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July 27, 2018 Practice Points

Supreme Court Rules in Favor of Employers by Enforcing Arbitration Agreements

By Ariel E. Harris and Graves Upchurch

In a 5-4 decision, the Supreme Court delivered a blow to employment rights. In an opinion by Justice Gorsuch the Court ruled that the Federal Arbitration Act, permitting individual arbitration agreements between an employer and employee, must be enforced, regardless of past decisions by the National Labor Relations Board. This decision gives employers more power, ensuring them that courts will enforce bilateral arbitration agreements.

In Epic Systems Corp. v. Lewis, the Court consolidated three cases concerning the ability of an employer to enter into an agreement with an employee stipulating that any dispute will be resolved through one-on-one arbitration. In essence, these agreements restrict employees from collectively bringing an action an employer. The three consolidated cases are similar in substance. One of the three, Ernst & Young LLP v. Morris, involved a junior accountant who entered into a one-on-one arbitration agreement with his employer. Despite the agreement the junior accountant sued Ernst & Young in federal court in a class action for “wage theft.” The Ninth Circuit Court of Appeals held that the Arbitration Act requires courts to enforce arbitration agreements, but the “saving clause” within the statute removes that requirement if enforcing it violates another federal law. In this case, the Ninth Circuit decided the arbitration agreement violated the National Labor Relations Act by preventing employees from pursuing class action or collective claims.

Consequently, the Supreme Court was tasked with deciding how to interpret two apparently competing statutes. In the opinion, Gorsuch remarked that for the past several decades courts have generally agreed that arbitration agreements should be enforced. It wasn’t until 2012 that the National Labor Relations Board decided for the first time in over 70 years that the National Labor Relations Act (NLRA) prohibits these types of agreements. To deal with this confusion, Gorsuch examined how each federal law should be interpreted in light of the other.

In short, the Court found the savings clause does not preserve an employee’s cause of action because, “the savings clause recognizes only defenses that apply to ‘any’ contract.” Epic Systems v. Lewis, 584 U.S. ­__ (2018). In this case, the employees’ argument fell short because they didn’t allege standard contract defenses such as fraud, duress, or unconscionability. The employees’ only objection to the contract was the individual arbitration requirement, which is not a defense to a contract. In simple terms, the majority sided with precedent, opting to continue to follow, “a congressional command requiring us to enforce, not override, the terms of arbitration agreements before us.” Id.

 Having dealt with the savings clause in the Federal Arbitration Act, Gorsuch pushed forward, addressing the employees’ argument that the National Labor Relations Act in effect overrules the Court’s decision to enforce arbitration agreements. In response, the opinion reiterated the rule that a party attempting to show two Congressional statutes cannot be harmonized bears a heavy burden of showing clear Congressional intent that one statute does in fact trump the other. There’s a strong presumption that Congress will specifically overrule preexisting law when it intends to nullify certain statutes. Gorsuch explains that these rules exist to support the separation of powers. The Court can’t, and shouldn’t go about the business of choosing to repeal or amend laws, that is the duty of the legislature. Specifically, the employees point to a section of the NLRA that gives them the right to join together in collective bargaining for protection. This statute, they argue, should be interpreted as superseding the Arbitration Act. Careful to respect the legislature’s intent, the Court acknowledges this provision may allow unions to collectively bargain to prohibit arbitration, but does not explicitly disapprove of arbitration agreements. Nor does it mention overruling the Arbitration Act. Consequently, the Court is unwilling to interpret the NLRA as displacing arbitration agreements.  

The Court has continually expressed that provisions advocating collective legal action do not necessarily preclude individual conciliation through arbitration. Moreover, since there is no specific statute discussing the relationship between arbitration and collective actions, the Supreme Court is unwilling to overturn a law Congress has not addressed. Congress has addressed the fact that arbitration agreements should be enforced, which the Court will follow.  This opinion provides insight into the steps the judiciary will take to avoid overstepping its own power by making decisions best left to the legislature.

Ariel E. Harris is an associate with Nelson Mullins Riley & Scarborough LLP, Charlotte, North Carolina. Graves Upchurch is a summer associate with Nelson Mullins Riley & Scarborough LLP, Charlotte, North Carolina.

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