Employers Can Enforce Class Action Waivers in Arbitration Agreements

This decision will have a significant impact on how employers respond to the threat of class action lawsuits and is likely to increase the use of arbitration agreements, if for no other reason than to decrease the risks and expense associated with class action litigation. The decision was considered a major victory for employers because it significantly reduces the number and likelihood of large numbers of plaintiffs banding together to arbitrate individual claims.

The History of Class Action Waivers

During the 1980s and 1990s, the U.S. Supreme Court issued several decisions that reinforced and strengthened the enforceability of arbitration agreements under the FAA. In response, companies began adding provisions, initially in consumer contracts, requiring that all disputes be submitted to arbitration and—more importantly—that they be submitted on an individual basis. This provision is known as a class or collective action waiver.

In 2011, the U.S. Supreme Court ruled in AT&T Mobility LLC v. Concepcion, 531 U.S. 333, that the FAA preempts state laws that prohibit arbitration agreements from disallowing class action lawsuits. In that case, two AT&T customers, Vincent and Liza Concepcion, brought a class action lawsuit alleging that AT&T engaged in false advertising and fraud by charging sales tax on phones it advertised as free. The Concepcions had signed an arbitration agreement with a class action waiver, which AT&T sought to enforce. The district court denied arbitration, relying on the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal. 4th 148, which declared class action waivers unenforceable because they unfairly took away the right of consumers to collectively assert a small amount of damages in a collective action. After the Ninth Circuit affirmed, the Supreme Court reversed in a 5–4 opinion, concluding that California’s rule prohibiting class action waivers as “unconscionable” disfavored arbitration in violation of the FAA. The Court held that “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” Concepcion, 531 U.S. at 344.

Because Concepcion dealt only with consumer class actions, an open question remained regarding the enforceability of class action waivers in the employment context. Now that question has been answered: Class action waivers will be enforced under the FAA.

The SCOTUS Decision in Epic Systems

As pointed out by Justice Gorsuch in the majority opinion in Epic Systems, the FAA and the National Labor Relations Act (NLRA) had “long coexisted,” since the FAA was initially passed in 1925 and the NLRA in 1935. Yet in 2012, the National Labor Relations Board concluded for the first time that a class action waiver was unenforceable because it violated Section 7 of the NLRA’s right to pursue workplace grievances through “concerted action.” D.R. Horton, Inc., 357 N.L.R.B. 2277.

The 2012 NLRB ruling created a flurry of activity in courts across the United States. The Second, Fifth, and Eighth Circuits rejected the NLRB’s interpretation, holding that the FAA mandated individualized arbitration and that nothing in the NLRA required a different conclusion. Meanwhile, the Sixth, Seventh, and Ninth Circuits reached the opposite conclusion, determining that the NLRA’s right to concerted action prohibited employers from requiring class action waivers. The United States Supreme Court granted certiorari to resolve the circuit split.

The majority opinion in Epic Systems began by reciting the history of the FAA and the Supreme Court’s pronouncement that it created “a liberal federal policy favoring arbitration agreements” according to their terms. 138 S. Ct. at 1621. Then the Court discussed the history of the “savings” clause, which “permits agreements to arbitrate to be invalidated by ‘generally applicable contract defenses, such as fraud, duress, or unconscionability.’ ” Id. at 1622 (quoting Concepcion, 563 U.S. at 339). The Court noted that these defenses must apply equally to all contracts, and not “defenses that target arbitration either by name or by more subtle methods, such as by ‘interfer[ing] with fundamental attributes of arbitration.’ ” Id. at 1622 (quoting Concepcion, 563 U.S. at 344).

Thus, the Court concluded, the FAA’s savings clause did not provide a basis for refusing to enforce arbitration agreements waiving class or collective action procedures.

Next, the Court addressed the issue of whether the NLRA overrides the FAA. The Court reasoned that Section 7 of the NLRA focuses on the right to organize unions and bargain collectively, but it does not express approval or disapproval of arbitration, nor mention class or collective action procedures. The Court addressed the history and structure of the NLRA and concluded that without specific statutory discussion of arbitration or class actions, the statutes could not be read in conflict. Thus, the Court concluded that the NLRA did not displace the FAA and prohibit class and collective action waivers.

Conclusion

Now that the Supreme Court has spoken, issues regarding arbitration agreements and class action waivers likely will turn on traditional questions regarding the formation of arbitration agreements, unconscionability, and related state law issues. But unless Congress amends the FAA, class action waivers in employment agreements will continue to be enforced.