Supreme Court Allows Mandatory Arbitration in Employment Agreements

By: Joshua Ruthizer

The inclusion of mandatory arbitration clauses with class action waivers has become common in contracts people face every day.  For example, it is difficult to fill out a credit card application, get cell phone or internet service, or even sign up for a website or shop online, without agreeing to mandatory arbitration and waiving the right to bring or participate in a class action.  The use of these clauses has also become common in employment contracts.  According to a 2017 study, since the early 2000s, the number of non-union, private sector employees who are subject to mandatory arbitration has more than doubled to 55%.

The use of mandatory arbitration and class action waivers just got a big boost, and is probably going to become even more common.  Last month, the Supreme Court held in Epic Systems Corp. v. Lewis that the use of mandatory arbitration clauses in employment contracts that prevent workers from engaging in a class action is permissible and does not violate federal labor law. 

The story here begins in the early 20th Century.  Before that time, many courts looked askance at arbitration provisions, and would refuse to enforce them.  In 1925, Congress passed the Federal Arbitration Act, or FAA (not to be confused with the Federal Aviation Administration), which states that agreements between parties to submit disputes to arbitration are valid and enforceable.  Ten years later, Congress passed the National Labor Relations Act (NLRA).  The NLRA protects workers’ rights to engage in “concerted activities,” including “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 Epic claimed that the NLRA’s provisions protecting their right to concerted activities trumped the FAA and made class action and joint action waivers in employment contracts invalid.  The Supreme Court, in a 5-4 decision by Justice Gorsich, disagreed.  The Court held that the NLRA’s protection of “concerted activities for the purpose of collective bargaining or other mutual aid or protection” focuses on the right for unions to organize and bargain collectively.  The Court also focused on the fact that the provision is silent on arbitration and class or collective/group actions.

Justice Ginsburg wrote an impassioned dissent, stating that the Court “today subordinates employee-protective labor legislation to the FAA” and “In so doing, the Court forgets the labor market imbalance that gave rise to the NLGA and the NLRA, and ignores the destructive consequences of diminishing the right of employees ‘to band together in confronting an employer.’” (Emphasis added).   Justice Ginsburg added that “the inevitable result of today’s decision will be the under enforcement of federal and state statutes designed to advance the well-being of vulnerable workers.

Justice Ginsburg’s dissent already may be more fact than prediction.  In a January 2018 paper titled “The Black Hole of Mandatory Arbitration,” NYU Law Professor Cynthia L. Estlund concluded that “the great bulk of employment disputes” subject to mandatory arbitration “evaporate before they are even filed.”  One reason is that claimants may be unable to find legal representation due the small amount of damages, which make paying an hourly rate or a contingency fee arrangement both economically unviable.  This is not a phenomenon limited to employment contracts.  In 2015, the New York Times published a three part series titled “Beware the Fine Print.”  The articles discuss numerous cases of how arbitration can be stacked against wronged consumers and employees.

The Supreme Court’s decision in Epic is its latest in a line of cases over the past ten years that have found arbitration agreements and class action waivers valid, the FAA trumps state laws that try to limit them (AT&T Mobility v. Concepcion (2011)  and DIRECTV, Inc. v. Imburgia (2015)), and class arbitration requires a contractual basis to conclude that it was specifically agreed to by the parties (Stolt-Nielsen S.A. v. AnimalFeeds International Corp. (2010)).  The push towards arbitration will again reach the Supreme Court in its 2018-2019 term in Lamps Plus Inc. v. Varela.  Varela’s employment contract with Lamps Plus included a waiver of the right to file a lawsuit in court and have his claims decided by a judge or jury.  Varela agreed “that arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment.”  The agreement did not expressly allow or prohibit class arbitration.  The Ninth Circuit Court of Appeals concluded, applying state contract law, that a “reasonable–and perhaps the most reasonable–interpretation of this expansive language is that it authorizes class arbitration.”  The Supreme Court will decide whether state contract law interpretation of a general arbitration clause can allow for class arbitration, or whether such an interpretation is banned by the FAA (which would likely mean that a contract must specifically state class arbitration is allowable).  This case has the potential to further limit employees and consumers class action rights.  We will follow this case and update you when a decision is issued.