Business & Corporate Articles


Arbitration Provisions and the Impact of the Epic Systems Decision

In a recent (and long-awaited) decision, the Supreme Court ruled on the enforceability of arbitration agreements containing class and collective action waivers of wage and hour disputes. In Epic Systems Corp. v. Lewis, the majority in a 5-to-4 ruling held that the Federal Arbitration Act (the “Arbitration Act”) mandates the enforcement of arbitration agreements and that the right to pursue class or collective relief is not a protected concerted activity under Section 7 of the National Labor Relations Act (“NLRA”).

Impact of Epic Systems on the Business Community

Almost dubbed the most important business case of the term, this decision comes as a relief to the business community and can be seen as an extension of recent Supreme Court decisions that permit corporations to avoid costly class-action lawsuits from consumers by enforcing contracts that call for individual arbitration. Businesses generally favor arbitration because they are cost effective, less time consuming and usually, confidential.

Employers are now free to require individual arbitration of disputes in their employment agreements as long as they are not unconscionable and are not obtained through duress. Companies may defer to the rules prescribed by ADR services such as the American Arbitration Association or JAMS when it comes to choosing an arbitration procedure. It is also advisable to include a provision whereby the arbitrator is conferred the exclusive authority to determine the enforceability of the arbitration agreement, including whether such agreement is unconscionable or obtained by duress.

Application of the Ruling

Though Epic Systems dealt with class action of wage and hour disputes, the decision is likely to be applied to other kinds of employment disputes as well. However, employers may choose to exclude some disputes from the mandatory arbitration requirement. Ride-hailing companies like Uber and Lyft recently scrapped mandatory arbitration to settle sexual harassment or assault claims, giving victims other options to pursue their claims including public lawsuits. Now, victims will no longer be forced to enter into confidentiality agreements as part of arbitration to settle claims, which prevented them from speaking publicly about their facts and circumstances surrounding their claim. This has been hailed as a step in the right direction though the waiver of class action will continue to be enforced.

Epic Systems and the #MeToo Movement

The decision is of significance to the #MeToo movement which has prompted several states including New York and Washington to enact laws that prohibit mandatory arbitration of sexual harassment cases. A bill pending in California also seeks to prohibit employers from requiring mandatory arbitration in sexual harassment cases. With the Supreme Court’s decision in Epic Systems, these state laws may be met with challenges on the grounds of federal preemption by the Arbitration Act but it is also possible that a more policy driven court may refuse to extend the decision to sexual harassment disputes. In light of state laws prohibiting mandatory arbitration, especially in sexual harassment claims, employers are also advised to review their arbitration clauses against applicable state laws.

Background of the Decision

Section 7 of the NLRA guarantees employees the right to engage in concerted activities for the purpose of “collective bargaining or other mutual aid or protection” and employees have been arguing over the past few years that arbitration clauses in employment agreements requiring employees to waive the right to class and collective action violates the right to concerted action guaranteed to them by the NLRA. The employees further argued that although the Arbitration Act generally requires courts to enforce arbitration agreements as written, its “saving clause” removes this obligation if an arbitration agreement violates some other federal law and that, by requiring individualized proceedings, the agreements violated the right to concerted action granted under NLRA. Finally, in 2012, the National Labor Relations Board ruled that class action waivers in individual employment contracts unlawfully impeded an employee’s right to engage in “concerted activities” guaranteed under Section 7 of the NLRA.

The Supreme Court’s Holding

On May 21, 2018the Supreme Court reversed this view by holding that the Arbitration Act emphatically requires courts to enforce arbitration agreements that provide for individualized proceedings and neither the Arbitration Act’s saving clause nor the NLRA alters this position. The court held that the Arbitration Act’s saving clause allows courts to refuse to enforce arbitration agreements only upon “such grounds as exist at law or in equity for the revocation of any contract.” The court emphasized the word “any” to interpret that the saving clause only recognizes general contract defenses, such as fraud, duress, or unconscionability that are applicable to any contract. Hence, absent these grounds, the saving clause would not apply. Further, it held that NLRA focuses on the right to organize unions and bargain collectively and it does not include class or collective action procedures and therefore, enforcing a contractual waiver of class or collective action is not opposed to the rights granted under Section 7.

The Court, declining to read into the NLRA “a novel right to class action procedures,” wrote that, though as a matter of policy, “these questions are surely debatable. But as a matter of law the answer is clear.” The Court refused to interpret the right to “concerted activities” as including a right to class and collective action, stating that “it is unlikely that Congress wished to confer a right to class or collective actions in §7, since those procedures were hardly known when the NLRA was adopted.”

The conservative majority did not commit an opinion as to policy and instead chose to base its judgment strongly on the principles of separation of powers stating that policy decisions are not for judges to make but are meant for “the policymakers in the political branches where those questions remain hotly contested” and that “this Court is not free to substitute its preferred economic policies for those chosen by the people’s representatives.”

Justice Ginsburg in her dissenting opinion based largely on policy arguments stated that “the court today holds enforceable these arm-twisted, take-it-or-leave-it contracts — including the provisions requiring employees to litigate wage and hours claims only one-by-one.” She expressed her strong disapproval stating that the “federal labor law does not countenance such isolation of employees” by forcing them to arbitrate such claims individually at the risk of huge legal bills and employer retaliation. She elaborated that the NLRA operates on the premise that employees must have the capacity to act collectively in order to match their employers’ clout in setting terms and conditions of employment and that for decades, the Supreme Court’s decisions have reflected that understanding. She said that suits to enforce workplace rights collectively “fit comfortably” under the rights granted by NLRA.

Sreelekha Haridas Maruthur is an attorney at law.

**This article is for information purposes only and does not contain or convey legal advice. The information herein should not be relied upon in regard to any particular facts or circumstances without first consulting an attorney. Any views expressed are those of the author only and not of the SDCBA or its Business & Corporate Law Section.**