LEGAL: Class Action Waivers Upheld

By Jeff Jones
Special to the UCBJ

Employment law and arbitration agreements have a contentious history. In simple terms, an arbitration agreement provides that any dispute between the parties to the agreement will be heard by an arbitrator, who is a paid neutral decision maker selected by the parties, versus having a claim heard in court. 

Employers favor arbitration agreements as a means of limiting the expense, publicity, and the potential of a runaway jury award, whereas the attorneys who represent employees generally prefer court litigation because they hope to hit a home run with a jury. Some employers have required entry into a mandatory arbitration agreement as a condition of employment. In turn, employees and the attorneys who represent them have challenged such agreements in various ways. 

In Gilmer v. Interstate/Johnson Lane, employees challenged whether claims under Title VII were subject to mandatory arbitration agreements. In a 1991 decision, the U.S. Supreme Court held that under the Federal Arbitration Act (“FAA”), such agreements were enforceable.

After Gilmer many employers implemented arbitration agreements. But some of them went too far.  Many federal appellate courts found such agreements unenforceable on grounds that they were contracts of adhesion (i.e., contracts between parties of unequal bargaining power where the party in the superior position presents a one-sided “take it or leave it” arrangement that the other party has little choice but to accept), or for other similar reasons. 

This outcome is permissible under the FAA because that statute by its terms provides that arbitration agreements are enforceable except “upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Accordingly, arbitration agreements can be voided for the same reasons that any other contract may be voided, including as a contract of adhesion or based on similar reasons such as fraud, duress, or other traditional contract doctrines.

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The most recent chapter involves interaction between the FAA and the National Labor Relations Act (“NLRA”). Section 7 of the NLRA provides that employees may engage in concerted activity for the purpose of forming, joining or assisting a union, for engaging in collective bargaining, “or  other mutual aid or protection.” 29 U.S.C. § 157. 

In a 2012 decision, D.R. Horton, the National Labor Relations Board (“Board”) ruled that the ability to pursue claims on a class-wide basis was a form of “mutual aid or protection” that employees were entitled to engage in, and thus that arbitration agreements that contained class action waivers were not enforceable.  

In Epic Systems Corp. v. Lewis and two other companion cases issued on May 21, 2018, the U.S. Supreme Court squarely rejected the Board’s position, noting that the FAA directs courts to enforce arbitration agreements as written, unless there are grounds for revocation of the agreement.

The employees in these cases did not contend that the agreements were contracts of adhesion, had been procured by fraud or duress, or that there were other traditional grounds for voiding the agreements. Therefore, there were no such grounds for revocation.

In addition, the Supreme Court rejected the notion that the NLRA’s provision that employees may engage in concerted activity for “mutual aid or protection” effectively overruled the FAA in the circumstances of class action waivers in arbitration agreements.  The opinion noted that when Congress wants to exempt a particular type of dispute from arbitration, it knows how to do so. 

Several statutes contain such provisions. But the NLRA does not mention class or collective action procedures, much less clearly state a desire to displace the FAA with respect to class or collective actions. Therefore, said the Court, nothing about the NLRA removed the agreements at issue from enforcement as required under the FAA.

In short, based on Lewis, arbitration agreements between employers and employees that contain a class action waiver are permissible. Such agreements will not be found unenforceable because of a class action waiver provision, though they are of course subject to other requirements for a valid agreement.  

This is not the last chapter, however. Legislation that would preclude mandatory arbitration in sex harassment cases has been introduced into Congress. There are also movements in certain states to limit the degree to which employers may force mandatory arbitration of disputes with employees. Clearly, there is more to come in the evolving story of employment law and arbitration agreements. Stay tuned.

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