The United States Supreme Court Hears Oral Argument on Individual Arbitration Agreements in Employment Contracts in Epic Systems Corp. v. Lewis and Consolidated Cases

On Monday, the Supreme Court of the United States heard oral argument in one of the most important employment cases in recent history. In Epic Systems Corp. v. Lewis, and consolidated cases, Ernst & Young LLP v. Morris, and N.L.R.B. v. Murphy Oil, Inc., petitioners asked the Court to address whether employees can join together to sue their employer for labor violations, or whether employers may enforce individual arbitration agreements. Transcript available here. Bryan Schwartz Law has previously blogged about the Morris, Lewis, and Murphy Oil cases here, here, and here. Based on the questioning at oral argument, the conservative justices of the Roberts Court appear poised to deliver a victory to big business at the expense of employees.

Background

Whether individual arbitration clauses in employment agreements are enforceable will depend on the Court’s interpretation of two federal laws, the Federal Arbitration Act of 1925 (FAA) and the National Labor Relations Act of 1935 (NLRA).

The FAA provides that arbitration agreements “shall be valid,” except, according to a savings clause, “upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Arbitration agreements require parties to resolve legal disputes in front of a private arbitrator rather than in a court of law. Employers frequently seek to condition employment on a worker’s agreement to forego class-wide relief if a dispute arises, and instead pursue their claims in individual arbitrations.

Section 7 of the NLRA prohibits employers from interfering with employees’ right to engage in “concerted activities” for their “mutual aid or protection.” 29 U.S.C. § 157. Class actions have long been considered a concerted activity, which permit large numbers of employees who share common disputes with large employers to band together to pursue relief they would otherwise have foregone due to fear of being singled out for retaliation, or because the cost of hiring an attorney for their individual case would dwarf the amount of their individual wage claims. Agreements to arbitrate individually are in tension with the NLRA’s right to “concerted” activity.

During the years John Roberts has served as Chief Justice, the Supreme Court has consistently stretched the FAA to favor big business, and disfavor class actions.[1] In 2011 and 2013, the Supreme Court held that the FAA allows companies to use fine-print arbitration clauses to force consumer and merchant disputes to be arbitrated on an individual basis. See AT&T v. Concepcion, 563 U.S. 333 (2011) (Scalia, J.); American Express v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013) (Scalia, J.). Bryan Schwartz Law previously blogged about Concepcion and Italian Colors here and here. These rulings effectively bar claims by millions of individuals who have each suffered a relatively small injury by a corporation, by baring them from using the class action mechanism.

Unlike consumers or merchants, federal law specifically recognizes a worker’s right under the NLRA to engage in “concerted activity” against employers. In Lewis v. Epic Systems Corp., and Morris v. Ernst & Young LLP, the Seventh and Ninth Circuit Courts of Appeal recognized “concerted activity” as a substantive federal right which would render individual arbitration clauses unenforceable against employees under the FAA’s savings clause. The employers appealed.

In Epic Systems Corp. v. Lewis, and the consolidated cases, petitioners asked the Court to determine whether the FAA gives an employer the freedom to condition employment on an employee’s agreement to proceed individually in arbitration. Put another way, the issue was whether the NLRA gives workers a chance at a more level playing field, by protecting  employees from their employer’s attempts to restrain their ability to act jointly to vindicate rights in an arbitral or other forum.

Oral Argument

Questioning from conservative Justices Roberts and Alito suggests they will back the employers’ arguments that the right to “concerted activity” ends at the courthouse or arbitral forum’s doors. These justices seem satisfied to interpret the FAA to permit companies to use forced individual arbitration to bar workers from coming together in a concerted or joint legal action against their employer. (See Transcript, pp. 5, 34-36, 41-44). They appear inclined to subordinate the purpose of the NLRA to the FAA’s mandate to honor arbitration agreements absent some very specific Congressional command. (See Transcript p. 4). Justice Thomas and the Supreme Court’s newest addition, Justice Gorsuch, were silent throughout the argument, but can be expected to vote with the vocal conservative Justices.

Justice Kennedy seems poised to contort the language of the NLRA to the benefit of employers, too. In the first question of the day, Justice Kennedy suggested the meaning of “concerted action” under the NLRA may somehow exclude class actions. (Transcript p. 5. Justice Kennedy raised a hypothetical of two employees seeking to arbitrate their wage claims. (Transcript pp. 15-16). He implied that employees’ concerted activity rights could be satisfied if each employee hired the same attorney for individual representation – though the whole point of class action is the efficiency of not having countless individual actions seeking the same relief. Justice Kennedy showed no apparent concern for workers’ potential confidentiality concerns, or conflicts of interest that can arise in separate individual representation of numerous employees against a single employer. (Transcript pp. 37). Justice Kennedy suggested, that “many of the advantages of concerted action can be obtained by going to the same attorney” (Transcript p. 39), but this is absurd: corporations and everyone else know that most workers will never step forward individually to prosecute their claims. Companies don’t want to arbitrate at all – they want to eliminate legal challenges by workers, and know the Supreme Court has gifted them a sledgehammer for doing so, with the creative distortion of the FAA to ban group litigation.

Even before Concepcion, Justice Kennedy has been willing to twist the plain language of the FAA to the benefit of employers. In Circuit City Stores, Inc. v. Adams, 532 U.S. 105, he interpreted the FAA to apply to all employment contracts, except for interstate transportation workers, despite the fact that the plain language of the FAA suggests the Act excludes all employees working in interstate commerce. 9 U.S.C. § 1 (“nothing herein contained shall apply to contracts of employment of seamen, or railroad employees, or any other class of workers engaged in foreign or interstate commerce.”) (emph. added).

To the Court’s progressive wing, the resolution of these issues could not be clearer – the NLRA is a Congressional command that falls within the FAA’s express savings clause, and the NLRA prevents employer restraints on employees’ concerted action, including joint efforts to seek labor law remedies.  

Justice Breyer made his view clear that the NLRA requires invalidation of forced individual arbitration agreements in employment contracts, because, under the NLRA, “what the employer cannot stop is joint effort” including bringing legal claims in a class or collective action. (Transcript, pp. 56-57). Enforcing individual arbitration agreements would gut a foundation of labor law that represents “the entire heart of the New Deal.” (Transcript, pp. 7-8).

Justice Ginsberg described as the “driving force” of the NLRA the recognition of an “imbalance” in bargaining power between employers and employees, and explained that the protection of employees’ “concerted activity” was meant to correct that imbalance. (Transcript, pp. 5-6). A worker with small monetary damages can thereby join with other workers sharing similar claims in order to bring a larger claim to recover their damages jointly. (Transcript, pp. 21).

Justice Kagan pointed to the Supreme Court’s prior precedent, federal statutes, and the Constitution in support of the progressive wing’s straightforward position. The Supreme Court in Eastex v. N.L.R.B., 437 U.S. 556, 565-566, 566 n. 15 (1978) recognized that the NLRA protects employees from retaliation by their employers when they resort to “administrative and judicial forums” for their mutual aid and protection. (Transcript, pp. 6-7). Sections 102 and 103 of the Norris-LaGuardia Act of 1932, upon which the NLRA was modeled, state that any contract that prevents concerted activities of workers for their mutual aid and protection “shall not be enforceable in any court.” (Transcript, pp. 18). Once such a basic right has been articulated, as in, e.g., the First Amendment right to free speech, its broad protection may not be easily narrowed in its exercise. (Transcript, pp. 66).  

To Justice Sotomayor, the NLRA is a federal law that invalidates contracts that constrain concerted activity, making forced individual arbitration clauses illegal and unenforceable, in much the same way that “state law concepts like fraud[ and] duress,” invalidate contracts. (Transcript pp. 13-14).

No Proportional Check on Corporate Wrongdoing

The conservative justices of the Roberts Court appear determined to interpret the FAA based on its text, or as Congress intended, but rather by any means available to protect large corporations against consumers, small businesses, and now employees. Berkeley Law’s Dean, and the famed constitutional law scholar Erwin Chemerinsky, has observed that to effectively protect their rights employees need a proportional response to violations by large corporations:

With the rise of the large corporation in the early twentieth century, courts and legislatures developed class actions as a procedural device to protect individuals from the harms of exploitation by large entities. Courts and legislatures realized that large entities have incentives to engage in widespread but small violations of the law, because corporations know that people cannot afford to sue over a small violation of the law. When individual litigation is not economically rational, the threat of litigation is not an effective deterrent to illegal behavior. Absent a robust government bureaucracy dedicated to enforcing consumer- or employee- protection laws, class actions are an essential aspect of law enforcement. And even the most aggressive enforcement agency cannot deal with even a significant fraction of law violations. Litigation is essential for deterring wrongdoing and class actions suits are necessary when a large number of people suffer a relatively small injury.[2]

If the Supreme Court proceeds as expected, based on Monday’s oral argument, millions of workers will lose an effective means to remedy many violations of their rights. More and more employees will be forced to enter into individual arbitration agreements and face their employers alone.

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[1] Jessica Silver-Greenberg & Robert Gebeloff, “Arbitration Everywhere, Stacking the Deck of Justice,” N.Y. Times, Oct. 31, 2015.

[2] Erwin Chemerinsky, The Case Against the Supreme Court, § II.5 (2014).

U.S. Supreme Court Upholds University of Texas’s Race-Conscious Admissions Program

In a 4-3 decision Thursday, the Supreme Court affirmed that a race-conscious admissions program used by the University of Texas is legal under the Equal Protection Clause of the 14th Amendment—at least, as that program was implemented in 2008 when UT rejected Abigail Fisher’s college application. Justice Kennedy’s majority opinion in Fisher v. University of Texas (Fisher II) was far from an enthusiastic defense of the need for race-conscious admissions programs at public universities, but it affirmed the status quo in reiterating the narrow range of circumstances in which such programs are constitutionally permissible. For that reason, advocates for racial justice can mark Fisher in the win column.

Fisher first came before the Court during the October 2012 term (Fisher I), at which point Ms. Fisher had already graduated from Louisiana State University with a degree in finance. The Court set forth the principles the UT admissions program needed to satisfy under the 14th Amendment (discussed below), said that the Fifth Circuit had failed to apply those principles, and sent the case back for the Fifth Circuit to reconsider.

The Supreme Court first addressed the constitutionality of affirmative action in higher education when it struck down a quota system for applications to the University of California Medical School at Davis in 1978. However, that case, Regents of University of California v. Bakke, also established that affirmative action would be constitutionally permissible, at least in some circumstances. The Court did not clearly establish the applicable level of scrutiny until the mid-1990s, when the Rehnquist Court held that all racial classifications—without regard to whether those classifications were intended to hinder or help people of color—would be subject to the highest level of scrutiny (strict scrutiny) under the Equal Protection Clause. In dissent, Justice Stevens wryly chided the majority as unable to tell “the difference between a ‘No Trespassing’ sign and a welcome mat.”

More recently, the Court considered two race-based admissions programs at the University of Michigan in 2003. The Court (in two opinions by Justice O’Connor) struck down the undergraduate school’s use of a point system to boost applications from people of color while it upheld the Law School’s use of race as a “plus factor” as part of a flexible assessment of other “soft variables.” Those decisions also established “attaining a diverse student body”—for the benefit of all students—as the only permissible basis for an affirmative action program. An affirmative action program that sought to remedy the effects of past discrimination, for example, would not pass constitutional muster. These Michigan cases established the needle which UT needed to thread if it wanted to promote diversity at its flagship university while satisfying strict scrutiny under the Equal Protection Clause.

UT thus developed an intriguing strategy to diversify its student body, by taking advantage of widespread racial segregation in the state’s public schools: it would offer admission to all students who placed in the top 10% of their high school class, up to 75% of the class. UT would then admit the remaining 25% according to an individualized inquiry which would consider race as one factor among many, much like the Michigan Law School plan approved by the Court. In alleging that her rejection from UT was racially discriminatory, Ms. Fisher challenged only the latter aspect of the admissions program (as she did not place in the top 10% of her high school class).

In Fisher I, Justice Kennedy described three controlling principles to assess the constitutionality of a public university’s race-conscious admissions program. First, such a program would have to satisfy strict scrutiny under the Equal Protection Clause (that is, it must be narrowly tailored to achieve a compelling government interest, and diversity qualifies as such an interest). Second, courts should defer to a university’s academic judgment, accompanied by reasoned explanation, that a diverse student body would promote its educational goals. Third, the university bears the burden of proving that a race-neutral approach would not accomplish the same goals.

In Fisher II, Justice Kennedy determined that UT had met its burden with respect to all three principles. In large part, Kennedy appears to have been persuaded by the comprehensiveness of the data produced by UT in support of its need to go beyond the Top 10% program to achieve the educational benefits of a diverse student body, the modesty of the program (using race as “but a ‘factor of a factor of a factor’ in the holistic-review calculus”), and a desire to defer to UT’s academic judgment.

Justice Kennedy’s Fisher II opinion (much like his Fisher I opinion) is far from a model of clarity. Justice Kennedy went to great lengths to explain that UT’s admissions program was one-of-a-kind, that the Court’s ruling was meant only to capture a moment in time, and that the opinion had “limit[ed] value for prospective guidance.” Justice Kennedy referred to UT’s program as unique (he used the Latin), although it is unclear why he thinks other states will not adopt a similar approach now that the Court has given its seal of approval—Texas is not unique in its de facto racially segregated public schools. He also noted that the opinion did not intend to approve of UT’s admissions program today or in the future, explaining that UT should continually assess the need for a race-conscious admissions policy.

In doing so, he also fell prey to the same dubious assumption as Justice O’Connor in the Michigan cases: that racism in the United States will soon become a distant memory (Justice O’Connor stated that affirmative action would cease to be necessary by 2028). This premise was misleading, even before a major U.S. political party nominated an overtly racist demagogue as its standard bearer.

Still, Justice Kennedy should be commended for his evolution on affirmative action. He voted to strike down the use of race as a plus factor in the Michigan Law School case less than 15 years ago, and less than 10 years ago joined the majority in striking down Seattle’s use of race in school assignments to further Seattle’s goal of racially integrated public schools. In fact, Justice Kennedy has never before affirmed an affirmative action program. Particularly before the death of Justice Scalia, many commentators suspected that Fisher II would effectively end race-conscious admissions at public universities, and deny countless students of color a fair shake in the application process. Fisher II instead preserved the status quo, for which the four justices in the majority should be applauded.