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).

The Supreme Court to Consider Employees' Right to Seek Class-wide Relief

On Friday, January 13, 2017, the Supreme Court granted certiorari to consider the consolidated appeals of Epic Systems Corp. v. Lewis, Ernst & Young v. Morris, and NLRB v. Murphy Oil. The Court will consider a circuit split regarding whether arbitration agreements containing class action waivers are enforceable under the Federal Arbitration Act in the employment context. In Murphy Oil, the Fifth Circuit held that a corporate defendant did not commit unfair labor practices by requiring employees to sign its arbitration agreement, which contained a class action waiver. In Epic and Ernst & Young, the Seventh and Ninth Circuits held otherwise -- that class waivers in arbitration agreements signed by employees violated the National Labor Relations Act because the waivers restricted the workers' right to concerted action. Bryan Schwartz Law blogged about the appellate decisions here and here.

These cases do not dispute that employees may waive their right to proceed with claims against their employer in any forum other than arbitration. Rather, the Seventh and Ninth Circuits have held that employees cannot waive their right to proceed as a class in any forum. These circuits, as well as the current National Labor Relations Board, agree that the National Labor Relations Act of 1935 protects private sector employees' right to concerted action in workplace disputes.

This long-enshrined federally-granted right to concerted action has come under attack since the Supreme Court decided AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). Concepcion broadly interpreted the Federal Arbitration Act of 1925 to preempt state laws that prohibit contracts from disallowing class-wide arbitration. While Concepcion was a consumer case, many courts, including the Fifth Circuit, have applied its holding to force employees to proceed with their claims against employers in arbitration, and to do so individually, rather than on a class-wide basis.

The Supreme Court should restore order in the lower courts by clarifying that the National Labor Relations Act protects workers' right to concerted action, that this right is not preempted by the Federal Arbitration Act, and that courts must stop applying Concepcion and its progeny to deny workers the right to proceed as a class in any forum. 

D.R. Horton Rising: The Ninth Circuit Sides with the Seventh Circuit and the National Labor Relations Board on Class Action Waivers, in Morris v. Ernst & Young, LLP

In the Ninth and Seventh Circuits, employers cannot force

employees to sign class action waivers as a condition of 

employment, because the NLRA provides employees the 

right to vindicate employment rights collectively.

Yesterday, the Ninth Circuit took sides in a major split within the U.S. Courts of Appeals over the enforceability of class arbitration waivers. In Morris v. Ernst & Young, LLP, No. 13-16599, Slip. Op. (9th Cir. Aug. 22, 2016), the Ninth Circuit held that employers violate Sections 7 and 8 of the National Labor Relations Act (“NLRA”) by requiring employees covered by the NLRA to waive, as a condition of their employment, participation in “concerted activities” such as class and collective actions. (Slip Op. at 1.)

By this holding, the Ninth Circuit joins the Seventh Circuit, which in Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. May 26, 2016) adopted the National Labor Relations Board (“The Board”) position in D.R. Horton, Inc., 357 NLRB No. 184 (2012). Under this line of authority, the Federal Arbitration Act (“FAA”) does not mandate enforcement of a contract that waives the substantive federal right to engage in concerted action established in Section 7 of the NLRA. (Slip Op. at p. 18-19.) Bryan Schwartz Law blogged in detail about the Lewis v. Epic Systems Corp. decision, here.

In Morris, two employees filed a class and collective action alleging that their employer had misclassified workers as exempt and deprived them of overtime in violation of the Fair Labor Standards Act (“FLSA”) and California labor laws. As a condition of employment, the employees were required to sign contracts containing a “concerted action wavier” that obligated them (1) to pursue legal claims against their employer exclusively through arbitration and (2) to arbitrate individually in “separate proceedings.” Based on these agreements, the employer moved to compel the employees to arbitrate their claims individually. The U.S. District Court granted the employer’s motion. (Slip Op. at p. 4-5.)

The Ninth Circuit reversed, reviewing the decision to compel arbitration de novo. Chief Judge Sidney R. Thomas explained in the opinion:

This case turns on a well-established principal: employees have the right to pursue work-related legal claims together. 29 U.S.C. § 157; Eastex, Inc. v. NLRB, 437 U.S. 556, 566 (1978). Concerted activity – the right of employees to act together – is the essential substantive right established by the NLRA. 29 U.S.C. § 157. Ernst & Young interfered with that right by requiring its employees to resolve all of their legal claims in “separate proceedings.” Accordingly the concerted action waiver violates the NLRA and cannot be enforced.

(Id. at p. 6.)

The Ninth Circuit explained that the FAA does not dictate a contrary result. (Id. at 14.) While the FAA creates a “federal policy favoring arbitration” clause enforcement, the Act contains a savings clause that prohibits enforcement of arbitration agreements that defeat substantive federal rights, including the right to engage in concerted activity under the NLRA. (Id. at 15, 26.) In Morris, employees’ waiver was illegal not because it required the employees to pursue their claims in arbitration, but rather, because they could not do so in concert. (Id. at p. 16.)

Other circuit courts have taken a contrary position, enforcing employers concerted action waivers under the FAA. See Cellular Sales of Missouri, LLC v. N.L.R.B., 824 F.3d 772, 776 (8th Cir. 2016); Murphy Oil USA, Inc. v. N.L.R.B., 808 F.3d 1013 (5th Cir. 2015); Owen v. Bristol Care, Inc., 702 F.3d 1050, 1053-54 (8th Cir. 2013); D.R. Horton, Inc. v. NLRB, 737 F.3d 344, 361 (5th Cir. 2013); Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297 n.8 (2d Cir. 2013).

As more circuits choose sides on whether class action waivers in arbitration agreements are enforceable, Supreme Court review becomes an inevitability. 

The High Court would also be wise to resolve a disagreement between the Ninth and Seventh Circuits regarding such waivers. In the Seventh Circuit, any “[c]ontracts that stipulate away employees’ Section 7 rights . . . are unenforceable.” Epic, 823 F.3d at 1155. The Ninth Circuit precedent is narrower, making such contracts enforceable if employment is not conditioned on agreeing to the clause. (Slip. Op. 11, n. 4.) For example, if an employee has the opportunity to opt-out of a class action waiver and keep his or her job, but chooses not to, that waiver would be enforceable by the employer in the Ninth Circuit. (Id. (citing Johnmohammadi v. Bloomingdale’s, Inc., 755 F.3d 1072, 1076 (9th Cir. 2014))). The Seventh Circuit provides a clearer rule, one that better comports with the purposes of the NLRA, and one that the Supreme Court should adopt.

For now, workers in the Ninth and Seventh Circuits, as well as their advocates, should take note that employers cannot force employees to sign class action waivers as a condition of employment, because Epic and Morris tell us that the NLRA provides employees with the right to vindicate their employment rights collectively. 

Arbitration Class Action Waivers Challenged: Seventh Circuit Sides with The National Labor Relations Board on D.R. Horton, in Lewis V. Epic Systems

On May 26, 2016, in Lewis v. Epic Systems Corp., No. 15-2997, 2016 WL 3029464 (7th Cir. May 26, 2016), the Seventh Circuit, fueling a circuit split, sided in favor of the National Labor Relations Board (“the Board”) position in D.R. Horton, Inc., 357 NLRB No. 184 (2012), holding that employers violate Section 7 of National Labor Relations Act (NLRA) by requiring employees covered by the Act to waive, as a condition of their employment, participation in class or collective actions.  Under Section 7 of the NLRA, employers are prohibited from interfering with employees’ right “to engage in…concerted activities for the purpose of collective bargaining or other mutual aid or protection.”

In Epic Systems, Lewis, a technical writer, filed a suit in federal court in Wisconsin on behalf of himself and other technical writers alleging that his employer – Epic Systems Corporation – had violated the Fair Labor Standards Act (FLSA) by misclassifying workers as exempt and depriving them of overtime.  In response, Epic-Systems moved to dismiss Lewis’s claim and compel individual arbitration because he had signed an arbitration agreement that waived his “right to participate in or receive money or any other relief from any class, collective, or representative proceeding.”  Lewis, however, responded that the agreement’s class and collective action waiver was unenforceable because it interfered with his right to engage in concerted activities under Section 7 of the NLRA.  The district court agreed with Lewis’s arguments and the Seventh Circuit affirmed.

Chief Judge Diane Wood explains in Epic Systems that “there is ‘no doubt that illegal promises will not be enforced in cases controlled by the federal law.’”  Epic Sys. Corp., 2016 WL 3029464, at *6 (quoting Kaiser Steel Corp. v. Mullins, 455 U.S. 72, 77 (1982)).  As reasoned in D.R. Horton, Section 7 grants employees the substantive right to act “concertedly for mutual aid or protection” and mandatory arbitration agreements that bar an employee’s ability to bring or join class or collective workplace claims restrict this substantive right. 

D.R. Horton adversaries claim that the Board and now the Seventh Circuit have expressly rejected the Supreme Court’s clear instructions on how to interpret the Federal Arbitration Act (FAA), which says that absent some specific “contrary congressional command” as to whether a claim can be arbitrated, the FAA “requires the arbitration agreement to be enforced according to its terms.”  CompuCredit Corp. v. Greenwood, 132 S.Ct. 665, 673 (2012).  However, as Chief Judge Wood explains in Epic Systems, “[b]efore we rush to decide whether one statute eclipses another, we must stop to see if the two statutes conflict at all.”  Epic Sys. Corp., 2016 WL 3029464, at *5.

The U.S. Supreme Court has made clear that “when two statutes are capable of co-existence ... it is the duty of the courts, absent a clearly expressed congressional intention to the contrary, to regard each as effective.”  Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528, 533 (1995); see also Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 381 (1996) (implied repeal should be found only when there is an “‘irreconcilable conflict’ between the two federal statutes at issue”) (quoting Kremer v. Chem. Const. Corp., 456 U.S. 461, 468 (1982)).  Epic Systems elucidates that the FAA and NLRA are reconcilable by way of the FAA’s savings clause, which provides that if “the provision at issue is unlawful under Section 7 of the NLRA, it is illegal, and meets the criteria of the FAA’s savings clause for non-enforcement,” i.e., that an arbitration agreement’s conflict with federal law is grounds for invalidation.  Epic Sys., 2016 WL 3029464, at *6.  When Congress drafted the FAA, it anticipated that conflicts could arise between it and other Federal laws, and by including the savings clause, it created a means of harmonizing the FAA with laws such as the NLRA. 

The Seventh Circuit’s decision splits with last year’s Murphy Oil USA, Inc. v. N.L.R.B., 808 F.3d 1013 (5th Cir. 2015), in which the Fifth Circuit held the exact opposite, ruling that the employer did not commit unfair labor practices by requiring employees to sign its arbitration agreement or seeking to enforce that agreement in federal district court.  The Fifth Circuit rejected the Board’s position, but the Court did not profess to have the last word on the matter.  The Fifth Circuit wrote, “[a]n administrative agency’s need to acquiesce to an earlier circuit court decision when deciding similar issues in later cases will be affected by whether the new decision will be reviewed in that same circuit…We do not celebrate the Board's failure to follow our D.R. Horton reasoning, but neither do we condemn its nonacquiescence.”  Murphy Oil, 808 F.3d at 1018 (referencing Samuel Estreicher & Richard L. Revesz, Nonacquiescence by Federal Administrative Agencies, 98 YALE L.J. 679, 735–43 (1989)). 

The circuit split on the enforceability of class action waivers has the legal community reeling.  While D.R. Horton, Epic Systems, and the present judicial climate have emboldened the plaintiffs’-side employment law bar nationwide, the debate continues to arouse long-held sentiments that workers’ rights should be subjugated in the name of commerce and contractual rights.  The Supreme Court will likely have to address the conflict presented in D.R. Horton, Murphy Oil, and Epic Systems, and people in the labor and employment law community are on the edge waiting to hear who ends up in the seat formerly held by Justice Antonin Scalia.

U.S. Supreme Court Denies Certiorari Review of Bridgestone, Declining for a Second time to Consider a Challenge to PAGA

PAGA stays on track after Bridgestone

cert petition denied.

On June 1, 2015 the U.S. Supreme Court denied a petition for certiorari in Bridgestone Retail Operations, LLC v. Brown (“Bridgestone”), 2015 WL 86028, No. 14-790. The Bridgestone petition challenged the California Supreme Court’s decision in Iskanian v. CLS Transportation Los Angeles (“Iskanian”) (2014) 59 Cal.4th 348, holding that representative claims under the California Labor Code Private Attorneys General Act, Labor Code section 2698, et seq., are not preempted by the Federal Arbitration Act (FAA) and may not be compelled to individual arbitration since they, like qui tam claims, are brought on behalf of the state. Earlier this year, the U.S. Supreme Court declined to consider a petition for certiorari of the Iskanian decision itself.  By declining to accept a second challenge to Iskanian, the High Court has given employee advocates a reason to feel renewed confidence that they may proceed in court with PAGA actions, whether or not their clients are otherwise subject to individual arbitration agreements.

PAGA permits an employee to recover civil penalties for wage violations on behalf of California’s Labor Workforce Development Agency, for redistribution to the State and all aggrieved employees. As Bryan Schwartz Law has discussed in previous blog posts, Iskanian holds that employees cannot waive the right to bring representative actions under PAGA in a court of law by signing mandatory arbitration agreements. AT&T Mobility v. Concepcion (2011) 131 S.Ct. 1740 and its progeny interpret the FAA as permitting employees to give up the right to bring class actions asserting other claims by signing agreements to individually arbitrate those claims. However, in Iskanian, the California Supreme Court reasoned that PAGA is an enforcement mechanism designed to carry out California’s interest in ensuring compliance with state wage laws, and not merely a private litigant’s claim. Therefore, while employers may argue under AT&T Mobility that employees have signed away their rights to bring ordinary class claims alleging wage violations, employees’ representative PAGA claims remain unaffected.

On June 3, 2015 the Ninth Circuit heard oral arguments in three cases presenting questions of whether the FAA requires enforcement of PAGA waivers. See Hopkins v. BCI Coca-Cola Bottling Company of Los Angeles, No. 13-56126; Sakkab v. Luxottica Retail North America, Inc., No. 13-55184; and Sierra v. Oakley Sales Corp., No. 13-55891. Like the U.S. Supreme Court when presented with Iskanian and Bridgestone – the Ninth Circuit should not interfere with California’s right to enforce its own wage laws. Stay tuned.