Epic Shift: Supreme Court Enforces Class Action Waivers in Arbitration Agreements
The Supreme Court issued a landmark decision on May 21, 2018, which has widespread implications for all employers. In Epic Systems Corp. v. Lewis, a 5-4 opinion written by Justice Gorsuch, the Supreme Court held that arbitration agreements and class/collective action waivers are enforceable, putting to rest any argument that the National Labor Relations Act prevents or limits their enforceability. The decision provides employers further options for limiting litigation risk, particularly with respect to costly wage and hour collective actions. The decision also contains important implications for employers that maintain or are considering implementing arbitration agreements in the workplace, as there is no longer any identified legal impediment to the concept of an employer requiring its employees to waive the ability to bring a class or collective action under federal, state, and local employment laws.1
The opinion resolves a circuit split on the enforceability of class action waivers in arbitration agreements, and repudiates the recent position of the National Labor Relations Board that these waivers were unenforceable. The decision addressed three consolidated cases: Epic Systems Corp. v. Lewis (Seventh Circuit), Ernst & Young LLP et al. v. Morris et al. (Ninth Circuit), and National Labor Relations Board v. Murphy Oil USA, Inc., et al. (Fifth Circuit). It marks a sea change for employers in jurisdictions where these waivers previously were not upheld, particularly within the Ninth Circuit,2 as well as the Sixth3 and Seventh Circuits.4 It reaffirms the position already adopted by courts within other jurisdictions, such as the Fifth Circuit,5 that class action waivers are enforceable.6 For employers whose operations span across different jurisdictions, the decision provides much needed clarity, consistency, and certainty, now allowing employers to rely on a universal arbitration agreement with a class action waiver in each state in which they operate without concerns about enforceability.
The decision also has significant ramifications for the scope of class action waivers. In each of the three consolidated cases, the plaintiffs were pursuing class/collective actions with Fair Labor Standards Act (“FLSA”) claims for unpaid overtime. Sheila Hobson’s FLSA claim in the Murphy Oil case had been dismissed by the trial court as a result of the arbitration provision in the employment agreement she signed when she started work at a gas station in Alabama. By contrast, plaintiff Jacob Lewis, a technical communications employee, had overcome a motion to dismiss his FLSA overtime class action in the Epic Systems case by arguing that a class action waiver in an arbitration agreement that had been emailed to him by his employer was unenforceable. Likewise, in the Ernst & Young case, plaintiff Stephen Morris sought unpaid overtime under the FLSA and the California Labor Code for working long hours during audit season. As a result of the Supreme Court’s ruling, after remand, all of these claims now appear destined for arbitration unless they are resolved. The Epic Systems decision represents a broader affirmation, however, that arbitration agreements are enforceable regardless of the nature of an employee’s claim, even if the claims are brought pursuant to employment statutes that explicitly provide for a class or collective action. Slip op. at 14-15, 17.
In recognition of the benefits of arbitration, “the promise of quicker, more informal, and often cheaper resolutions for everyone involved,” as Justice Gorsuch put it, the decision contains important implications for drafting or updating arbitration clauses. Slip. op. at 5. The decision reiterates that employers may generally fix the procedures to govern arbitration in the terms of the arbitration agreement with the expectation that they will be upheld. Slip op. at 5-6. Guidance can be drawn from the three agreements in these cases which the court held enforceable, each with varying terms. For example, one of the arbitration agreements gave the employee the option to choose the arbitrator, whereas another did not.
The decision may also carry potential implications for states responding to the #MeToo movement with legislation to restrict the arbitrability of claims of sexual harassment. The Epic Systems opinion commences with a question with great weight on this issue: “Should employees and employers be allowed to agree that any disputes between them will be resolved through one-on-one arbitration?” Slip op. at 1. The opinion responds with a resounding “yes,” noting later that debates over arbitration “remain hotly contested” in Congress. Slip op. at 24. Although the opinion does not discuss the Ending Forced Arbitration of Sexual Harassment Act, a current bill pending in Congress, the opinion contains repeated reiterations of the primacy of the Federal Arbitration Act. Arguments that the Federal Arbitration Act preempts, and therefore dooms, state laws restricting the enforceability of arbitration in cases alleging sexual harassment or sex discrimination may now draw added force from Epic Systems.
In the wake of Epic Systems, employers that are interested in more fully developing an arbitration program are left with a variety of issues to consider.7
- What procedures will govern the proceeding?
- What jurisdiction’s law will govern?
- Where will disputes be adjudicated?
- Does law in a given jurisdiction require the employer to pay the costs of arbitration?
- Could a plaintiff argue that terms are procedurally or substantively unconscionable?
- Is class arbitration prohibited, and if there is a dispute over this clause, will it be resolved by a court or arbitrator?
- When must claims be filed?
- What evidentiary guidelines will apply?
- How is cost shifting addressed?
- Is arbitration voluntary or mandatory?
These factors will come into greater focus for employers as the Epic Systems ruling reverberates through the lower courts. While there are many issues to evaluate, the Supreme Court’s ruling assures employers of one critical point: arbitration agreements with class action waivers remain a useful option for employers seeking to minimize litigation risk exposure.
The Labor & Employment group would like to thank Emery Richards for drafting this client alert.
1 Certain nuances in state law, however, may enable employees to nevertheless pursue certain state law claims outside of arbitration, such as perhaps through California’s Private Attorney General Act. In addition, there are some classes of employees to whom the Federal Arbitration Act does not apply, and agency-initiated actions brought by the Equal Employment Opportunity Commission or Department of Labor can proceed in court regardless of whether an employee has signed a class action waiver in an arbitration agreement.
2 The U.S. Court of Appeals for the Ninth Circuit includes California, Washington, Oregon, Arizona, Nevada, Alaska, Montana, Idaho, and Hawaii.
3 The U.S. Court of Appeals for the Sixth Circuit includes Kentucky, Michigan, Ohio, and Tennessee.
4 The U.S. Court of Appeals for the Seventh Circuit includes Illinois, Indiana, and Wisconsin.
5 The U.S. Court of Appeals for the Fifth Circuit includes Texas, Louisiana, and Mississippi.
6 In the Fifth Circuit, class action waivers are enforceable in employment cases, even if they are not part of an arbitration agreement. Convergys Corp. v. Nat’l Labor Relations Bd., 866 F.3d 635 (5th Cir. 2017).
7 As a result of the Epic Systems decision, opt-out or opt-in processes for agreeing to arbitration no longer appear to be a factor which can affect the enforceability of arbitration agreements.
© 2018 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.