Supreme Court Favors Delegation Clauses, But Courts Retain Jurisdiction Over Formation Disputes

On January 8, 2019, the Supreme Court reversed the Fifth Circuit decision in Henry Schein, Inc. v. Archer and White Sales, Inc., Case No. 17-1272. 

The case is a business dispute in which plaintiff Archer and White seeks both money damages and injunctive relief. Defendant Schein moved to compel arbitration and Archer and White opposed, arguing that the dispute was not subject to arbitration because the complaint seeks injunctive relief, at least in part. The relevant contract provision states:

Disputes. This agreement shall be governed by the laws of the State of North Carolina. Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of [Schein]), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association. The place of arbitration shall be in Charlotte, North Carolina.

Schein argued that because of the contract's express incorporation of the American Arbitration Association's rules, the parties agreed that questions of arbitrability, including the arbitrability issue raised by Archer and White, would be decided by an arbitrator. Archer and White responded that because they seek injunctive relief, which is excluded in the above provision, the court may resolve a threshold question of arbitrability if the argument for arbitration is "wholly groundless." The district court agreed and Schein's motion to compel was denied. The Fifth Circuit affirmed, citing its own precedent for a "wholly groundless" exception to enforcing a delegation clause. 

In his first Opinion, Justice Kavanaugh writes for a unanimous Supreme Court that when parties contract to delegate arbitrability questions to an arbitrator, a court may not override this agreement even if the court believes that arbitrability of the particular dispute is "wholly groundless." He explains that "[j]ust as a court may not decide a merits question that the parties have delegated to an arbitrator, a court may not decide an arbitrability question that the parties have delegated to an arbitrator."

However, citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995), and Rent-a-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010), the Opinion clearly states that courts retain the power to decide whether there is "clear and unmistakable evidence" of a meeting of the minds to delegate arbitrability questions to an arbitrator. Rather than ordering the lower courts to grant Schein's motion to compel, the Court remanded to the Fifth Circuit to consider, in the first instance, the issue of whether the contract in fact delegated the arbitrability question to the arbitrator.

In employment law, workers' rights attorneys generally seek to avoid arbitration because of the ways in which arbitration agreements are being used not only to stop workers and consumers from vindicating their rights in a concerted manner, but also to exert control over the dispute resolution process, primarily by companies building repeat-customer relationships with certain preferred arbitrators.    

The Supreme Court's decision in Schein is prompting defense attorneys to advise their employer clients to review their arbitration agreements and include a clearly worded delegation clause. However, employers cannot circumnavigate the courts merely through the presence of a provision attempting to delegate questions of arbitrability to an arbitrator. Workers remain able to argue defenses to formation of such an agreement, and courts must hear these arguments. Workers, if you can argue that the defendant lacks "clear and unmistakable evidence" that the parties agreed to arbitrate, or that the parties agreed to delegate issues of arbitrability to an arbitrator, the Supreme Court has made clear, unanimously, that this argument must be heard by the court before compelling arbitration.

On Remand, Ninth Circuit Holds that Car Service Advisors Do Not Fall within the Fair Labor Standards Act’s Car Salesman Exemption from Overtime Pay (Overturned by the United States Supreme Court in Encino Motorcars, LLC v. Navarro 584 U. S. ____ (2018))

Update: On April 2, 2018, the United States Supreme Court overturned the Ninth Circuit's decision in Encino Motorcars, LLC v. Navarro 584 U. S. ____ (2018).
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On January 9, 2017 the Ninth Circuit held that car service advisors do not fall within the exemption from overtime-compensation for “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles” provided in § 213(b)(10)(A) of the Fair Labor Standards Act (“FLSA”). (Navarro v. Encino Motorcars, LLC, No. 13-55323, Slip Op. 4 (9th Cir. 2017)).

Individuals working as “service advisors” filed an FLSA overtime action against their employer, a dealership that sells and services new and used cars. Plaintiffs alleged that service advisors’ duties include: greeting car owners as they arrive at the dealership’s service area; evaluating cars’ repair and maintenance needs; suggesting services for cars; writing up estimates; and following up with customers. (Slip Op. 4-5)

The U.S. District Court for the Central District of California dismissed the overtime claim. Thus began the case’s long appellate journey. Initially, the Ninth Circuit reversed, holding that a 2011 regulation by the Department of Labor reasonably interpreted § 213(b)(10)(A) to exclude service advisors. The Supreme Court held that the Ninth Circuit’s first decision erred by relying on the 2011 regulation and vacated the decision. The Court then remanded to the Ninth Circuit to construe § 213(b)(10)(A) without deferring to the 2011 regulation. (Slip Op. 5)

On remand the Ninth Circuit performed a detailed inquiry into the text and legislative history surrounding § 213(b)(10)(A). After reviewing “the ordinary meaning of the exemption’s words and the rule that we must interpret exemptions narrowly,” the court concluded, “we are convinced that Congress intended to exempt only salesmen selling cars, partsmen servicing cars, and mechanics servicing cars.” (Slip Op. 23)

However, assuming for the sake of argument that the FLSA’s language leaves room for ambiguity, the court examined the legislative history of the amendments and held that “Congress did not intend to exempt service advisors.” The legislative history for the operative amendments to § 213(b)(10)(A) “reveal[s] clear concerns with applying the overtime-compensation requirement to exactly three categories of a dealership’s employees: automobile salesmen, partsmen, and mechanics. The extensive legislative record . . . contains hardly a mention of service advisors, and the few references that exist display no concern about overtime compensation for service advisors.” On these bases, the Court held that Congress did not intend to exempt service advisors. (Slip Op. 31)

In ruling that Congress did not intend to include service advisors within the § 213(b)(10)(A) exemption, the Ninth Circuit maintains a split with the Fourth and Fifth Circuits as well as the Supreme Court of Montana, each of which has held that car services advisors were exempt from overtime. Walton v. Greenbrier Ford, Inc., 370 F.3d 446 (4th Cir. 2004); Brennan v. Deel Motors, Inc., 475 F.2d 1095 (5th Cir. 1973); Thompson v. J.C. Billion, Inc., 294 P.3d 397 (Mont. 2013). Navarro's journey may include another trip to the Supreme Court.

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.