October 19, 2017, Trial News
SCOTUS seems closely divided in trio of employment arbitration cases
Alyssa E. Lambert
In one of the year’s most watched cases, the U.S. Supreme Court started its October 2017 Term with oral arguments in a trio of consolidated decisions about the enforceability of class and collective action waivers contained within forced arbitration agreements in employment contracts. The Seventh and Ninth Circuits have held that such provisions violate the National Labor Relations Act, which makes it illegal for employers to “interfere with, restrain, or coerce employees in the exercise” of their right to “engage in concerted activities.” But the Fifth Circuit has disagreed, ruling that the Federal Arbitration Act overrides the NLRA and requires upholding these agreements.
In one of the year’s most watched cases, the U.S. Supreme Court started its October 2017 Term with oral arguments in a trio of consolidated decisions about the enforceability of class and collective action waivers contained within forced arbitration agreements in employment contracts. The Seventh and Ninth Circuits have held that such provisions violate the National Labor Relations Act (NLRA), which makes it illegal for employers to “interfere with, restrain, or coerce employees in the exercise” of their right to “engage in concerted activities.” But the Fifth Circuit has disagreed, ruling that the Federal Arbitration Act (FAA) overrides the NLRA and requires upholding these agreements. (Epic Systems Corp. v. Lewis, No. 16-285; Ernst & Young LLP v. Morris, No. 16-300; Nat’l Labor Relations Bd. v. Murphy Oil USA, Inc., No. 16-307 (U.S. oral arg. Oct. 2, 2017).)
In Epic Systems, Jacob Lewis alleged that the Wisconsin-based software company did not pay him and other technical writers overtime in violation of the Fair Labor Standards Act (FLSA). Epic Systems moved to compel arbitration based on an electronic arbitration agreement that required wage-and-hour claims to be brought through individual arbitration only and prohibiting any collective or class action proceeding. The contract did not contain an option to decline or opt out, stating that employees were “deemed to have accepted this [a]greement” if they “continue[d] to work at Epic.”
Lewis contended that the agreement violated §7 of the NLRA, which protects employees’ rights to “engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection,” and §8, which makes it “an unfair labor practice for an employer . . . to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed” under §7. The district court denied the motion, and the Seventh Circuit affirmed, noting that “other concerted activity” included collective and class actions and rejecting the employer’s argument that the FAA conflicts with and overrides the NLRA. (823 F.3d 1147 (7th Cir. 2016).)
The fact pattern was similar in Ernst & Young: Stephen Morris and Kelly McDaniel worked in the auditing division of two of the company’s California offices. In February 2012, Morris sued in New York federal court, alleging that the company failed to pay him overtime wages in violation of the FLSA. McDaniel later joined the collective action, which was transferred to California federal court. Ernst & Young moved to compel individual arbitration based on a “concerted action waiver” in its employment contract that required employees to bring claims through individual arbitration only and barred court proceedings, as well as arbitration conducted on a classwide or collective basis. The district court ruled that public policy favored enforcing the arbitration agreement under the FAA.
A split Ninth Circuit panel reversed, holding that §7 of the NLRA established a substantive right for employees “to pursue work-related legal claims, and to do so together,” and that the arbitration agreement interfered with that right. The court also held that the FAA’s savings clause provides that arbitration clauses are enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract” and that the FAA recognizes the contract defense of illegality—and violating the NLRA is illegal. (834 F.3d 975 (9th Cir. 2016).)
In Murphy Oil, Sheila Hobson, who worked at a Murphy Oil gas station in Alabama, filed a collective action alleging she and her coworkers were routinely asked to perform tasks while “off the clock” and without pay, which violates the FLSA. Murphy Oil moved to compel arbitration based on an employment contract Hodson and the others signed preventing them from pursuing any class or collective action in arbitration or court proceedings. The district court ordered the parties to proceed to arbitration and dismissed Hobson’s case after they failed to do so. Hobson filed a complaint with the National Labor Relations Board (NLRB), which held that Murphy Oil’s arbitration agreement violated the NLRA and constituted an unfair labor practice. The company appealed, and the Fifth Circuit held that the FAA dictates enforcement of the arbitration agreement. (808 F.3d 1013 (5th Cir. 2015).)
The petitions for certiorari were granted in January 2017, and the three cases were consolidated for joint argument. Although the Solicitor General’s office originally petitioned the Court for review in Murphy Oil on the NLRB’s behalf, it did an about-face in June 2017 after the administration change, filing an amicus brief in support of all three corporate employers and pitting the federal government against a federal agency. The NLRB submitted its own brief in August, again urging the Court to reverse the Fifth Circuit.
Former Solicitor General Paul Clement argued on behalf of all three employers. “Because of the clarity with which the FAA speaks to enforcing arbitration agreements as written, the FAA will only yield in the face of a contrary congressional command, and the tie goes to arbitration. Applying those principles to §7 of the NLRA, the result is clear the FAA should not yield,” Clement said.
But Justices Stephen Breyer, Ruth Bader Ginsburg, Elena Kagan, and Sonia Sotomayor all focused on the far-reaching implications of having one federal law override another.
“I’m worried about what you are saying is overturning labor law that goes back to . . . the entire heart of the New Deal,” Breyer emphasized.
Deputy Solicitor General Jeffrey Wall, who also argued on the employers’ behalf, faced a similar barrage from the Court’s more liberal voices.
Ginsburg noted that the claims in Ernst & Young amounted to $1800 each, making individual arbitration costly and impractical. “That’s why this is truly a situation where there is strength in numbers, and that was the core idea of the NLRA. . . . We have to protect the individual worker from being in a situation where he can’t protect his rights,” she said.
“What you’re saying is the FAA trumps the NLRB’s concerted activity statement. . . . I don’t know how you do that when at least one of these agreements, if not all three, have confidentiality agreements that prohibit the employees from talking to other employees, from combining with other employees. . . . If it does that and it stops them from going to the courtroom door, is that an unfair labor act?” Sotomayor asked. But Wall stood his ground, even after Breyer pressed him to conclude it was an unfair labor practice, asserting that Breyer’s “historical premise is just wrong.”
Richard Griffin, arguing for the NLRB, countered that Wall and Clement were the ones in error: “The Board’s precedent has always said that individual agreements that require employees to waive their right to proceed collectively are violations of the NLRA.”
University of Virginia Law professor Daniel Ortiz, one of Lewis’s attorneys, noted that roughly 25 million private sector, non-union workers have signed contracts that contain these mandatory arbitration clauses. Chief Justice John Roberts commented that a decision in the employees’ favor would invalidate those agreements.
On rebuttal, Clement emphasized Justice Anthony Kennedy’s earlier point that employees still have the right to concerted activity under these agreements because even though they would arbitrate individually, they could have the same lawyer, for example. But Kagan took issue with that: “[T]he fact that there is one way to exercise a right left over does not make it OK if we’ve taken away another 25 ways of exercising the right.”
“This case is going to divide the Court, just as it divided the federal government,” said Matt Wessler, of Washington, D.C.-based Gupta Wessler, one of the attorneys who submitted an amicus brief on AAJ’s behalf in favor of the employees and the NLRB. “It’s not clear how the Court is going to resolve these fairly novel questions: how much deference an agency is entitled to when it interprets an ambiguous clause within the statute it is charged with administering and the relationship between the FAA and other federal laws that would appear to limit or restrict collective or class action waivers in the context of arbitration agreements.”
San Francisco employment rights attorney Cliff Palefsky, who signed onto an amicus brief in support of 10 labor unions, the National Employment Law Project, and the National Employment Lawyers Association, said that the decision could be close if it’s decided on strictly political lines, but legally speaking, it’s pretty cut and dried.
“The right to file an employment claim is expressly and statutorily protected. If you’re looking at plain language of the labor law statutes—the NLRA, Norris-LaGuardia, the FLSA—and if you’re looking at congressional intent, it’s all there,” Palefsky said. “In addition, there is no such thing as preemption of one federal statute over another.”
Karla Gilbride, an attorney with Washington, D.C.-based Public Justice, said the justices seemed to understand the potentially broad impact of the case. “This case involves a federal statute and rights that were guaranteed by Congress—something that you didn’t have in Concepcion—and the contracts that employers are requiring people to sign go right to the heart of the employees’ ability to band together, which is something you heard in the justices’ questions,” Gilbride said. “And as Sotomayor noted during the rebuttal—this isn’t just about wage-and-hour cases; it also affects employment discrimination cases.” Public Justice also signed onto an amicus brief filed on behalf of 30 civil rights organizations.
If the Court adheres to its own precedent, Palefsky said, the decision should come down in the employees’ favor.
“Every case on arbitration that the Supreme Court has written states that arbitration is a change of forum; it can’t be used to change substantive rights. In the cases involving class actions, the Court said it was a procedural right. But that’s not the case here. Here it is a substantive right,” he said.