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Class Action Defense Cases – Epic Systems v. Lewis: Supreme Court Holds FAA Compels Individual Arbitration Of Labor Law Disputes Rejecting Employee Claim That NLRA Permits Class Action Lawsuits Despite Arbitration Agreement With Employer

Employee Attempt to Pursue Class Action Lawsuit Despite Having Agreed to Individually Arbitrate Any Disputes with Employer Fails as Supreme Court Rejects NLRB’s Effort to Carve Out Labor Law Class Actions from FAA Requirement that Arbitration Agreements be Enforced

The Supreme Court issued a seminal decision yesterday in Epic Systems Corp. v. Lewis, 584 U.S. ___ (May 21, 2018), ruling 5-4 that the Federal Arbitration Act (FAA) compels enforcement of an employer-employee arbitration agreement to resolve disputes on an individual basis, rejecting the employees’ claim that the National Labor Relations Act (NLRA) authorizes the utilization of the class action procedure to resolve employee complaints.

The Supreme Court’s decision affects three consolidated appeals – out of the Fifth Circuit, the Seventh Circuit and the Ninth Circuit.  Justice Gorsuch concisely summarized the central issue as follows: “Should employees and employers be allowed to agree that any disputes between them will be resolved through one-on-one arbitration? Or should employees always be permitted to bring their claims in class or collective actions, no matter what they agreed with their employer?” (Slip Opn., at 1.)

Yet again, consistent with well-settled Supreme Court precedent on the FAA, the Supreme Court held that the arbitration clause prevails.  Importantly for class action counsel in California, language in the Supreme Court opinion suggests that the California Supreme Court’s decision in Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348, 383, 327 P.3d 129, 148 (Cal. 2014), which held that an employee’s right to bring a Private Attorney General Act (PAGA) class action asserting labor law claims cannot be waived, may not withstand a federal court challenge.

The Supreme Court used the Ninth Circuit case of Ernst & Young LLP v. Morris, where the employer and an employee (Stephen Morris) agreed to resolve on an individual basis through arbitration any disputes that may arise out of Morris’s employment. Morris later filed a putative class action against Ernst & Young alleging violations of the federal Fair Labor Standards Act (FLSA) and California labor laws claiming that he had been misclassified as exempt. Ernst & Young successfully moved to compel arbitration of Morris’s individual claims, but the Ninth Circuit reversed on the grounds that the FAA’s “saving clause” (9 U.S.C. §2) exempted from arbitration lawsuits that other federal laws permit to be brought as class actions. In the Ninth Circuit’s view, the NLRA expressly authorized “concerted activities” by employees (29 U.S.C. §157), which it believed included class actions or collective actions.

The Supreme Court disagreed. Historically, the High Court observed, the FAA (which dates to 1925) and the NLRA (which dates to 1935) have coexisted. Indeed, in 2010 the NLRB’s General Counsel remarked that “employees and employers ‘can benefit from the relative simplicity and informality of resolving claims before arbitrators,’ [and] … opined that the validity of such agreements ‘does not involve consideration of the policies of the National Labor Relations Act.’” (Slip Opn., at 4, citation omitted.) It was not until 2012 that the NLRB concluded that the NLRA’s right to concerted activity supercedes the FAA’s power to enforce arbitration agreements. (Id.)

In rejecting this position, the Supreme Court summarized the employees’ argument as follows: The FAA’s saving clause “allows courts to refuse to enforce arbitration agreements ‘upon such grounds as exist at law or in equity for the revocation of any contract’” and this provision applies “because the NLRA renders their particular class and collective action waivers illegal.” (Slip Opn., at 6.) The Supreme Court rejected this argument due to a “fundamental” flaw – viz., “the saving clause recognizes only defense apply to ‘any’ contract” – thereby “establish[ing] a sort of ‘equal treatment’ rule for arbitration” – but “the clause offers no refuge for ‘defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.’” (Id., at 7, citations omitted.) In other words, “the saving clause does not save defenses that target arbitration either by name or more subtle methods, such as by ‘interfer[ing] with fundamental attributes of arbitration.’” (Id., citations omitted.)

This is where the employees’ argument stumbles. They don’t suggest that their arbitration agreements were extracted, say, by an act of fraud or duress or in some other unconscionable way that would render any contract unenforceable. Instead, they object to their agreements precisely because they require individualized arbitration proceedings instead of class or collective ones. And by attacking (only) the individualized nature of the arbitration proceedings, the employees’ argument seeks to interfere with one of arbitration’s fundamental attributes. (Slip Opn., at 7.)

The Supreme Court further held that the purpose of Section 7 of the NLRA is to allow employees “to organize unions and bargain collectively.” (Slip Opn., at 11.) It does not concern arbitration or resolution of disputes (id.), and could not have been intended to address class actions as Rule 23 “didn’t create the modern class action until 1966” (id.).

NOTE: The Supreme Court’s analysis, set forth in the indented quote above, casts doubt on whether the High Court would allow the California Supreme Court’s analysis in Iskanian – exempting PAGA labor law class actions from the reach of the FAA – to survive, and is likely to give birth to a new wave of challenges to PAGA class action lawsuits.

Download PDF of Epic System v. Lewis