Supreme Court Upholds Individual Arbitration in Employment

On May 21, 2018, the U.S. Supreme Court upheld the enforceability of individual arbitration agreements containing class or collective action waivers within the employment context. In other words, the Federal Arbitration Act (“FAA”) allows an employer to require its employees to resolve disputes individually in arbitration, and neither the FAA’s savings clause, nor the prohibition in the National Labor Relations Act (“NLRA”) against interfering with concerted activities, requires otherwise.

The Court’s 5-4 decision in Epic Systems Corporation v. Lewis(2018 WL 2292444) resolved a split among the lower courts arising from three separate pending cases: Epic Systems Corporation v. Lewis(7thCir., No. 16-2850), Ernst & Young LLP, et al. v. Morris(9thCir., NO. 16-300) and National Labor Relations Board v. Murphy Oil USA, Inc., et al.(5thCir., No. 16–307). All three cases involved a contract that provided for individualized arbitration to resolve employment disputes. However, the respective employees each attempted to pursue Fair Labor Standards Act (“FLSA”) and related state law claims through federal class action litigation. 

The Issue
The majority framed the issue as follows:
“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?”

The employees argued that, while the FAA generally requires courts to enforce arbitration agreements as written, the FAA’s “saving clause” would not require this if the arbitration agreement itself violated other federal law. In this case, the employees alleged that the requirement for individualized proceedings violated the NLRA’s prohibition against interfering with concerted activities. The Court disagreed on both counts.

FAA Savings Clause
In enacting the FAA, the Court noted that Congress directed courts to treat arbitration agreements as “valid, irrevocable, and enforceable.” The Court also acknowledged that the FAA establishes “a liberal federal policy favoring arbitration agreements.” Taking it a step further, the Court stated:

Indeed, we have often observed that the Arbitration Act requires courts “rigorously” to “enforce arbitration agreements according to their terms, including terms that specify with whomthe parties choose to arbitrate their disputes and the rules under which that arbitration will be conducted.” American Express Co. v. Italian Colors Restaurant,570 U.S. 228, 233, 133 S.Ct. 2304, 186 L.Ed.2d 417 (2013) (some emphasis added; citations, internal quotation marks, and brackets omitted).

The savings clause allows courts to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.” In this case, the allegation is that a requirement for individual arbitration in the employment context violates the NLRA’s protections.

However, the Court pointed out that the savings clause allows arbitration agreements to be invalidated by “generally applicable contract defenses, such as fraud, duress, or unconscionability” and not by defenses that arise solely because an arbitration agreement is at issue. The employees in the cases at issue did not allege fraud, duress or unconscionability, which would invalidate any contract, but challenged the legality of requiring individual arbitration in lieu of class actions under the NLRA. While illegality may be a generally applicable contract defense, “an argument that a contract is unenforceable just because it requires bilateral arbitration is a different creature.” It would impermissibly disfavor arbitration, in direct conflict with Congress’ liberal policy favoring arbitration agreements.

NLRA Concerted Activities
The employees further argued that, even if the FAA requires the Court to enforce such arbitration agreements, the NLRA still requires them to be found unlawful.
When considering two Acts of Congress that appear to touch on the same subject, the Court noted that it does not have the authority to pick and choose, and must instead strive to reconcile them. The NLRA guarantees employees the right to organize, form unions and bargain collectively. It also guarantees them the right, “to engage in other concerted activitiesfor the purpose of collective bargaining or other mutual aid or protection.” It does not specify how legal disputes or arbitration proceedings must be handled. Furthermore, both the FAA and the NLRA have been the law for decades but they have not historically been viewed as being in conflict with one another. The NLRA was never interpreted to invoke a right to class actions until the National Labor Relations Board did so in 2012.

The employees argued that the language of the NLRA should be interpreted to demonstrate a clear congressional intent to displace the FAA and prohibit the agreements at issue but the Court declined to do so, finding that the NLRA focuses on the right to organize unions and bargain collectively. It permits unions to bargain against arbitration, but it does not itself take a position on arbitration or mention any right to class or collective actions. When read in context, the phrase “other concerted activities” is intended to protect employees’ activities in furtherance of organizing, forming, joining or assisting labor organizations.
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What Credit Unions Need to Know
Key to the enforcement of any arbitration agreement is to ensure that it is clearly and fully communicated to all parties. Whether in the employment context as in the present case, in a vendor agreement, or in a consumer financial services contract, credit unions are encouraged to work with legal counsel to determine when and whether arbitration is the best approach and to craft appropriate language.