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September 11, 2018 article

Epic Systems Corp. v. Lewis: The Reach of the FAA Remains Unchanged

By Sheila J. Carpenter

Epic Systems Corp. v. Lewis is the Supreme Court’s most recent exposition of the reach of the Federal Arbitration Act (FAA), 9 U.S.C. §1 et. seq. Authored by the Court’s newest justice, the opinion sounds an old theme—arbitration agreements must be enforced if the objection to arbitration is due to the nature of the arbitration rather than the traditional grounds for revocation of any contract.

Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), took up the question of whether the right of employees under the National Labor Relations Act (NLRA) to bargain and act collectively made employment agreements specifying that only individual arbitrations might be brought an unfair labor practice. In an opinion authored by Justice Gorsuch, the Court held 5–4 that the NLRA should not be held to override section 2 of the FAA, which provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Justices Kennedy, Thomas, and Alito and Chief Justice Roberts joined in the majority opinion; Justice Thomas wrote a brief concurrence. Justice Ginsburg wrote a lengthy dissent, joined by Justices Breyer, Sotomayor, and Kagan.

The full text of section 2 of the FAA reads as follows:

A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

After defining “maritime transactions” and “commerce,” section 1 exempts certain contracts from the FAA: “[N]othing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” In Circuit City Stores, Inc. v Adams, 532 U.S. 105 (2001), applying the maxim ejusdem generis, the Supreme Court held that “any other class of workers engaged in foreign or interstate commerce” referred only to workers in the transportation industries such as the seamen and railroad workers specifically referenced in the same clause and that other types of employment contracts are covered by the FAA. The dissenters in that case argued that section 1 was intended to exempt all employment contracts and that the FAA’s legislative history indicated that it was intended to cover only business disputes. The dissenters made this same argument in Lewis, continuing to maintain that the FAA was designed to cover only business-to-business disputes. The dissent goes so far as to compare employment agreements requiring individual arbitration to the “yellow dog contracts” used before the NLRA to require workers to agree not to join a union.

The dissent is heavily laden with policy arguments, particularly a concern with the perceived inequality of bargaining power between employer and employee and the disincentive to arbitrate on a solo basis for what may be relatively small sums. The opinion of the Court addresses these arguments at the outset:

Should employees and employers 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 agreed with their employers?

As a matter of policy these questions are surely debatable. But as a matter of law the answer is clear. In the Federal Arbitration Act, Congress has instructed federal courts to enforce arbitration agreements according to their terms—including terms providing for individualized proceedings. Nor can we agree with the employees’ suggestion that the National Labor Relations Act (NLRA) offers a conflicting command. It is this Court’s duty to interpret Congress’s statutes as a harmonious whole rather than at war with one another. And abiding that duty here leads to an unmistakable conclusion. The NLRA secures to employees rights to organize unions and bargain collectively, but it says nothing about how judges and arbitrators must try legal disputes that leave the workplace and enter the courtroom or arbitral forum.

Lewis, slip op. at 1–2.

The statutory analysis by the majority is largely textual, not looking outside the statutory language when such a view is not deemed necessary. Thus, Lewis not only provides insight into Justice Gorsuch’s view of the FAA but confirms what we can expect from him when the Court construes any federal statute.

The Court has held a number of times since Circuit City that section 2 of the FAA overrides the attempts of courts, legislatures, and agencies to limit arbitration and that various categories of disputes, such as consumer contracts, cannot be excluded. It has also held that arbitration agreements can prohibit class arbitration. With these precedents, what was left to decide in Lewis?

Lewis arose from a peculiar administrative scenario. During the Obama administration, the National Labor Relations Board (NLRB) decided that employment agreements specifying that employees could bring only individual arbitrations constituted an unfair labor practice. Section 7 of the NLRA reads in part:

Employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection. . . .

29 U.S.C. §157.

The NLRB regarded the language referring to the right to “engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection” as including the right to bring collective or class actions. Once the Republican Party won the White House, the executive branch rejected the NLRB’s position; the Supreme Court received two briefs from the federal government, with the solicitor general and the NLRB espousing opposite positions on the issues.

Sidelight: American workers have the right to join unions and bargain collectively. However, except in certain industries such as auto manufacturing, they largely do not exercise that right. A Bureau of Labor Statistics January 2018 report shows private sector union membership dipping below 7 percent in 2017. Had the NLRB succeeded in its argument that individual private sector workers seeking to bring class or collective actions are engaged in “concerted activities” within the meaning of the NLRA, it would have expanded its powers with respect to nonunion employers not currently subject to organizing efforts.

The employees involved in Lewis argued that section 7 of the NLRA made their restriction to solo arbitration “illegal” and that illegality is a ground for revocation of any contract. Justice Gorsuch rejected this argument because it contravened the direction of 9 U.S.C. § 2 that arbitration agreements may be invalidated only on the same grounds as would invalidate any contract. When an arbitration provision of a contract is singled out for invalidity, that is precisely what the FAA states cannot be done. This is the teaching of AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), another 5–4 decision (written by Justice Scalia) with the same justices dissenting as did in Lewis. “[C]ourts may not allow a contract defense to reshape traditional individualized arbitration by mandating classwide arbitration procedures without the parties’ consent.” Lewis, slip op. at 8 (citing Concepcion, 563 U.S. at 344–51).

The NLRB argued that its position was entitled to Chevron deference. See Chevron USA v. Nat. Res. Def. Council, 467 U.S. 837 (1984).However, the Court noted that the NLRB has no expertise with respect to the FAA and thus is not in a position to determine whether the FAA should be subordinated to the NLRA. The reconciliation of statutory conflict is a matter for the courts, not for administrative agencies.

The NLRB also argued that because the NLRA was passed several years after the FAA, there was an implied repeal of the FAA to the extent it could be read to allow arbitration agreements that prohibit collective claims. Justice Gorsuch cited precedent holding that the Court is reluctant to find that one statute invalidates an earlier statute absent an indication by Congress that repeal was intended, and he added:

Respect for Congress as drafter counsels against too easily finding irreconcilable conflicts in its work. More than that, respect for the separation of powers counsels restraint. Allowing judges to pick and choose between statutes risks transforming them from expounders of what the law is into policymakers choosing what the law should be. Our rules aiming for harmony over conflict in statutory interpretation grow from an appreciation that it’s the job of Congress by legislation, not this Court by supposition, both to write the laws and to repeal them.

Lewis, slip op. at 10.

Lewis reiterates that when two parties agree to an arbitration clause, it will be enforced. Here the employees were told that if they did not agree to arbitration, they could quit. They chose to stay and thus were bound by the arbitration agreements their employers drafted. As in Concepcion, one party was free to say: “If you want to do business with me, you will agree to individual arbitration.” The choice to do business with the party insisting on arbitration is a choice to accept individual arbitration. Lewis makes clear that absent legislative action, the status quo will be maintained. The dissent’s vigorous denunciation of the Court’s two decades of precedent suggests that if the Court’s ideological makeup were to change, drafters of arbitration clauses would face a different landscape.

Sheila J. Carpenter is with Carpenter ADR, LLC, in Purcellville, Virginia.

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