U.S. Supreme Court Clarifies Enforceability of Class Action Waivers in Arbitration Agreements

On May 21, 2018, the United States Supreme Court held that class and collective action waivers in arbitration agreements are enforceable under the Federal Arbitration Act (FAA).[1]

Many employers enter into arbitration agreements with employees, requiring employees to resolve their disputes in arbitration rather than in court. A significant portion of those agreements also require employees to do so on an individual basis. In other words, employees cannot file a class action in court because they are required to arbitrate their claims, and they cannot file a class action in arbitration because they are required to arbitrate individually.

The enforceability of such agreements has recently been the subject of vigorous debate, particularly as it relates to Section 7 of the National Labor Relations Act (NLRA). In its recent decision, the Supreme Court granted certiorari to three matters from different federal courts — the Fifth, Seventh, and Ninth Circuits — which all considered the same question: do class action waivers in arbitration agreements violate Section 7 rights?

The FAA requires courts to enforce agreements to arbitrate. It has a savings clause, however, that allows courts to refuse to enforce arbitration agreements "upon such grounds as exist at law or in equity[.]" For its part, Section 7 guarantees employees "the right to self-organization, to form, join, or assist labor organizations, to bargain collectively . . . and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection."

The plaintiffs in these three cases argued that, consistent with the 2012 opinion issued by the National Labor Relations Board (NLRB), class and collective actions are "concerted activities" under Section 7, and that, as a result of the FAA savings clause, the NLRA overrides the FAA and renders all such arbitration agreements unlawful.

Justice Gorsuch, writing for a 5-4 majority, disagreed, holding that the FAA savings clause only recognizes defenses that apply to "any" contract, such as unconscionability, fraud, and duress. In other words, the clause does not save defenses that target arbitrations specifically, or that interfere with the "fundamental attributes of arbitration," such as requiring individual proceedings instead of class or collective ones.

Further, the Court noted that "Section 7 focuses on the right to organize unions and bargain collectively." Thus, Section 7 protects the right for unions to bargain to prohibit arbitration, but Section 7, by itself, "does not express approval or disapproval of arbitration" more generally. And, contrary to the plaintiffs' suggestion, Congress likely did not contemplate that "concerted activities" included class actions in 1935 when the NLRA was adopted, as class and collective action procedures were hardly known at that time.

Finally, the Court noted that the plaintiffs' underlying claims involved payment of wages pursuant to the federal Fair Labor Standards Act (FLSA), yet "they do not offer the seemingly more natural suggestion that the FLSA [as opposed to the NLRA] overcomes the Arbitration Act to permit their class and collective actions" in arbitration. Why not, the Court asked? Because the high court held decades ago that a collective action scheme identical to that of the FLSA does not prohibit individualized arbitration proceedings. In fact, every federal court to consider the question has held that the FLSA allows agreements requiring individualized, rather than collective, arbitration.

The Court thus concluded: "It's more than a little doubtful that Congress would have tucked into the mousehole of Section 7's catchall term an elephant that tramples the work done by these other laws; flattens the parties' contracted-for dispute resolution procedures; and seats the [NLRB] as supreme superintendent of claims arising under a statute [i.e., the FLSA] that it doesn't even administer."

Justice Ginsburg's dissent, which Justices Breyer, Sotomayor and Kagan joined, argued that with its decision, "the Court forgets the labor market imbalance" that gave rise to the NLRA and bargaining in the first place, "and ignores the destructive consequences of diminishing the right of employees to band together in confronting an employer." Her sentiment, however, did not win the day.

In sum, the Court has now blessed the inclusion of class and collective waivers in arbitration agreements. The practical result is that companies can, in many circumstances, effectively insure against class or collective actions by requiring employees to enter into well-drafted arbitration agreements. Please contact an L&E lawyer at Tonkon if you would like us to take a look at your current arbitration agreement, or help your company to institute one.

This update is prepared for the general information of our clients and friends. It should not be regarded as legal advice. If you have any questions regarding this update, or for more information about this topic, please contact an attorney in our Labor & Employment Practice Group, or the attorney with whom you normally consult.

 


[1] Plaintiffs can assert class actions, on behalf of themselves and others "similarly situated," pursuant to most state and federal laws. Collective actions arise under particular laws, such as the Fair Labor Standards Act.

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