Supreme Court to Decide Legality of Mandatory Arbitration Clauses

On January 13, 2017, the U.S. Supreme Court granted certiorari in three Circuit Court cases – Murphy Oil USA, Inc. v. National Labor Relations Board, 808 F.3d 1013 (5th Cir. 2015); Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016); and Morris v. Ernst & Young, LLP, 834 F.3d 975 (9th Cir. 2016) – and consolidated them for oral argument. The Supreme Court will review whether class action waivers in mandatory employment arbitration agreements violate the National Labor Relations Act (“NLRA”). In other words, the Supreme Court will decide whether businesses can force employees to waive their right to collectively pursue employment-related claims.

Previous Cases Involving Validity of Class Action Waivers

Several Circuit Courts have ruled on this issue. On the one hand, the Seventh and Ninth Circuits recently adopted the National Labor Relations Board’s (“NLRB”) long-standing position that class action waivers are unenforceable by virtue of Sections 7 and 8 of the NLRA, which both Circuit Courts have held are to be liberally interpreted and give employees substantive rights. Section 7 provides that “employees shall have the right to engage in . . . concerted activities for the purpose of collective bargaining or other mutual aid or protection,” while Section 8(a)(1) makes it an unfair labor practice “to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in Section 7.”

On the other hand, the Fifth Circuit determined that such mandatory arbitration agreements are valid because the use of class action procedures is a procedural right, rather than a substantive right, under Section 7. In Patterson v. Raymours Furniture Co., Inc., 659 Fed.Appx. 40 (2d Cir. 2016), the Second Circuit likewise upheld class action waivers in arbitration agreements. In doing so, it relied on precedent from Sutherland v. Ernst & Young LLP, 726 F.3d 290 (2d Cir. 2013), which declined to follow the NLRB’s decision.

The Supreme Court addressed a consumer class action issue in 2011 in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), which involved a customer agreement between the plaintiffs and AT&T, mandating that claims be brought in an “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” Ultimately, in a 5-4 decision authored by the late Justice Antonin Scalia, the Supreme Court held that class action waivers in arbitration agreements cannot be invalidated by state law, and federal policy under the Federal Arbitration Act favors arbitration.

Gorsuch on Arbitration

The Supreme Court’s decision on class action waivers in employment contracts could hinge on the appointment of President Trump’s nominee, Neil Gorsuch, a federal appeals judge from the Tenth Circuit. Given his conservative reputation, Gorsuch is expected to continue Scalia’s legacy.

Recently, in Regab v. Howard, 841 F.3d 1134 (10th Cir. 2016), a matter involving arbitration, Gorsuch disagreed with the majority that held the parties in the case did not have a valid arbitration agreement because they entered six different arbitration agreements with conflicting and irreconcilable terms. In his dissent, Gorsuch argued that, since there were a total of six different arbitration agreements, the parties intended to enter a binding agreement together, but the terms differed on procedural grounds and how arbitration should proceed. In other words, these were not essential contract terms that were substantive in nature. Gorsuch’s reasoning arguably parallels the Fifth Circuit’s rationale in Murphy Oil USA that class actions are a procedural, not a substantive right.

As of February 8, 2017, the Supreme Court has decided to schedule oral arguments for the 2017 term, which begins in October. Therefore, Gorsuch, even if confirmed, may not cast a potential deciding vote on this matter until later this year or possibly 2018.

What This Means for Employers

If the Supreme Court ultimately rules in favor of class action waivers, there may not be a significant change in the current labor landscape because the use of such clauses has become more prevalent in many jurisdictions. Arbitration is typically a more efficient route, concluding within months rather than years, which, arguably, can be more cost-effective depending on the size of the employer. Furthermore, documents regarding the claim are generally not accessible publicly, so it is less likely that any details that may be harmful to the employer are made public.

However, class action waivers can sometimes prove to be costly for smaller employers. This is because courts have previously held that employers may be held responsible for the entire cost of any arbitration proceedings, which can cost thousands of dollars regardless of the value of the claim. Employers would also lose the right to appeal any unfavorable decision, as arbitration is final and binding.

Employers are urged to be mindful of their current arbitration agreements and to follow the Supreme Court decision.

Please contact Jason Hsi at (516)382-2298 for additional information.

~Submitted by Brian Jasinski



Categories: Employment Law