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.

Supreme Court to Hear Challenge to Legality of SEC Judges

On behalf of Wolf Popper LLP

Most judges become judges by winning an election, or by receiving an appointment by an elected official, such as a governor, a legislature, or even being nominated by the President of the United States.  However, there are some judges that are appointed by administrative agencies, such as the Securities and Exchange Commission (“SEC”), instead of by elected officials.

A case currently before the U.S. Supreme Court, Lucia v. Securities and Exchange Commission, No. 17-130 (set for argument on April 23, 2018), addresses the legality of the use of Administrative Law Judges (“ALJs”) by the SEC.  Several U.S. Courts of Appeal are split on the subject.

What is the issue in the case? On January 12, 2018, the Supreme Court agreed to hear the case.  According to the SEC, the question at stake is “[w]hether administrative law judges of the Securities and Exchange Commission are Officers of the United States within the meaning of the Appointments Clause [of the Constitution].”

The argument involves a bit of history.  Congress has given the SEC the power to delegate enforcement proceedings to a hearing officer, and so the SEC often assigns ALJs to hear these proceedings.  Indeed, the vast majority (over 80%) of the SEC’s enforcement proceedings are now presented to these ALJs.  The decision of the ALJ almost always becomes the final decision of the SEC.

This particular case begins with certain registered investment advisors who marketed a “wealth-management strategy” to manage retirement savings.  Following allegations that they had engaged in misleading and deceptive conduct in marketing their “strategy,” these advisors were charged with securities laws violations and SEC administrative proceedings were commenced.  Following comprehensive proceedings which included the testimony of witnesses, cross-examinations, documentary evidence, and other hearings, the advisors were found to have willfully engaged in deceptive conduct, materially misleading investors in violation of the Investment Advisors Act.  

The advisors believe that the proceedings are unlawful because the ALJs are acting as “Officers of the United States” without being appointed pursuant to the Appointments Clause of the Constitution.  (The Appointments Clause states that a judge must be appointed “by the President, the head of a department, or a court of law.”)   

The enforcement of the securities laws of the United States is vested in the SEC and the SEC is authorized under those securities laws to hold administrative proceedings to deal with alleged violations.  Because the SEC has historically assigned ALJs to hold such hearings, a decision could impact the SEC’s enforcement of the securities law.

What will happen in this case? The SEC will likely see a change in the process by which ALJs are appointed and also in the way in which ALJs may be removed.  Importantly, since ALJs play significant roles throughout the different departments of the government, a decision could have widespread ramifications affecting far more than just the SEC.

The briefs submitted by the parties, including the SEC, as well as those submitted by more than a dozen Amicus Curiae, emphasize that the current legal procedures and the challenges to the ALJs have created disruption in government proceedings and request the Supreme Court to provide guidance.