Supreme Court Rules That Employees Can Waive Class Action Rights Through Arbitration Agreements
On May 21, 2018, the United States Supreme Court ruled in Epic Systems Corp. v. Lewis that arbitration agreements containing class action waivers are enforceable under the Federal Arbitration Act. 584 U.S. ___ (Dkts. 16-285, 16-300, 16-307).
The U.S. Supreme Court has repeatedly affirmed an employer’s ability to enforce arbitration agreements under the Federal Arbitration Act (FAA). But the U.S. Circuit Courts have split over whether employers could insist in those agreements that such arbitrations must be brought individually and not as class actions. Some courts, including the Ninth Circuit, had held that class waiver provisions were prohibited by Section 7 of the National Labor Relations Act (NLRA), which protects employees’ right “to engage in…concerted activities for the purpose of collective bargaining or other mutual aid and protection.”
In 2017, the U. S. Supreme Court heard arguments for the following three cases: Epic Systems Corp. v. Lewis, Ernst & Young LLP v. Morris, and NLRB v. Murphy Oil USA, Inc. All three cases presented the issue of whether class waivers were enforceable under the FAA. For instance, Ernst & Young LLP v. Morris involved a junior accountant who had entered an arbitration agreement which included a class waiver but who then filed a misclassification class action in federal court, alleging that the class waiver was unenforceable.
On May 21, 2018, the Supreme Court issued a long-awaited decision answering the question underlying all three cases. Justice Gorsuch authored the majority decision, finding that the FAA’s saving clause (which excepts the enforcement of illegal agreements) did not preclude enforceability of class action waivers. In part, the Court found that the saving clause’s general bases for rendering an agreement illegal only encompass defenses that could apply to any contract and do not include the argument that class waivers are illegal under the NLRA. Moreover, the majority concluded that such an expansive interpretation of the saving clause would undermine the effect of the FAA overall. The majority also opined that the language of NLRA Section 7 did not encompass protection for class and collective legal actions but rather was intended to protect the exercise of “the right to free association in the workplace.” Epic, 584 U.S. ____, (Dkts. 16-285, 16-300, 16-307), slip op. at 12.
Now, Epic makes clear to employers that arbitration agreements containing class action waivers can effectively limit employees’ disputes to individualized actions. As such, employers may offer arbitration agreements containing class action waivers at the outset of an employment relationship to avoid future collective actions. However, when deciding whether to make use of such arbitration agreements, employers may also want to weigh the potential cumulative cost of multiple individual arbitrations – particularly given that employers in California normally must bear the cost of the arbitrator in such actions. Employers should consult with legal counsel before determining whether arbitration clauses with class action waivers will advance their goals.