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Vedder Thinking | Articles Class Is in Session: Supreme Court to Decide Future of Class Waiver Arbitration Clauses

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From Fortune 500s to regional warehouses, employers have long relied on arbitration clauses that prohibit class or collective action employment claims (“class claims”) in order to minimize legal costs and financial exposure. However, the National Labor Relations Board (NLRB) and a patchwork of court decisions have put those clauses under increasing scrutiny, and in 2017 the Supreme Court will finally decide if such agreements are enforceable. Needless to say, the decision will be crucial for the business community.

For over 20 years, the use of arbitration agreements prohibiting class claims by employees has been on the rise, and for good reason. Faced with potentially costly internal investigations, the prospect of adverse publicity, and the possibility of expensive class litigation and settlements, companies have had strong incentives to consider implementing such waivers in the employment setting. Arbitration clauses that prohibit class claims may offer a safeguard from steady streams of settlement demands, often devoid of any substantive merit but which are nevertheless very costly to defend.

Meanwhile, the NLRB, state courts and federal appellate courts have opined on whether such agreements are legally enforceable, prompting many employers to wonder whether they may end up defending claims in court they previously thought would head to an arbitral forum. At the heart of the debate is whether class action waivers in arbitration agreements violate Sections 7 and 8 of the National Labor Relations Act (NLRA), which dictate that it is an unfair labor practice to interfere with, restrain or coerce employees in the exercise of guaranteed rights, including the right “to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.”

This sets up a potential conflict between the NLRA, which the NLRB says protects the filing of class or collective actions in court by employees as a form of “concerted activity,” and the Federal Arbitration Act (FAA), which safeguards and encourages arbitrations as a mechanism to resolve disputes in a faster and less costly manner.

Differing Views in the Courts

In 2011, the Supreme Court offered tacit approval of class action waivers in the context of a mandatory consumer arbitration agreement in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). There, the Court found that a California Supreme Court decision that declared such clauses as unconscionable conflicted with the FAA. Writing for a 5-4 majority, Justice Scalia wrote that “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration” under the FAA. In balancing state law and the FAA, the Court gave the FAA the inside track.

A number of decisions have since bolstered the AT&T decision. In Am. Exp. Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013), the Supreme Court held that mandatory class action waivers are enforceable and do not deny a plaintiff any substantive right simply because individual claims are more costly for employees to pursue. More recently, in DIRECTV, Inc. v. Imburgia, the Court found that class action waivers contained in mandatory arbitration agreements are enforceable under the FAA and cannot be struck down on state law grounds. No. 14-462, 577 U.S. ___, (2015).

Backed by AT&T and subsequent decisions, many employers across the country have created or altered employment arbitration policies modeled on the arbitration/class waiver clauses approved by the Supreme Court. Sony, Netflix, eBay, PayPal and StubHub are among the companies that reportedly implemented employment-related arbitration provisions, including class waivers, after the AT&T decision.

The NLRB, meanwhile, has taken the stance that class action waivers violate Sections 7 and 8 of the NLRA, beginning with its seminal 2012 decision in D.R. Horton, Inc., 357 N.L.R.B. No. 184. In D.R. Horton, the Board advanced the nuanced argument (which was eventually adopted by the Seventh Circuit) that there is no clash between the NLRA and the FAA, deciding that proceeding collectively in furtherance of employees’ wage claims was a substantive right (as opposed to a merely procedural right) that could not be waived in an arbitration agreement. The Board also ruled that since the FAA’s savings clause permits the enforcement of only legal arbitration contracts, the employer’s unlawful arbitration agreement and class waiver could not be enforceable. The NLRB reached the same conclusion in 2014 in Murphy Oil USA, Inc., 361 N.L.R.B. No. 72, finding again that the right to file or participate in collective proceedings could not be waived.

The NLRB has had mixed results, however, when seeking appellate court approval of the D.R. Horton and Murphy Oil decisions. The Second, Fifth and Eighth Circuits have rejected the Board’s reasoning and currently allow class action waivers in mandatory arbitration agreements. The Ninth Circuit and, recently, the Seventh Circuit have concurred with the Board’s position that class action waivers in mandatory arbitration agreements are unenforceable. Of note, the Ninth Circuit has held in two other decisions that a class action waiver is enforceable where the employee can “opt-out.” The NLRB has nevertheless concluded that such “opt-out” agreements still violate the NLRA.

Litigation, therefore, continues at the state and federal levels with various wrinkles, and over a dozen cases on this issue are pending at the NLRB. This growing circuit split and lack of clarity regarding the enforceability of class waivers has provided a clear path to the Supreme Court.

Where to from Here?

The Supreme Court has received four petitions for certiorari to address these issues. The petitions have been brought from both sides of the circuit split, including one petition from employees, two from employers, and one from the NLRB itself. See NLRB v. Murphy Oil, No. 16-307 (petition filed Sept. 9, 2016 by Solicitor General on behalf of NLRB); Epic Sys. Corp. v. Lewis, No. 16-285 (petition filed Sept. 2, 2016 by employer); Ernst & Young U.S. LLP v. Morris, No. 16-300 (petition filed Sept. 8, 2016 by employer); Patterson v. Raymours Furniture Co., No. 16-388 (petition filed Sept. 22, 2016 by the employees).

On January 13, 2017 the Court consolidated several of these cases and collectively granted certiorari to Murphy Oil, Ernst & Young, and Epic Systems. The briefing schedule will likely be extended, based on the number of amicus briefs expected to be filed.

With the issue now on the Supreme Court docket, it appears that the question may be resolved once and for all. However, the Court still stands at eight justices since the passing of Justice Scalia, with the eight justices on record as an even 4-4 split in AT&T. With President Trump’s nomination of Circuit Court Judge Gorsuch to the Supreme Court there is speculation that Gorsuch will break the 4-4 tie in favor of class action waivers. Moreover, the new administration will have the opportunity to appoint members to fill three vacancies at the NLRB in the coming year, which will presumably lead to the Board changing its position on the matter altogether.

Employers should, therefore, keep a watchful eye on the cases before the Supreme Court. Depending on how the Court rules, employers should be prepared to strike their class waivers entirely from their arbitration agreements or resume using them across-the-board, including in those jurisdictions where the circuit courts currently disallow waivers of class actions.

If you have any questions regarding the topics discussed in this article, contact J. Kevin Hennessy +1 (312) 609 7868, Joseph K. Mulherin +1 (312) 609 7725, Heather M. Sager +1 (415) 749 9510, Elliot G. Cole +1 (312) 609 7590 or any Vedder Price attorney with whom you have worked.

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