U.S. Supreme Court Greenlights Expansive Arbitration Clauses in Employment Contracts

On May 21, 2018, the United States Supreme Court issued a landmark decision on employers’ ability to include mandatory and individualized arbitration clauses in contacts with their employees.  The issue came before the high court in cases from the Fifth, Seventh, and Ninth Circuits.  See Epic Sys. Corp. v. Lewis, Docket No. 16-285 (May 21, 2018).  In each case, the employer and employee entered into a contract providing for individualized arbitration proceedings to resolve employment disputes.  Nevertheless, the plaintiff-employees sought to litigate Fair Labor Standards Act (FLSA) claims and related state-law claims through class or collective actions in federal district court.

In an attempt to circumvent the contracts’ arbitration provisions, the plaintiffs relied upon the Federal Arbitration Act’s “saving clause,” which permits courts to disregard an arbitration provision if it violates some other federal law; the employees maintained that an agreement requiring individualized proceedings violates the National Labor Relations Act (NLRA).  For years, courts and the National Labor Relations Board’s general counsel had agreed that such clauses were valid and enforceable.  However, in 2012, the Board reversed course and held that the NLRA trumped the Arbitration Act in instances such as these.  Courts later split on the issue.  The Seventh and Ninth Circuits sided with the employees, while the Fifth Circuit held that such clauses were enforceable.

In a 5-4 decision split along ideological lines (with Justice Kennedy siding with the conservative justices), the Supreme Court ruled in favor of the employers and held that the provisions were enforceable.  Writing for the Court, Justice Gorsuch reasoned that the Arbitration Act’s “saving clause” allows courts to refuse to enforce arbitration clauses only on the grounds of fraud, duress or unconscionability, which did not apply here.  In rejecting the employees’ argument that the NLRA overrides the Arbitration Act in this area, the Court relied on its precedent to try and interpret federal laws in a harmonious fashion so as to give effect to both.  Without a clear intention from Congress to displace the Arbitration Act, the Court relied on the strong presumption that disfavors repeals by implication.

The Court’s opinion invited a strong and lengthy dissent authored by Justice Ginsburg, and joined by Justices Breyer, Sotomayor and Kagan.  Justice Ginsburg argued that

[t]he Court today subordinates employee-protective labor legislation to the Arbitration Act.”  She further opined that the majority’s opinion was “egregiously wrong” primarily because it ignores “the extreme imbalance once prevalent in our Nation’s workplaces, and Congress’ aim in the NLGA [Norris-LaGuardia Act, 20 U.S.C. § 151, et seq.] and the NLRA to place employers and employees on more equal footing.

Regardless of how one personally feels about this decision, it will undoubtedly have significant effects on employment litigation.  Employers can now safely include in their employment contracts arbitration clauses that mandate individualized resolution of employee claims and all but eliminate the risk of costly class or collective actions from their employees.  Without being able to pursue their claims together, employees (and their attorneys) may be dissuaded from bringing such claims at all.  In the wake of this decision I imagine the general counsels of many companies are revising their employment agreements, and employees are carefully reading theirs.

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