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An Important Case that Impacts Arbitration Between Employers and Employees

On Behalf of | May 31, 2018 | Business Litigation, Employment & Labor Law

Epic Systems Corp. v. Lewis, ___ U.S. ___, No. 16-285 (21 May 2018)

This is an important case that will impact the use of arbitration to litigate disputes between employers and their employees. The decision concerns three consolidated cases that differ in detail but not in substance. In each case, an employee alleged that his employer misclassified his position and violated the wage and hour provisions of the Fair Labor Standards Act (FLSA). Each employee had signed an arbitration agreement requiring individual arbitration of employment-related disputes.

Notwithstanding the arbitration agreements, each employee sued in federal court to litigate his or her claim on behalf of a nationwide class under the FLSA’s collective action provision, 29 U.S.C. §216(b). The FLSA’s collective action provision allows employees to sue on behalf of themselves and other employees similarly situated, and it is precisely that type of collective action that the respondent employees were pursuing.

But the employees had a problem. The Supreme Court has held that the Federal Arbitration Act (FAA), 9 U.S.C §§1-16, establishes “a liberal federal policy favoring arbitration agreements, Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). Not only did Congress require courts to enforce agreements to arbitrate, it also required them to respect and enforce the parties’ chosen arbitration procedures, including individualized rather than class or collective action procedures. AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011); American Express v. Italian Colors Restaurant, 570 U.S. 228, 233 (2013). In the face of this precedent, how could the employees override their arbitration agreements and gain the benefit of the FLSA’s collective action provision?

The FAA has a provision, 9 U.S.C. §2, often referred to as the “savings clause,” that allows courts to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.” (Italics supplied.) So, if an arbitration agreement conflicts with a federal law, then that conflict could be a ground at law to revoke the arbitration agreement. At first glance it would seem that the arbitration agreements at issue conflict with the FLSA’s collective action provision; but the employees did not make that argument. Why not? Presumably because the Supreme Court held decades ago that an identical collective action provision (in fact one borrowed from the FLSA) does not displace the FAA or prohibit individualized arbitration proceedings. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 32 (1991) (discussing Age Discrimination in Employment Act). In fact, every circuit to consider the question has held that the FLSA allows agreements for individual arbitration.

Foreclosed from arguing a conflict between the FLSA and the FAA, the employees asserted that their arbitration agreements violated a different statute, the National Labor Relations Act (NLRA), by barring them from engaging in concerted activity authorized by the NLRA. 29 U.S.C. §157. That argument convinced the 9th Circuit but not a majority of the Supreme Court. Justice Gorsuch wrote that the employees’ contention that one statute (the NLRA) steps in to dictate procedures for claims under a different statute (the FLSA) and thereby overrides the commands of yet a third statute (the Arbitration Act), is “a sort of interpretative triple bank shot, and just stating the theory is enough to raise judicial eyebrows.”

The Court stated multiple reasons why the NLRA does not conflict with the FAA. The first and primary rationale is based on a close reading of the specific language of the FAA’s savings clause. Under the savings clause, a court can invalidate an arbitration agreement only if there is a ground at law or equity to revoke any contract. The savings clause recognizes only defenses (grounds) such as fraud, duress, or unconscionability, which are grounds for revoking any contract, not just revoking arbitration agreements. A defense (ground) that applies only to arbitration agreements is not a ground for revoking any contract. An asserted conflict between the NLRA and the FAA is not a ground for revoking any contract, but a ground for revoking only arbitration agreements. Therefore, an asserted conflict with the NLRA is not a ground within the meaning of the FAA’s savings clause.

The Court also said that if a defense (ground for revocation) interferes with a fundamental attribute of arbitration, then it is not a ground for revoking any contract, but rather targets only arbitration agreements. Individual arbitration is a fundamental attribute of arbitration. Class actions interfere with that fundamental attribute. Therefore, the asserted statutory right to litigate a class action is not a ground for revoking any contract, only for revoking arbitration agreements, and is not a ground within the FAA’s savings clause.

The Court stated other reasons for its holding. Although the FAA and the NLRA have long coexisted – they date from 1925 and 1935 respectively – the suggestion that they might conflict is new. Until a few years ago, courts agreed, as did the NLRB’s general counsel, that arbitration agreements like those before the Court must be enforced according to their terms. It was not until 2012, seventy-seven years after the NLRA’s adoption, that the NLRB asserted that the NLRA effectively nullifies the Arbitration Act in employment disputes. The weight of history, shown by the long coexistence of the two statutes, cuts against the employees’ contention that the NLRA conflicts with the FAA.

The two acts have different purposes that run on parallel tracks that do not collide. At one time, judges were hostile to arbitration, and the purpose of the FAA was to overcome that hostility and to guarantee arbitration to parties who have agreed to arbitrate, as in the instant case. The purpose of the NLRA is different; its purpose is to guarantee the right to organize unions and to bargain collectively. The NLRA expresses neither approval nor disapproval of arbitration. It does not even hint at displacing the Arbitration Act. If Congress had intended to nullify arbitration in employment cases, then Congress would have clearly said so. Congress does not hide elephants in mouseholes. Whitman v. American Trucking Assns., Inc., 531 U.S. 457, 468 (2001).

This was a five-to-four decision. Justice Ginsburg wrote a 30-page dissent which at times has the tone of a primal scream. By preventing class actions through enforcing arbitration agreements, we return to the dark age of Lochner v. New York, the age of 12-hour days and six-day work weeks, squalid, dangerous working conditions, child labor, “yellow dog contracts,” and so forth.

Justice Ginsburg’s main argument is that the language of the NLRA’s §7 conflicts with the FAA and is a reason for revoking arbitration agreements in employment disputes. That language guarantees employees the right to “engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection” (italics supplied), and that language Justice Ginsburg contends includes class actions and revokes arbitration agreements. Justice Ginsburg also argues that the FAA’s legislative history shows that Congress did not intend the statute to apply to employment contracts. Given the impassioned vehemence of Justice Ginsburg’s dissent, when and if Democrats regain control of the levers of power, I anticipate an effort to legislatively overturn this decision.

John Polk is a Special Counsel at Berenzweig Leonard, LLP. John can be reached at [email protected].