Arbitration Agreements

By: John Yslas

Arbitration agreement resolution of commercial disputes on a desk.

Seyfarth Synopsis: In vetoing the California Legislature’s attempt to criminalize arbitration agreements (AB 3080), Governor Brown displayed common sense and the legal learning provided by recent U.S. Supreme Court authority.

Haven’t high courts already upheld mandatory arbitration agreements?

Yes, they have. The California and U.S. Supreme Courts have repeatedly ruled that employers may require employees to enter valid arbitration agreements (waiving the right to judge and jury trial). The most recent vindication of arbitration agreements was the U.S. Supreme Court’s May 2018 decision in Epic Systems, which upheld the enforceability of an arbitration agreement that waived participation in class waivers, against an argument that such a waiver violated employee rights to concerted activity under the National Labor Relations Act.

Hasn’t the California Legislature got the message?

Apparently not yet. The Legislature has tried again and again to outlaw arbitration agreements in ever more inventive ways, notwithstanding the clear authority to the contrary. Governor Brown, meanwhile, has learned that these efforts will not pass constitutional muster. In 2014, Governor Brown signed into law AB 2617, which outlawed mandatory arbitrations for goods and services; but a March 2018 appellate decision held that the law was preempted by the Federal Arbitration Act. Meanwhile, in 2015, Governor Brown vetoed AB 465, which would have outlawed mandatory arbitration as a condition of employment. In doing so, Governor Brown noted that bans on arbitration have been consistently struck down as violating the FAA, and that California courts have made arbitrations more employee-friendly by requiring certain protections (neutral arbitrator, adequate discovery, no limit on damages or remedies, written decision subject to some review, cost limits). He even questioned whether arbitration is really less fair than traditional litigation for employees.

While Governor Brown’s learning curve has progressed, the California Legislature’s has regressed, as evidenced by AB 3080

In August 2018—just three months after the Epic Systems decision—the Legislature passed AB 3080, which banned mandatory arbitration agreements, which outlawed “opt-out” provisions (allowing employees to refuse to enter into arbitration agreements), and which even criminalized employer conduct to implement such an agreement. The legislative committee analyses argued that there must be “consent and fairness” in entering into an agreement, that the Supreme Court “has never ruled that the FAA applies in the absence of a valid agreement,” that the FAA would not preempt AB 3080 because it “regulates behavior prior to an agreement being reach[ed],” and that AB 3080 does not “outright ban or invalidate arbitration agreements.”

The apoplectic reaction to the outrage that was AB 3080

The employer community reacted strongly to AB 3080. Leading law firms urged Governor Brown to veto AB 3080. They noted that the proponents were making old, tired arguments that the U.S. and California Supreme Courts have rejected. They protested the disingenuousness of saying that arbitration agreements could not be voluntary even where employees have the right to opt out. They reminded Governor Brown of his veto of AB 465 in 2015.

Most emphatically, they pointed out that criminalizing employer conduct that the FAA so clearly protects could coerce fearful employers into abandoning arbitration agreements until the courts clearly rule AB 3080 unconstitutional. In this respect the Legislature, ironically, was engaging in something that a private party could not do without engaging in an unfair business practice. After all, an unfair business practice occurs when a party inserts an obviously unlawful provision into a contract, aiming to intimidate the other party into abiding by the unlawful provision.

Governor Brown’s veto and what’s next

On September 30, 2018, Governor Brown vetoed AB 3080. His accompanying letter rejected the Legislature’s argument that AB 3080 only regulates behavior prior to an agreement being reached. The Governor pointed out that in a 2017 Supreme Court decision, even Justice Kagan (“an appointee of President Obama”) acknowledged that the FAA “cares not only about the ‘enforcement’ of arbitration agreements, but also about their initial ‘valid[ity].’ ” Governor Brown emphatically stated that AB 3080 “plainly violates federal law.”

So what does all this mean? The lesson is that our systems of checks and balances can still work, where a governor learns not to permit a legislature to flout federal law. Will this trend continue as our great state ushers in a new governor in 2019? Stay tuned.

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By: Noah A. Finkel, David S. Baffa, Daniel C. Whang, and Andrew L. Scroggins

Seyfarth Synopsis:  In one of the most significant employment cases in memory, a sharply divided United States Supreme Court held today that employers may require employees, as a condition of employment, to enter into arbitration agreements that contain waivers of the ability to participate in a class or collective action under various employment statutes.

There is no longer any reason under the law why an employer cannot require its employees to waive the ability to bring a class or collective action under federal, state, and local employment laws.

While there are certain exceptions (explained below), the United States Supreme Court today removed the last potential legal barrier to the enforcement of class waivers in the employment sphere.  In a 5-4 decision authored by Justice Neil Gorsuch, it held in three cases consolidated for review that requiring employees to agree to arbitration agreements with class waivers does not violate the National Labor Relations Act (“NLRA”) and that such agreements are fully enforceable.

The only foreseeable barrier to enforcement of a class waiver would be federal legislation amending the Federal Arbitration Act (“FAA”) or state legislation permitting private attorney general actions such as California’s Private Attorneys General Act (“PAGA”).  Employers who maintain mandatory arbitration programs with class waivers can be assured for the time being that those waivers provide a valid defense to a collective or class action.  Employers who do not have such arbitration programs need to be aware of this significant development in the employment law landscape and at least consider whether an arbitration program with a class waiver is appropriate for them.

Be aware, however, that a class waiver in an arbitration program does not mean the end of all multi-claimant litigation.  As those with operations in California know, employees who have entered into class waivers with their employers nevertheless may bring PAGA actions in that state.  Likewise, agency-initiated actions are not impacted, leaving the Department of Labor and the Equal Employment Opportunity Commission free to pursue relief under the statutes they enforce on behalf of employees regardless of whether those employees have entered into class waivers.  Meanwhile, some plaintiff-side attorneys have become skilled at bringing dozens of single-claimant arbitration matters against an employer at the same time, which might cost an employer more than defending a collective or class action in court.

An arbitration program with a class waiver isn’t necessarily for every employer.  But this ruling certainly will cause more employers to adopt arbitration programs with class waivers, and likely will reduce the number of class and collective actions employers face.

The Path Leading to the Decision

Beginning with its 2011 decision in AT&T Mobility v. Concepcion, the Supreme Court has blessed the validity and enforceability of class waivers in arbitration agreements.  This was followed by decisions in CompuCredit Corp. v. Greenwood and American Express Co. v. Italian Colors Restaurant, where the Supreme Court forged jurisprudence that made class waivers seem unassailable in the commercial context.  But because none of the cases involving class waivers before the Supreme Court were in the employment context, uncertainty existed as to whether class waivers in mandatory employment arbitration agreements were enforceable.

This uncertainty was amplified by the National Labor Relations Board’s 2012 decision in D.R. Horton, which rejected workplace class waivers.  In the Board’s view, class waivers prevent employees from engaging in protected concerted activity in violation of Section 7 of the NLRA.  The Board continued to press its view even after the Second, Fifth, and Eighth Circuits refused to enforce the rule.  Then in 2016, the Seventh Circuit created a circuit split with its decision in Lewis v. Epic Systems Corp., which held that the right to bring a class or collective action is protected concerted activity under the NLRA, and that class waivers violate that right.  The Sixth and Ninth Circuit followed the Seventh Circuit’s reasoning, deepening the split.

The Supreme Court granted cert in three cases to resolve the issue of whether employers who require employees to arbitrate claims on an individual basis are preventing employees from engaging in protected concerted activity in violation of the NLRA.  On October 2, 2017, the Supreme Court heard oral argument, and today it issued its decision in a split that is just as close as the circuit split below.

The Court’s Reasoning

The Supreme Court began with the premise that the Federal Arbitration Act (FAA) is unequivocal in its mandate that courts enforce arbitration agreements.  The Court’s majority decision rejected the argument that the NLRA overrides that command by rendering a class waiver unlawful.  In the majority’s view, Section 7 of the NLRA does not create a right to pursue a collective or class action.  Rather, Section 7 focuses on the right to organize unions and bargain collectively and does not mention  class or collective action procedures, the majority reasoned.

Section 7’s catch-all provision that employees  must be permitted to engage in “other concerted activities for the purpose of . . . other mutual aid or protection” does not protect the right to participate in a class action because it only protects activities similar to those explicitly listed in Section 7 and thus reaches only to “things employees do for themselves in the course of exercising their right to free association in the workplace.”

The majority supported its holding with other observations, including that: class and collective action procedures were “hardly known” in 1935 when the NLRA was passed; the NLRA states no rules on class or collective action, in contrast to the regulatory regime it imposes surrounding other concerted activities; and the collective action procedures under the Fair Labor Standards Act (“FLSA”) — the statute under which the employees’ underlying causes of action arise — is just like the collective action procedures under the Age Discrimination in Employment Act, which the Supreme Court previously has held does not prohibit mandatory individual arbitration.

At bottom, the Court’s majority was unwilling to infer a Section 7 right to a class or collective action based on “vague terms or ancillary provisions” that would “dictate the particulars of dispute resolution procedures in Article III courts or arbitration proceedings–matters that are usually left to, e.g., the Federal Rules of Civil Procedure, the Arbitration Act, and the FLSA.”

The reasoning of the majority, as articulated by Justice Gorsuch, is broader than some expected.  His majority opinion does not merely hold that between conflicting rights and interests of the FAA and NLRA, the FAA wins.  Rather, the majority suggests that there may not be any Section 7 right to pursue a collective or class action in the first place.  This raises the question of whether a collective or class action waiver that is not contained within an arbitration program may be enforceable.

The Dissent

As expected, Justices Ginsburg, Kagan, Sotomayor, and Breyer dissented in an opinion authored by Justice Ginsburg.  The dissent focused on the circumstances that are unique to the employment context, including what Justice Ginsburg refers to as the “extreme imbalance once prevalent in our Nation’s workplaces,” and the reasons Congress enacted the NLRA in the first place, to “place employers and employees on more equal footing.”  Of paramount importance was the NLRA’s recognition that an individual employee has unequal bargaining power against the employer, and that the right to engage in concerted activities levels the playing field.

In the dissent’s view, class and collective actions qualify as concerted activities because in these actions, employees band together to improve their working conditions by holding employers accountable for violations of employment law.

What Should Employers Do

Employers will undoubtedly be asking:  what does this decision mean for me?  The answer depends on many factors, and like arbitration agreements themselves, there is no one answer that fits all.

For employers that already maintain a mandatory arbitration agreement with a class waiver, the Supreme Court’s decision has minimal impact.  A well-drafted agreement that does not overreach will be enforced.  While there are no longer any barriers to enforcing mandatory class waivers, the Supreme Court’s decision will not save a poorly drafted arbitration agreement.  In many states, an arbitration agreement still can be found unenforceable if it is both procedurally and substantively unconscionable under state law principles.  Some courts in some states may find that an arbitration agreement that is mandatory in nature is procedurally unconscionable, which makes it imperative that there is nothing in the arbitration agreement that can be substantively unconscionable.

Employers that have a voluntary arbitration agreement with a class waiver should consider whether making the arbitration program mandatory could yield additional benefits.  If almost all employees participate in a voluntary arbitration program with a class waiver, the additional risk of a mandatory program – whether due to procedural unconscionability concerns or employee relations issues – may not outweigh the marginal benefit.  But if the number of employees who opt out of or refuse to sign a voluntary arbitration agreement with a class waiver is higher than an employer is comfortable with, a mandatory program should be considered.  This is particularly true for employers in the Ninth Circuit, which gave a hat-tip to the NLRA by permitting class waivers so long as employees could opt out of the arbitration agreement.  An opt-out procedure, however, is no longer required in light of the Supreme Court’s decision.

Employers that maintain arbitration programs without a class waiver should strongly consider revising their agreement to include a class waiver.  An arbitration agreement without a class waiver leaves open the worst possible outcome, which is class arbitration.  The potential exposure in any class action is too high to inject any uncertainty as to whether the parties intended to permit class arbitration or not.  And an employer may want a court, rather than an arbitrator with potential financial incentive, to decide whether the parties intended to permit class arbitration.  An express class waiver likely would avoid these issues.  If an employer has an arbitration agreement already in place, there is now no reason to omit a class waiver.

For everyone else who has been waiting for the Supreme Court’s decision before deciding what to do, there are various factors to consider.  The threshold question is whether to even have an arbitration program.  There are certainly many benefits to arbitration.  These include quicker resolution of claims, more predictable outcomes compared to a jury, arguably lower attorneys’ fees to take a case through completion in arbitration than in court, and greater chance of keeping the proceedings and outcome confidential.

But there also are numerous downsides to arbitration that employers have to consider.  Arbitrator fees can be very significant, and in states like California, the employer must pay all of the arbitrator fees.   Some plaintiffs’ attorneys have resorted to filing a large number of individual arbitrations to make the arbitration process exorbitantly expensive for employers.  Arbitrators also can be less likely to grant dispositive motions because they may feel a claimant has a right to take his or her claim through the evidentiary hearing (the equivalent of a trial in arbitration).

Another question is what the scope of the arbitration program should be.  Given the costs associated with arbitration, some employers may want to limit an arbitration program to just wage and hour claims, which have the greatest likelihood of being brought as class claims.  In addition, current federal and state legislative headwinds are pushing against mandatory arbitration of sexual harassment and other Title VII claims.  Certain Department of Defense contractors have long been banned from imposing such agreements, and the State of New York recently passed legislation that seeks to prohibit private employers from requiring arbitration of sexual harassment claims.  While state laws of this type are susceptible to preemption by the Federal Arbitration Act, federal bans have been proposed, and employers may wish to sidestep the controversy altogether by considering wage-hour only arbitration agreements.  In this way, discrimination claims, which usually are brought on a single-plaintiff basis, could then be excluded from the arbitration program if the additional costs associated with arbitration exceed the confidentiality benefit of arbitration.

Employers considering implementing an arbitration program also need to be aware of the various exceptions.  The FAA does not apply to certain employees, most notably transportation workers.  In California, PAGA representative actions are not subject to class waivers and cannot be arbitrated.  Complaints and charges filed with governmental agencies are not subject to arbitration agreements.

While there are many factors to consider, the Supreme Court’s decision today assures employers that arbitration agreements with class waivers remain a valuable option for employers interested in reducing potential class and collective action exposure.

*Seyfarth Shaw LLP is counsel for Epic Systems Corp. in the Lewis case at the district and appellate courts and is co-counsel for Epic at the Supreme Court.

By: John Phillips and Steve Shardonofsky

Seyfarth Synopsis: In an important decision for employers seeking to enforce arbitration agreements and limit wage and hour exposure and related defense costs, the U.S. Court of Appeals for the Fifth Circuit reaffirmed that district courts should rule on motions to compel arbitration and related jurisdictional questions before reaching issues on FLSA conditional certification.  The decision also provides a helpful roadmap for business executives and practitioners on the enforcement of arbitration agreements and the practical importance of so-called “delegation clauses.”  This case marks an important win for employers and is a must read for anyone seeking to enforce an arbitration agreement in the Fifth Circuit, particularly in the wage-hour context.

While wage and hour cases continue to proliferate in state and federal courts, many employers have turned to arbitration agreements with class/collective action waivers in an attempt to stem the tide. In response, savvy plaintiff-side attorneys often file motions for class or collective-action certification very early in the litigation, hoping to obtain a ruling on those issues before the court addresses issues related to arbitration.  The strategy has been successful in some jurisdictions, resulting in proverbial class- and collective-action bells that cannot be un-rung—even when the case is subsequently dismissed and moved to arbitration.  Fortunately, the Fifth Circuit affirmed that, in the collective action setting, questions regarding whether the plaintiff’s claims should be arbitrated must be decided prior to any issues regarding conditional certification.  Along the way, the Court provided a helpful analysis on the enforcement of arbitration agreements and the importance of delegation clauses in this context (i.e., a provision explaining that the arbitrator, not the court, must decide all issues regarding arbitrability, including whether the parties agreed to arbitrate and whether the claims at issues are subject to arbitration).

Background on the Case

In Edwards v. DoorDash, Incorporated, the plaintiff brought a purported FLSA collective action alleging that he and other delivery drivers were misclassified as independent contractors.  The same day the suit was filed, the plaintiff also moved for conditional certification of a nationwide collective.  In response, DoorDash filed an emergency motion to stay the briefing and any ruling on conditional certification, and it moved to compel arbitration pursuant to the plaintiff’s arbitration agreement, which included a class/collective action waiver provision and required the parties to arbitrate under the rules of the American Arbitration Association.

The district court delayed its ruling on conditional certification until it ruled on whether the lawsuit should be sent to arbitration.  The district court found ultimately that the arbitration agreement was valid and enforceable, dismissed the plaintiff’s lawsuit, and compelled him to arbitrate his claims, effectively denying the motion for conditional certification as moot. The plaintiff appealed to the Fifth Circuit, arguing that (1) the court should have decided conditional certification before ruling on the arbitration agreement, and (2) the district court erred in enforcing the arbitration agreement itself.  The Fifth Circuit upheld the district court in full; and in doing so, the Court provided a helpful analysis for any employer seeking to enforce arbitration agreements in the wage-hour context.

The Fifth Circuit’s Ruling

The Fifth Circuit reaffirmed its prior precedents and held that questions regarding arbitration are “threshold” matters that should be resolved “at the outset” and before any ruling on conditional certification under the FLSA.  This result, according to the Court, prevents certification of a collective or class action that should not have been brought in the court in the first place, and it also aligns with the “national policy favoring arbitration embodied in the FAA.”

In determining whether to compel arbitration, courts usually undertake a two-step inquiry to determine (1) whether there is a valid agreement to arbitrate, and (2) whether the dispute falls within the scope of the valid agreement.  But when there is a delegation clause, the Fifth Circuit re-affirmed, district courts should focus only on the first inquiry: whether an agreement to arbitrate was formed and whether it contains a valid delegation clause. The Fifth Circuit then noted:  “If there is a delegation clause, the motion to compel arbitration should be granted in almost all cases.”

In this case, the Court found that there was a valid arbitration agreement with a valid delegation clause. Applying California law, it rejected the plaintiff’s arguments that the arbitration agreement was illusory and never formed because DoorDash allegedly never signed the contract (although it did perform under the agreement) and did not give him a personal copy of the contract to keep. The Court also rejected the plaintiff’s argument that the agreement as a whole was unconscionable because questions regarding the underlying validity of the agreement (but not its formation) were questions for the arbitrator. Finally, the Court found that the agreement contained a valid delegation clause because it incorporated the rules of the American Arbitration Association, which provide that the arbitrator has the power to rule on his or her own jurisdiction, including all issues regarding arbitrability. Because the arbitration agreement was valid and also contained a valid delegation clause, the Fifth Circuit affirmed the district court’s order compelling the plaintiff’s claims to arbitration.

Takeaways and a Word of Caution About Delegation Provisions

This decision is a welcome ruling for employers, and it re-enforces the Fifth Circuit’s willingness for enforce arbitration agreements and give deference to the parties’ intentions—and in the correct procedural order. Importantly, it should help curb attempts by the plaintiffs’ bar to spur fast rulings on conditional certification before considering arbitration and other jurisdictional issues.

By: Noah A. Finkel and Andrew L. Scroggins

Seyfarth SynopsisPending bi-partisan legislation aimed at preventing employers from enforcing arbitration agreements of sexual harassment claims might make employers unable to enforce arbitration agreements, and class waivers included in them, as to any employment claim.

High profile stories of sexual harassment (and much worse) in the workplace and beyond have dominated headlines in recent months.  Yesterday Time magazine recognized The Silence Breakers – women who have gone public with allegations of sexual harassment and sexual assault – as the 2017 “Person of the Year,” thus becoming the latest to criticize companies and other employers who keep sexual harassment allegations and settlements secret through arbitration agreements with their employees.

Congress is now stepping in with a bill titled the “Ending Forced Arbitration of Sexual Harassment Act” that would amend the Federal Arbitration Act (FAA) by making the FAA inapplicable to claims of sex discrimination.  Without the FAA available to enforce an arbitration agreement, an employer likely would be unable to compel a claim of sex discrimination into arbitration and thus would have to litigate sex discrimination claims publicly in federal or state court.

The bill already has attracted bipartisan support.  At a press conference to announce the bill, former Fox News anchor Gretchen Carlson shared the stage with Democrats and Republicans from both houses of Congress.  In the House, its early co-sponsors include two Republicans.  In the Senate, the six original co-sponsors include two Republicans, Lisa Murkowski of Alaska and Lindsey Graham of South Carolina, the latter of whom said at the press conference that his goal is to create a better business environment where women are “able to go to work without having to put up with a bunch of crap.”

That is a goal that any employer can support, but the bill would do far more than that.  Under the version pending in the House (the version in the Senate has not yet been posted), there exists a so-called “technical and conforming amendment” that is anything but that.

Currently, Section 1 of the FAA contains an exclusion from its mandate to enforce arbitration agreements for employees involved in transportation.  The bill, however, would strike certain limiting language from Section 1 of the FAA so that Section 1 simply would read as follows:  “nothing herein contained shall apply to contracts of employment.”

This language likely would mean that employers would not be able to enforce arbitration agreements with their employees.  It would not matter whether the agreement is optional or a condition of employment.  It would not matter whether the arbitration program contained a waiver of the ability to bring a class or collective action.  Under this bill, the FAA arguably no longer could be used as the vehicle to enforce any arbitration agreement in the employment context.  And while there may be other vehicles through which to enforce an arbitration agreement (for, example state arbitration acts), the FAA has provided the foundation for recent jurisprudence allowing for enforcement of arbitration agreements, most notably class and collective action waivers, including the ones currently at issue before the U.S. Supreme Court.

It is unlikely that this is Congress’ intent, at least within the Republican majority.  And while the bill as a whole has received media attention today, none of that has focused on or even mentioned the broader limit the bill would place on arbitration agreement.

Given recent media coverage about sexual harassment, prominent stories about efforts to use private agreements to thwart complaints about harassment, and early Republican support for this bill, this bill appears it has a real chance of becoming law.  Congress should remove the amendment to Section 1 of the FAA before passing it.  Otherwise, it threatens to greatly limit the ability of companies and their employees to agree to arbitrate employment disputes on an individual basis.

Authored by Andrew L. Scroggins, Noah A. Finkel, and David S. Baffa

Seyfarth Synopsis:  The NLRB has withdrawn the significant concession it offered at oral argument on the nature of the NLRA rights it seeks to assert in the face of employers’ mandatory arbitration programs.

As noted in our earlier blog post, the Supreme Court heard oral argument on October 2, 2017, on one of the most significant employment law cases in some time, to consider whether to permit employers to use mandatory arbitration programs that contain waivers of collective and class actions.

In the most dramatic moment of the morning, the NLRB’s General Counsel Richard Griffin made a significant admission.[1]

In response to a series of questions by a skeptical Chief Justice Roberts, Griffin agreed that it would not be an unfair labor practice for a mandatory arbitration program to require use of a forum whose rules did not allow class arbitration. Justice Alito quickly realized the significance of this point: “if that’s the rule, you have not achieved very much because, instead of having an agreement that says no class, no class action, not class arbitration, you have an agreement requiring arbitration before the XYZ arbitration association, which has rules that don’t allow class arbitration.” Griffin did not dispute this. He commented that “the provisions of the [NLRA] run to prohibitions against employer restraint.”

Next to the podium was counsel for the employees, Daniel Ortiz of the University of Virginia School of Law. Ortiz did not agree with that concession, thus seeming to highlight a fundamental dissent from the NLRB’s position. This gap was all the more notable for the fact that the Solicitor General already had abandoned the NLRB to side with the employers.

In an unusual development, just one day after the argument, the NLRB’s Griffin sent a short letter to the Court disavowing its argument and adopting the position staked out by Ortiz:

I am writing to correct an inaccurate response I gave at oral argument yesterday in response to the line of questioning by Chief Justice Roberts found at pages 47-50 of the transcript of the oral argument.  My responses, to the extent they indicated any difference from the responses given by employees’ counsel, Mr. Ortiz, to the questions of Chief Justice Roberts found at pages 60-64 of the transcript of the oral argument, were a result of my misunderstanding the Chief Justice’s questions and were inaccurate; Mr. Ortiz correctly stated the Board’s position and there is no disagreement between the Board’s and the employees’ position on the answers to those questions.

Such letters are not unprecedented. Still, it is a remarkable about face. For the justices who already seemed skeptical of the NLRB’s position, this change of position may only serve to highlight that the NLRB is not clear in the reasoning of its position or the effects such reasoning may have if ordered more broadly by the Court to apply to future cases.

[1] The New York Times highlighted Griffin’s concession:

The labor board’s general counsel, Richard F. Griffin Jr., argued for the workers. He made a concession at odds with the position of another lawyer on his side.

Mr. Griffin said that employment contracts could not require workers to give up collective action in arbitration but that the private entities that conduct arbitration could require that cases be pursued one by one.

If that is so, Justice Samuel A. Alito Jr. responded, “you have not achieved very much because, instead of having an agreement that says no class arbitration, you have an agreement requiring arbitration before the XYZ arbitration association, which has rules that don’t allow class arbitration.”

Daniel R. Ortiz, a law professor at the University of Virginia who also argued for the workers, took a different approach…

Co-authored by Noah A. Finkel, David S. Baffa, and Andrew L. Scroggins

Seyfarth Synopsis: Following oral argument, employers should be cautiously optimistic that the Supreme Court will allow mandatory arbitration programs containing waivers of the ability to bring collective and class actions.

In yesterday’s oral argument, in one of the most significant employment law cases we have seen in some time, a divided Supreme Court appeared more likely than not to give the green light to employers’ mandatory arbitration programs that contain waivers of collective and class actions. Our summary of the issues this case presents can be found here: https://www.wagehourlitigation.com/arbitration-agreements/will-the-supreme-court-finally-remove-doubt-that-an-employer-can-mandate-that-employees-enter-into-arbitration-agreements-with-class-waivers/

Reading tea leaves from oral argument is always a challenge, especially for those who have a stake in the matter.[1] But the three authors of this post attended yesterday’s argument and, judging from the questions from the Court, the various Justices’ reactions to the answers to those questions, and the prior rulings from the Court, are optimistic that the Court ultimately will issue a closely-contested ruling in favor of class waivers.

Four Justices Appear Ready to Invalidate Class Waivers in Employment Cases

While our prediction is somewhat uncertain, there is one aspect in which we are completely confident: there will not be a unanimous decision. Indeed, it appeared that there are four solid votes to hold that Section 7 of the National Labor Relations Act provides an employee with a right to bring a collective or class action, that requiring an employee to waive that right as a condition of employment violates NLRA Section 8’s prohibition against employer restraint of that right, and that, therefore, an employer’s arbitration agreement including a class waiver cannot be enforced either because the class waiver is illegal or because the NLRA constitutes a contrary congressional command to the general rule that, under the Federal Arbitration Act, arbitration agreements are to be enforced according to their terms.

Justice Ginsburg asserted in her questions that “the driving force of the NLRA was the recognition that there was an imbalance, that there was no true liberty of contract,” which is why concerted activity — including, in her apparent view, class and collective action — is protected against employer interference. She further contended that the Court’s prior precedents regarding the FAA concerned only commercial contracts and did not involve NLRA rights. (As the employers’ counsel Paul Clement rightly pointed out, however, the Court has twice reviewed the propriety of arbitration agreements between employers and employees, and neither time did the Court reason that arbitration agreements in the employment context are entitled to any less weight than those in the commercial context.)

Justice Kagan relied on the Court’s prior precedent to argue that the NLRA protects “employees seeking to improve working conditions through resort to administrative and judicial forums” and thus implied that filing a class action also is protected by the NLRA. But the employers’ counsel retorted that Court precedent merely protects “resort to” courthouses, and that “there is no right to proceed as a class once you get there.” Once in court, nothing prohibits an employer from asserting all available defenses to class treatment, including moving to enforce an agreement between an employer and employee to arbitrate all disputes on a bilateral basis.

Justice Sotomayor questioned that argument by maintaining that an employer cannot enforce a contract that is “illegal” even under the FAA. In response to that, employers’ counsel Clement retorted that the Court has decided two other cases (Circuit City v. Adams and Gilmer v. Interstate Johnson/Lane Corp.) in which employees had agreed to bilateral arbitration and in which it could have been argued that the NLRA makes such an agreement unlawful. “But no dog barked at that point . . . and that’s because the NLRA in no other context extends beyond the workplace to dictate the rules of the forum,” Clement told the Court.

The most vigorous questioner was Justice Breyer, who appeared offended by the idea of a class waiver. He went so far as to say that he is worried that the employers’ position “is overturning labor law that goes back to, for FDR at least, the entire heart of the New Deal” and that “I haven’t seen a way that you can, in fact, win the case, which you certainly want to do, without undermining and changing radically what has gone back to the New Deal.” Clement explained, however, that “for 77 years” — from the passage of the NLRA until its 2012 D.R. Horton decision — “the [NLRB] did not find anything incompatible about Section 7 and bilateral arbitration agreements” and the NLRB’s General Counsel issued a memorandum on the issue in 2010 in which it found that a mandatory class waiver does not violate the NLRA.

But From Where Does the 5th Vote Come?

Despite these fairly clear votes to invalidate class waivers, four votes does not a majority make.  And in questioning of counsel for the NLRB and counsel for the employees, it appeared that it will be difficult to find that fifth vote. Justice Thomas, in keeping with his usual demeanor, did not ask a question, but he has been in the Court’s majority in other cases enforcing arbitration agreements and is regarded as generally receptive to employer’s views. Nor did Justice Gorsuch ask a question. He, however, thus far has joined the Court’s conservative majority in all decisions in which he has been a part.

Chief Justice Roberts and Justice Alito clearly were skeptical of the NLRB’s position. Indeed, in questioning its General Counsel Richard Griffin, Chief Justice Roberts and Justice Alito led Griffin into a significant admission, providing the most dramatic moment of the morning. They asked Griffin a series of questions that led Griffin to agree that it would not be an unfair labor practice for a mandatory arbitration program to require use of a forum whose rules did not allow class arbitration. Justice Alito quickly realized the significance of this point: “if that’s the rule, you have not achieved very much because, instead of having an agreement that says no class, no class action, not class arbitration, you have an agreement requiring arbitration before the XYZ arbitration association, which has rules that don’t allow class arbitration.” Griffin did not dispute this.  He commented that “the provisions of the [NLRA] run to prohibitions against employer restraint.”

Interestingly, counsel for the employees, Daniel Ortiz of the University of Virginia School of Law, did not agree with that concession, thus highlighting fundamental dissent from the NLRB’s position. These cases at the Supreme Court already were notable because the Solicitor General took a position opposite that of the NLRB. Oral argument added another layer of disagreement: even the employees urging the Court to adopt the Board’s view of the NLRA don’t agree with the concession made by Griffin. In other words, the employees and the NLRB are asking the Supreme Court to recognize a right that overrides the FAA, but they cannot agree on what that right is.

As in any close case recently at the Supreme Court, most eyes were on the swing vote, Justice Kennedy. Going into the argument, he appeared to be the Justice most likely to join Justices Ginsburg, Sotomayor, Kagan, and Breyer, the four justices who dissented from the Court’s enforcement of a bilateral arbitration agreement in the consumer context in AT&T Mobility v. Concepcion. Justice Kennedy did not tip his hand as much as the other Justices. But he did appear to be interested in the concession that NLRB General Counsel Griffin made (and clarified Chief Justice Roberts’ question that induced that concession), and his questioning of the Board and the employees’ counsel suggested that he believed that, even with a collective and class action waiver, employees still can exercise Section 7 rights in various ways, and that he did not wish to “constrain[] employers in the kind of arbitration agreements they can have.”

Little of the argument focused on the FAA and the nature of its saving clause or what constitutes a “contrary congressional command.” The Justices seemed more interested in exploring whether the NLRA contains a right to a class action in the first place.

What Next?

Our predicted close victory for the employers is just that: a prediction. After all, even the Justices who appeared to favor permitting class waivers did not strongly signal how they might reach that result or whether any guidelines or restrictions might accompany the rule. We do not recommend that employers bank on our prediction, because one never knows what is in the minds of the Justices or how they will come out after discussing the cases with each other. Until a decision is issued — which likely will be early 2018 — there will be no definitive answer as to whether a class waiver in an arbitration program provides a defense to an employment class or collective action. Employers should continue to consider whether an arbitration program with a class or collective action waiver is right for them and, if it is, be ready to implement one if the Supreme Court rules in the employers’ favor in these cases.

[1] Seyfarth Shaw LLP is counsel for Epic Systems Corporation — one of the three companies whose arbitration programs are at issue in the three consolidated cases at the Supreme Court — and represents Epic at the district court in this case, was counsel for Epic in the appellate court, and is co-counsel for Epic at the Supreme Court.  The views expressed in this blog post are Seyfarth Shaw’s and not necessarily those of Epic.

Co-authored by Noah Finkel and David Baffa

Seyfarth Synopsis: In the first argument of the first day of its new term, the U.S. Supreme Court will hear oral argument in three cases presenting the issue of whether an employer may require employees to enter into arbitration agreements containing a waiver of the ability to join a class or collective action. The Court’s decision — expected in early 2018 — could significantly alter the landscape of multi-claimant employment litigation more than any other development in recent memory. Employers should start preparing now.

Whether for claims of discrimination, ERISA violations, or, most frequently, wage-hour violations, employers have faced an increasing number of employment lawsuits brought as class or collective actions, and have spent more and more to defend and settle them. As a result, some employers have enacted mandatory arbitration programs for their employees, with a key feature of the arbitration program being a waiver of the ability to participate in a class or collective action.

The Supreme Court’s Embrace of the Federal Arbitration Act

Enforcing arbitration agreements with class waivers has been successful for the most part in recent years, at least with respect to arbitration programs that are carefully drafted to avoid state contract defenses such as claims of lack of consideration or procedural unconscionability. This is largely due to the U.S. Supreme Court steadily removing the most significant hurdles to enforcement of class waivers in arbitration agreements.

At first, many argued that a class waiver violates public policy. But in 2011, the Supreme Court made clear in AT&T Mobility v. Concepcion that California’s Discover Bank rule that effectively barred enforcement of class action waivers in consumer arbitration contracts is preempted by the Federal Arbitration Act (“FAA”). Then, some tried to distinguish Concepcion by arguing that it merely elevated the federal FAA above state law, and that a class waiver of a federal claim cannot be enforced. But the Supreme Court rejected that argument in 2012 in CompuCredit Corp. v. Greenwood and held that arbitration agreements must be enforced according to their terms “even when federal statutory claims are at issue.” Next, some argued that class waivers should not be enforced because if small claims cannot be pooled together in a class or collective action, then there is no way effectively to vindicate rights, especially where the costs to pursue individual claims exceeds the potential recovery. The Supreme Court rejected that theory too, in 2013, in American Express Co. v. Italian Colors Restaurant.

The net effect of these favorable rulings could have caused most employers to adopt arbitration programs with class waivers. Many held back, however. One reason is that, in the employment context, a significant hurdle remained to the enforcement of class waivers in arbitration agreements: the National Labor Relations Board (“NLRB”) and its D.R. Horton decision in 2012.

The NLRB — and Some Circuit Courts — Fight Back

The NLRB’s theory, first articulated in D.R. Horton, is that the pursuit of class or collective actions constitutes protected concerted activity under Section 7 of the National Labor Relations Act (“NLRA”). Just as Section 7 protects the right to form a union, picket, strike or engage in other concerted activities for mutual aid or protection, it also protects the right of employees to band together to participate in a class or collective action, or so has said the NLRB. The Fifth Circuit, however, refused to enforce the NRLB’s decision, and shortly thereafter, the Second and Eighth Circuits rejected similar arguments premised on the NLRB’s theory. Similarly, all but a handful of district courts rejected the D.R. Horton theory even while the NLRB continued to espouse it.

That changed in May 2016 when the Seventh Circuit issued its decision in Lewis v. Epic Systems Corp. There, the Seventh Circuit endorsed the theory that bringing a class or collective action (Lewis brought both) is a form of protected concerted activity under the NLRA, and that because of that, an arbitration agreement that requires a class waiver is illegal. Accordingly, said the Seventh Circuit panel, the arbitration agreement cannot be enforced under the saving clause of the FAA (the “saving clause” provides that arbitration agreements “shall be valid, irrevocable, and enforceable save upon such grounds as exist at law or in equity for the revocation of any contract”).[1] A few months later, in May 2016, the Ninth Circuit followed the Seventh in Morris v. Ernst & Young (as did the Sixth Circuit a year later in May 2017 in NLRB v. Alternative Entertainment, Inc.).

The Supreme Court Steps In to Tackle the Most Significant Employment Case in Years

Due to the circuit split, the Supreme Court granted cert to three case presenting the issue of whether an employer may require its employees to arbitrate all claims against it on an individual (i.e., non-class) basis, despite the provisions of the NLRA: Epic Systems Corp. v. Lewis from the Seventh Circuit, Ernst & Young v. Morris from the Ninth Circuit, and NLRB v. Murphy Oil Co. out of the Fifth Circuit.

Oral argument will take place on October 2, the first day of the Supreme Court’s term. Indeed, the three cases constitute the first matter the Court will take up that day. The Court does not announce when opinions will be issued, but it is expected that the decisions in these cases likely will be issued in January or February 2018.

A decision in favor of the plaintiffs and the NLRB likely would preclude enforcement of class waivers as to the vast majority of employment claims and would allow to continue, if not further amplify, the wave of collective and class actions that have plagued employers. Those groups of employees not covered by the NLRA, including supervisors and independent contractors, likely could be compelled to enter into class waivers, but all other employees would remain free to lead or participate in class or collective proceedings.

A decision in favor of the companies, however, probably would clear the last foreseeable hurdle to the enforcement of arbitration agreements containing a waiver of the ability to participate in a collective or class action. It is even possible that the Court’s reasoning could allow for class waivers outside of an arbitration agreement, as the Fifth Circuit held earlier this year in Convergys Corp. v. NLRB.

A green light for class waivers in arbitration agreements thus likely would cause many employers to adopt arbitration programs with class waivers. Those waivers likely would be enforced by courts under a favorable Supreme Court decision, provided the waivers and the arbitration agreements are carefully drafted to comport with state contract laws.

There are some narrow exceptions for certain claims or employees that would not be covered. For example, claims under California’s Private Attorneys General Act (“PAGA”) cannot be compelled to arbitration, and certain transportation workers are exempt from the FAA (though arbitration agreements potentially could be enforced as to them under state arbitration acts). Also, employees must remain free to file administrative charges, and lawsuits initiated by the EEOC or Department of Labor would be unaffected by arbitration agreements with class waivers. There also could be multi-claimant actions brought in different ways, such as the assertion of serial arbitration demands on behalf of dozens of employees at a time. But on the whole, a favorable Supreme Court decision could enable employers to largely avoid the employment class action epidemic.

“So Should Our Company Have One of These Arbitration Agreements?”

Because of the potential significance of the Court’s ruling, the October 2 oral argument is likely to receive a lot of media attention over the next few weeks. Company executives are likely to ask their in-house lawyers and human resource professionals some variant of the following question: “I just read about this case about arbitration agreements and class waivers. Do we have that? Should we have that?”

The answer to that question, in the short term, probably is to wait and see how the Court rules, which should be within a few months. But if the Court rules in favor of employers, the answer still will vary from company to company, as an arbitration program may not be right for every employer even though it may free a company from the burdens of an expensive class or collection action.   There are several other advantages to consider, but also several disadvantages.

On the one hand, companies that implement such an agreement could avoid runaway jury verdicts, reach decisions on the merits more quickly than is typical in court, and likely count on greater confidentiality given the non-public nature of arbitration proceedings. On the other hand, an arbitration agreement means that, for covered claims, employment disputes are before an arbitrator rather than a judge. Arbitrators often are less predictable than judges, usually disfavor motions to dismiss or summary judgment motions, and issue binding decisions from which there is often limited opportunity for appeal. Arbitrations also can be more expensive: arbitrator fees can be high and generally must be borne by the employer. Also, arbitrations more typically result in an evidentiary hearing (rather than ending by a dispositive motion), meaning that attorneys’ fees for arbitrations may be higher as well. Finally, many companies are concerned that employees may perceive an arbitration program with a class waiver to be a takeaway, potentially leading to a drop in employee morale or even giving a boost to a union organizing effort.

In addition to the above considerations, drafting and implementing an arbitration agreement requires great care. For example, employers need to ensure that they not give a court any basis on which to find that the provisions of an arbitration agreement could be unconscionable. Thought must be given to what claims are covered (e.g., should the agreement cover wage-hour claims but not discrimination claims?). Questions often arise about whether a mutual exchange of promises to arbitrate constitutes sufficient consideration, or whether consideration beyond continued employment must be provided in some states. Above all, a thoughtful communications plan must be prepared to minimize employee relations risks.

Although a ruling in these cases is not likely until early 2018, it is not too early to start thinking of next steps now. Please join us for a webinar on October 4, 2017 at 1:00 p.m. Eastern, during which we will provide our analysis of the Court’s oral argument, predict what employers may expect from the Court’s ruling, and whether, when, and how employers should enact or modify their arbitration programs. Click here to register.

[1] Seyfarth Shaw LLP is counsel for Epic in the Lewis case at the district court, was counsel for Epic in the appellate court, and is co-counsel for Epic at the Supreme Court. The views expressed in this article are Seyfarth Shaw’s and not necessarily those of Epic.

Authored by Holger G. Besch 

Perhaps signaling the importance of the issue for American businesses and jurisprudence, the U.S. Supreme Court‎ chose the first day of its term beginning in October as the date to set oral arguments in three petitions for certiorari asking whether employees can be required to waive their rights via arbitration agreements to file class and collective actions against their employers. The arguments in Ernst & Young LLP v. Morris; Epic Systems Corp. v. Lewis; and NLRB v. Murphy Oil USA Inc., will all be heard on October 2nd, so mark your calendars.

The cases before the Supreme Court originated either before the National Labor Relations Board, which had ruled that such agreements violate workers’ rights under the National Labor Relations Act to take collective action to ameliorate their working conditions, or with district courts that had used the NLRB’s ruling to reject employers’ motions to compel bilateral arbitration of putative collective and class actions.

SCOTUS will be resolving the resulting Circuit split, in which the Ninth and Seventh Circuits backed the NLRB’s position when they ruled against Ernst & Young and Epic Systems, respectively, and the Fifth Circuit ruled in favor of Murphy Oil. Opening briefs are already on file and address, at bottom, whether the Federal Arbitration Act or the NLRA should take precedence.

Co-authored by Robert S. Whitman and Howard M. Wexler

Seyfarth Synopsis: A New York intermediate appellate court with jurisdiction over Manhattan weighed in on the enforceability of arbitration agreements with class and collective action waivers.  Its decision, issued on July 18, 2017, holds that waivers are unenforceable as they interfere with employees’ rights under the National Labor Relations Act to engage in protected concerted activity by depriving them of the ability to bring class or collective actions.

As our loyal readers are well aware, the U.S. Supreme Court is scheduled to hear oral argument in its Fall 2017 term regarding the enforceability of arbitration agreements with class and collective action waivers.  This has been a “hot button” issue ever since the NLRB’s highly controversial D.R. Horton decision in 2012, which held that these waivers violate employees’ right to engage in protected concerted activity.   Three circuits—the Second, Fifth, and Eighth—have concluded that such agreements are enforceable, while three circuits—the Sixth, Seventh, and Ninth— have held that they are not.

As practitioners eagerly await the Supreme Court’s decision (oral argument is scheduled for the October 2017 term, with a decision expected in early 2018), a New York intermediate appellate court with jurisdiction over Manhattan weighed in on this divisive question.  Its decision, issued on July 18, 2017, holds that waivers are unenforceable as they interfere with employees’ rights under the National Labor Relations Act to engage in protected concerted activity by depriving them of the ability to bring class or collective actions.

In reaching its decision, the court weighed “an individual’s right to resort to the courts, on the one hand, and this State’s preference for enforcing arbitration agreements.” The court found there to be “no reason that the [Federal Arbitration Act] policy favoring arbitration should trump the NLRA policy prohibiting employers from preventing collective action by employees.”  Accordingly, the court came down on the side of the Sixth, Seventh, and Ninth Circuits and held “that waiver of collective claims violates the NLRA, and is void and invalid under the FAA’s saving clause.”

In a vigorous dissent, Judge Andrias noted that, “although the NLRA gives employees a right to bargain collectively, the statute does not expressly give employees the right to arbitrate or litigate disputes as a class or collective action, and the legislative history lacks any indication of a congressional command precluding courts from enforcing collective-action waivers according to their terms.”

This critically important question has significant implications for employers within Manhattan, many of whom implemented class waivers in their arbitration agreements with employees following the approval of such clauses in decisions issued by the U.S. Supreme Court and the Second Circuit. In light of this decision, those New York employers are now subject to contrary decisions issued by the state and federal courts with authority over their place of operation.  Until the Supreme Court decides the issue in the coming months, or the New York Court of Appeals somehow steps in during the interim (which is unlikely), employers may face more state court filings by employees seeking to nullify their class action waivers.  We will be watching these developments closely, so stay tuned!

Co-authored by Noah Finkel and Andrew Scroggins

Employers have faced questions about the enforceability of arbitration agreements with class and collective action waivers since the NLRB’s highly controversial D.R. Horton decision in 2012, which held that the waivers violate employees’ right to engage in protected concerted activity. The Fifth Circuit refused to enforce the decision, and other courts followed, but the NLRB refused to change course. In 2016, the Seventh and Ninth Circuits also adopted the NLRB’s view, as has the Sixth Circuit in 2017.

In January 2017, the U.S. Supreme Court agreed to hear the issue, consolidating cases from the Fifth, Seventh, and Ninth Circuits. Oral argument is scheduled to take place during its Fall 2017 term.

The tea leaves at the Supreme Court give many reason to believe that the NLRB’s position will be struck down. Newly-appointed Justice Neal Gorsuch is considered by many observers to be likely to follow the pro-arbitration stance of his predecessor, Justice Scalia. The Office of the Solicitor General recently reversed its position, filing an amicus brief in support of the employers that details the flaws it sees in the NLRB’s position and leaving the NLRB on its own to argue the case before the Court. And the appointment of new Board members and the end of the NLRB General Counsel Richard Griffin’s term in November 2017 raise the possibility the agency may revisit its position, thus eliminating any argument that courts should defer to the NLRB’s current position on the legality of class waivers.

Some, from both sides of the bar, speculate that if the Supreme Court rejects the D.R. Horton theory nearly all well-advised employers seeking to minimize their risks will adopt mandatory arbitration programs with class waivers, and that wage-hour litigation as we know it will be over. That hope/fear, however, may be overstated.

This post is the first of several that will consider what the future may hold if employers find themselves confident that they will be able to issue enforceable, mandatory arbitration programs containing class and collective waivers. To what extent will the wage-hour class and collective action landscape change?

A recent Sixth Circuit decision, Taylor v. Pilot Corporation, et al., provides a glimpse into one part of the future. The employer had in place an arbitration agreement with a collective action waiver that applied to most, but not all, of its 50,000 hourly employees. One of the employees who was not bound by the agreement filed an FLSA collective action alleging that she had not been paid for all of her overtime hours. She asked the court to authorize sending notice of conditional certification to those “similarly situated” to her, which she contended included all 50,000 hourly employees.

The employer protested that the plaintiff was not similarly situated to the tens of thousands of employees bound by the arbitration agreement. After all, even if those employees opted in to the suit, the court would lack subject matter jurisdiction, and their claims would be dismissed and sent to arbitration. The district court disagreed, reasoning that it would determine whether the arbitration agreements were enforceable only after learning who had opted-in to the litigation. Notice to all 50,000 hourly employees was approved. The decision was affirmed on appeal, with the Sixth Circuit concluding it did not have jurisdiction to consider questions about the enforceability of the arbitration agreement at this stage.

The decision illustrates how even carefully prepared arbitration agreements can have unintended consequences if not carefully rolled out. Suppose that notice to 50,000 employees results in just 1,000 opt-in plaintiffs, and all of them have signed enforceable arbitration agreements with a collective action waiver. While those employees ultimately may not be able to participate in the collective action for which they received notice, they nonetheless have now been in touch with a lawyer or group of lawyers who can file individual arbitration demands on behalf of all 1,000 employees who had filed consents to join the lawsuit for which they received a collective action notice after conditional certification.

And it gets worse. Consider that most third-party arbitration services require that the employer pay an initial fee when the employee’s claim is filed. The American Arbitration Association, for example, imposes a non-refundable fee of at least $1,500 on the employer for cases filed by an employee. Continuing with the example from above, the employer could be hit with $1,500,000 in costs just as the price to play. Costs begin to rise exponentially when it comes time to mount a defense and arbitrator and hearing fees begin.

In other words, employers should not expect that a Supreme Court endorsement of arbitration agreements with class and collective action waivers will act as a complete bar to collective claims. After all, to adopt a famous movie phrase, plaintiffs’ lawyers “find a way.” The Taylor decision shows the potential power of finding the “unicorn” plaintiff who is not bound by the same agreement as her co-workers, and shows that employers will have to ensure that each and every one of their employees will have to be bound by an arbitration program to maximize a class waiver’s protection. But even then, the unicorn for a plaintiff’s lawyer may merely be someone who had been employed by the defendant-employer within the last three years (the longest of the FLSA’s potential limitations periods), but whose employment had ended before the arbitration program had been enacted. Other novel workarounds are sure to arise if new rules about arbitration force plaintiffs to get more creative.