit class actions, yet employees have waived the right to pursue their claims in a court. Chief Justice Roberts noted that, for instance, if an arbitral forum requires class action claims to include 50 or more claimants, and there are only 49 individuals employed by that employer, the employees would be effectively barred from bringing class action claims.

In response, Mr. Griffin agreed that those employees would be foreclosed from pursing a class action claim based on the rules of the arbitral forum; however, the employment agreement itself would not infringe on section 7 rights. As he argued to the Court, “the employee takes the rules of the forum as they find them.”

Justice Alito replied, “If that’s the rule, you have not achieved very much because, instead of having an agreement that says no class, no class action, no class arbitration, you have an agreement requiring arbitration before the XYZ arbitration association, which has rules that don’t allow class arbitration.”

Supreme Court Decision Could Invalidate Millions of Agreements
Employer, union, and employee groups alike recognize the widespread impact of this case on the validity of binding employment agreements. Twenty-seven amicus curiae briefs were submitted, reflecting arguments on both sides of the dispute, including ten international labor unions, the National Academy of Arbitrators, the Chamber of Commerce, and the NAACP Legal Defense & Educational Fund, among others.

If the Court were to rule in favor of employers, that would effectively close the courthouse door on the ability of millions of employees who are party to agreements containing class action waivers to bring class action wage-and-hour claims. The inability to litigate as a group could make it financially infeasible for individual employees to pursue FLSA claims.

On the other hand, if the Court were to rule in favor of employees, millions of employment agreements requiring individual arbitration of class action claims would be invalidated and may need to be renegotiated, and employers would be open to the risk of costly litigation.

Copyright © 2018, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).