Supreme Court Upholds Lawfulness of Class and Collective Action Waivers in Arbitration Agreements

The Supreme Court has weighed in: class and collective action waivers in arbitration agreements are lawful and must be enforced under the Federal Arbitration Act (FAA).  The Court’s decision ends a circuit split and overturns the National Labor Relations Board’s (NLRB) position that class and collective action waivers violate employees’ rights under the National Labor Relations Act (NLRA).  Ever since the NLRB’s 2012 decision in D.R. Horton, courts have wrangled with the enforceability of class action waivers and the interaction between the NLRA and the FAA.  The Supreme Court’s decision in Epic Systems Corp. v. Lewis (Epic) brings an end to the dispute.1 In a 5-4 opinion authored by Justice Gorsuch, the Court held the FAA requires arbitration agreements to be enforced on the same grounds as any other contract, and the NLRA, which was enacted after the FAA, contains no contrary congressional command excluding class action waivers from the FAA’s mandate. 

The Seventh Circuit in Epic and the Ninth Circuit in Ernst & Young, et al. v. Morris (Ernst & Young) both held that class action waivers in mandatory, pre-dispute arbitration agreements between employers and employees violate the NLRA by restraining employees’ right to engage in concerted activity.  Both of these courts held there is no conflict between the NLRA and the FAA due to the FAA’s “savings clause,” which provides arbitration agreements are “enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  And since class action waivers contained in mandatory, pre-dispute arbitration agreements are unlawful, they are not enforceable under the FAA.

The Supreme Court disagreed.  The FAA’s savings clause only recognizes general contract defenses such as fraud, duress, and unconscionability.  It does not allow for defenses that apply specifically to arbitration agreements instead of contracts generally.  The employees’ argument failed because they did not argue that the class and collective action waivers in their arbitration agreements were fraudulent or unconscionable; they simply attacked the agreements because they required individualized arbitration.  This specific attack on arbitration is not a defense under the FAA’s savings clause.

The Court went on to hold that the NLRA does not grant employees the right to engage in class or collective actions as a Section 7 right.  Section 7 instead guarantees employees the right to bargain collectively and organize unions.  In reaching this conclusion, the Court noted that when the NLRA was adopted in 1935, the Federal Rules of Civil Procedure had not created the class action, and neither had the Fair Labor Standards Act codified its collective action provision.  Thus, the NLRA does not contain a congressional command contrary to the FAA's central purpose, which is to enforce agreements to arbitrate in accordance with their terms.  As Justice Gorsuch noted, “it’s more than a little doubtful that Congress would have tucked into the mousehole of Section 7’s catchall term an elephant that tramples the work done by these other laws.”

Finally, Justice Gorsuch also rejected the argument that the NLRB was due deference for its position on class and collective waivers.  By finding class and collective action waivers unlawful, the NLRB was not just interpreting the NLRA, it was interpreting the NLRA along with the FAA, the latter being a statute it does not administer.  According to the Court, this type of analysis concerning two different statutory regimes is for the courts, not an administrative agency.   

The Court’s decision is a great win for employers, and it brings an end to the years of uncertainty created when the NLRB first changed course to challenge arbitration agreements. 

Littler's ADR Practice Group will hold three complimentary webinars on this decision and its implications. On Tuesday, May 22, 2018, the webinar will be held in the morning at 8:45 PT/11:45 ET, and in the afternoon at 1:00 PT/4:00 ET. On Thursday, May 24, 2018, the webinar will be held at 1:00 PT/4:00 ET. See our upcoming events page for more information or to register for the webinar. 

See Footnotes

1 Epic was consolidated with the Ninth Circuit’s decision in Ernst & Young LLP et al. v. Morris et al., and National Labor Relations Board v. Murphy Oil USA, Inc., et al., from the Fifth Circuit.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.