On January 13, 2017, the U.S. Supreme Court granted certiorari in three cases involving the lawfulness of class and collective action waivers in arbitration agreements. Since the National Labor Relations Board’s 2012 decision in D.R. Horton, courts have wrangled with the enforceability of class action waivers and the interaction between the National Labor Relations Act (NLRA) and the Federal Arbitration Act (FAA). The Supreme Court’s decision to address this issue means the now-existing circuit split could end.
Two of the cases granted review—the Seventh Circuit’s Epic Systems Corp. v. Lewis and the Ninth Circuit’s Ernst & Young, et al. v. Morris—favored the NLRB’s position that class action waivers contained in mandatory, pre-dispute arbitration agreements between employers and NLRA employees violate the National Labor Relations Act (NLRA) by restraining employees’ right to engage in concerted activity. In the third case, NLRB v. Murphy Oil USA, Inc., et al., the Fifth Circuit overturned the NLRB, and held arbitration agreements must be enforced per their terms under the FAA. The Fifth Circuit reasoned that due to the conflict between the FAA and NLRA, the Court had to determine whether the NLRA, a later-enacted statute, contained a contrary congressional command to the FAA’s mandate that arbitration agreements should be enforced according to their terms. And since the NLRA lacked a contrary congressional command, class action waivers have to be enforced under the FAA.
The Ninth Circuit and Seventh Circuit disagreed with the Fifth Circuit and created a split.1 They 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.” Therefore, since class action waivers contained in mandatory, pre-dispute arbitration agreements are unlawful under the NLRA, they are not enforceable under the FAA.
The three cases are consolidated, and the Supreme Court will allow a total of one hour of oral argument. With an eight-member Court, one looming question is whether there will be a new Justice on the Supreme Court when the Court makes a decision on these cases. A President-elect Trump nominee might be hostile to the NLRB’s position. Likewise, after the NLRB is reconstituted in the Trump administration, will that happen in time for the Board to change its views and so advise the Court that it no longer adheres to the D.R. Horton analysis? That outcome is not entirely speculative, as there have been bitter splits between the current minority members of the Board and the pro-Horton current majority. The “minority” position could under the new administration become the “majority.” Also notable is that none of these three cases involve agreements with “opt-out” provisions. Opt-out provisions give employees the ability to opt out of an arbitration agreement within a certain timeframe. Although the NLRB takes the position that opt-out provisions do not make an otherwise unlawful agreement lawful, the Ninth Circuit has enforced opt-out agreements, which consequently have become a crucial distinguishing factor in many cases.
There are likely to be major developments for employers in this area of the law from the Supreme Court—stay tuned.
1 The Court of Appeals for the Second and Eighth Circuits have also rejected the NLRB’s D.R. Horton reasoning and enforced class action waivers in arbitration agreements. Cellular Sales of Missouri, LLC v. N.L.R.B., 824 F.3d 772 (8th Cir. 2016); Owen v. Bristol Care, Inc., 702 F.3d 1050 (8th Cir. 2013); Sutherland v. Ernst & Young LLP, 726 F.3d 290 (2d Cir. 2013); Patterson v. Raymours Furniture Co., Inc., 2016 WL 4598542, (2d Cir. Sept. 2, 2016) (Summary Order). Three other cases involving this issue are also subject to certiorari petitions pending before the Supreme Court.