SCOTUS Decision on Mandatory Employment Arbitration Agreements Will Have Far-Reaching Implications

In 2012, in D.R. Horton (Horton I), the National Labor Relations Board (NLRB) concluded that an employer-imposed agreement requiring all employment-related disputes to be resolved through individual arbitration (and disallowing class claims) violated the National Labor Relations Act (NLRA) because it prohibited the exercise of substantive rights protected by section 7 of the NLRA. 2012 NLRB LEXIS 11 at *1-*2. Section 7 of the NLRA provides that: “[e]mployees shall have the right to … engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” 29 U.S.C. § 157 (emphasis added). As such, the NLRB found that employees who join together to bring employment-related claims were engaged in a “concerted activity,” which is protected. Horton I, 2012 NLRB LEXIS 11 at *10. Further, the NLRB found that the right to engage in “concerted activity” was substantive and not procedural, such that the FAA could not preempt its decision that class action waivers in employment arbitration agreements are enforceable. Id. at *32-*55.

After the Horton I decision, many federal circuit courts had the opportunity to revisit the same issue. Three of the federal circuits that have addressed this issue have declined to agree with the NLRB's interpretation of the NLRA. See D.R. Horton, Inc. v. Nat'l Labor Relations Bd. (Horton II), 737 F.3d 344 (5th Cir. 2013) (directly reversing the NLRB's decision in Horton I); Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297 (2d Cir. 2013) (holding that collective action waivers are permissible in an arbitration context); Cellular Sales of Missouri, LLC v. Nat'l Labor Relations Bd., 824 F.3d 772, 776-77 (8th Cir. 2016) (same). In so holding, these federal circuit courts found that the FAA establishes a liberal policy favoring arbitration agreements that should be enforced according to their terms, that the NLRA does not contain a congressional command exempting the statute from the application of the FAA, that the right to use class action procedures is procedural, not substantive, and accordingly, arbitration agreements, even those including class action waivers, must be enforced pursuant to the FAA. See, e.g., Horton II, 737 F.3d at 362.

The U.S. Courts of Appeal for the Seventh and Ninth Circuits, however, have agreed with the NLRB on this issue. See Lewis v. Epic Sys. Corp., 823 F.3d 1147, 1151-52 (7th Cir. 2016); Morris v. Ernst & Young, LLP, 834 F.3d 975, 980 (9th Cir. 2016). In so holding, these federal circuit courts have held that “[c]oncerted activity — the right of employees to act together — is the essential, substantive right established by the NLRA.” Morris, supra, 834 F.3d at 980 (citing 29 U.S.C. § 157) (emphasis added).

Accordingly, class action waivers are not enforceable under the NLRA when they require aggrieved employees to use arbitration — yet forbid concerted activity in those arbitration proceedings, resulting in the employees being prevented from initiating concerted legal action in any forum in violation of the NLRA. Id. at 983-84. Further, because these circuits viewed the NLRA as conferring a “substantive right” on employees, as opposed to a procedural right, that right could not be preempted, or waived, by the FAA. Id. at 985-86.

On Jan. 13, 2017, the Supreme Court granted certiorari in three cases that had decided this issue, including Lewis v. Epic Sys. Corp. and Morris v. Ernst & Young LLP, to resolve this circuit split.

Implications for Employers

It is anticipated that employers are anxious to have a definitive answer from the Supreme Court on this issue. As the jurisprudence currently stands, there are two main quandaries for employers.

First, those employers with employees in numerous circuits are facing inequity with respect to the terms and conditions of their employees' employment. For example, a retailer that operates outlets and has employees in California and New York is faced with the prospect of a class action arbitration waiver that is unenforceable in the former forum and valid in the latter. This creates inefficiencies with respect to time and money, as it prevents an employer from using a standard arbitration agreement, having a standard employment agreement, and having uniform human resource training of employees.

Second, the NLRA does not protect “supervisors,” such that even those employers who operate in one jurisdiction must use different terms and conditions of employment for its “supervisors” as opposed to “employees.” Ostensibly, “supervisors” in any jurisdiction can validly be required to submit to class action arbitration waivers because they are not within the aegis of the NLRA. As the amicus brief submitted by the National Association of Manufacturers, the Coalition for a Democratic Workplace, and the National Retail Federation states, “[d]etermining which employees are 'supervisors' under the NLRA is a Sisyphean task because of the NLRB's unpredictable positions, opaque tests and results-oriented case law.”

Employers and their interest groups consistently argue that bilateral arbitration benefits employers because it offers speed, efficiency, and informality. Employers would much prefer to prevent class actions, even in the arbitration context, for many reasons.

For employers, class actions, even in the arbitration context, are significantly more expensive to litigate than individual claims. More individuals usually leads to more damages — and class actions may require an employer to seek specialized outside counsel who may charge higher fees. A survey of approximately 350 companies shows class actions in the employment context cost those employers approximately $462.8 million in 2014 alone. See the 2015 Carlton Fields Jorden Burt Class Action Survey. These litigation costs can cause chaos for an employer, leading to layoffs, higher consumer prices and instability with the Boards of Directors and shareholders. Due to the staggering costs of class actions and dangerous implications thereof, employers are often pressured into settling questionable claims (which in turn may motivate employees to bring more class or collective actions, starting the cycle over again).

Moreover, class actions are messy for employers, as they may involve multiple forums or multiple choice of law issues. While the multiple forum issue can be resolved through arbitration, the choice of law issue may not be depending on the types of claims at issue.

Finally, given the private nature of arbitration, employers enjoy a cloak of confidentiality that is not present with traditional litigation in a public forum. This protection, particularly in an age where it is easy to search court dockets, may prevent employers from facing meritless copycat suits from professional plaintiffs or backlash from consumers. This protection is essentially vitiated when an arbitration involves a class of employees instead of one specific employee.

As such, employers have an interest in ensuring that arbitration agreements entered into between employers and employees are enforced according to their terms, as required by the FAA. Waivers for class or collective actions in arbitration agreements give employers peace of mind and the assurance of avoiding particular litigation expenses unique to class and collective actions.

Should the Supreme Court determine that such class action arbitration waivers are unenforceable in the employment context, however, employers will have to incentivize their employees and prospective employees to sign separate, negotiated agreements, and provide additional compensation, benefits, or vacation time. While these will add to the increased costs faced by the employer, such incentive costs pale in comparison to the cost of class action litigation or arbitration.

Implications for Employees

Class actions are a tremendous tool for aggrieved employees, particularly those with smaller claims, because they enable these smaller claims to be aggregated and resolved en masse, whether through arbitration or litigation. This aggregation further incentivizes counsel that may not ordinarily take on such claims to engage in such litigation or arbitration, providing an advocate for these aggrieved employees where they may not have one. While one employee's $1,000 wage and hour claim may not be attractive to an attorney working on a contingent fee basis, 100 employees with similar claims can often prove lucrative for an attorney. Further, consolidating these claims in a class context prevents numerous repetitive individual claims, whether before a court or an arbitrator. Accordingly, should the Supreme Court uphold the decisions of the U.S. Courts of Appeal for the Second, Fifth and Eighth Circuits and find that employment-related class action arbitration waivers are enforceable, this could forego an important procedural tool for aggrieved employees.

However, class actions are not a panacea for employees, and, in fact, can be a disservice to employees such that they can also benefit from class action waivers in arbitration. Congress has recognized this as much in enacting the Class Action Fairness Act of 2005, 28 U.S.C. §§ 1332(d), 1453, & 1711-1715, noting that “abuses of the class action device” have “harmed class members with legitimate claims and defendants that have acted responsibly” and that “[c]lass members often receive little or no benefit from class actions, and are sometimes harmed,” including where “counsel are awarded large fees, while leaving class members with coupons or other awards of little or no value.”

The tendency of class or collective actions to settle claims on a generalized or formula basis can harm each individual employee by devaluing individual claims, while only truly benefiting class counsel who receives a hefty award of fees. Further, individual treatment of claims is much better for an employee with a stronger case than putative class representatives.

Many employee grievances are individualized, and therefore cannot be pursued as part of a class or collective action, such as an employee who alleges that he was sexually harassed by his supervisor. Similarly, employees with hybrid individual and class claims may be pressured to forego their individual claims for the sake of representation in a class action. For example, an employee who was sexually harassed, but also prevented from taking his rest breaks by a common policy, may be pressured to forego his individual claim in order to be represented by counsel on his class rest break claim.

Employees also benefit from the efficiency, lower cost, and speed of arbitration. See Concepcion, 563 U.S. at 348. In the employment context, employers often pay for virtually all arbitration costs, which is a benefit to the employee. Also, employees can reach resolution of their individual claim in a matter of months instead of years. Employees may also benefit from the cloak of confidentiality that arbitration provides, particularly if the employee has sensitive claims that he or she may not want available through a simple Google search.

Accordingly, even if the Supreme Court agrees with the Second, Fifth and Eighth Circuits in finding class action arbitration waivers in the employment context enforceable, this will not prevent an employee from bringing an individual suit against his or her employer in arbitration, with all benefits appurtenant thereto.

Conclusion

The resolution of this issue by the Supreme Court will, hopefully, provide both employers and employees with a solid roadmap of what to expect with respect to class action waivers in arbitration agreements in the employment context. At the very least, a concrete resolution to this issue will provide both employers and employees with clear direction nationwide going forward.

*****
Ryan Saba is a Partner with Rosen Saba, LLP, a Beverly Hills-based civil litigation and trial law firm. He can be reached at 310-285-1727 or [email protected]. Krystle Meyer is an Associate with the firm. Reach her at 310-285-1727 or [email protected].

On April 27, 2011, in AT&T Mobility LLC v. Concepcion, the Supreme Court held that, in the consumer context, class action waivers in arbitration agreements are enforceable under the Federal Arbitration Act (FAA), because the FAA makes arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” See 563 U.S. at 333-34. While employers had long used the protections of the FAA to require employees to consent to mandatory arbitration in employment agreements, after Concepcion, employers desirous of avoiding class and collective actions from their employees increasingly included class and collective action waivers in their employment arbitration agreements. This naturally resulted in a maelstrom of litigation and an eventual circuit split between federal courts interpreting the validity of such class action waivers in the employment context.

On Oct. 2, 2017, the Supreme Court was set to hear argument as to whether these class action arbitration waivers in employment agreements are valid and enforceable. Thirty-six amicus briefs were submitted to the Supreme Court on this issue, underscoring the amount of interest in the Supreme Court's resolution of this matter, and the fact that regardless of the Court's decision, there will be sweeping implications for both employers and employees.

Background

In 2012, in D.R. Horton (Horton I), the National Labor Relations Board (NLRB) concluded that an employer-imposed agreement requiring all employment-related disputes to be resolved through individual arbitration (and disallowing class claims) violated the National Labor Relations Act (NLRA) because it prohibited the exercise of substantive rights protected by section 7 of the NLRA. 2012 NLRB LEXIS 11 at *1-*2. Section 7 of the NLRA provides that: “[e]mployees shall have the right to … engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” 29 U.S.C. § 157 (emphasis added). As such, the NLRB found that employees who join together to bring employment-related claims were engaged in a “concerted activity,” which is protected. Horton I, 2012 NLRB LEXIS 11 at *10. Further, the NLRB found that the right to engage in “concerted activity” was substantive and not procedural, such that the FAA could not preempt its decision that class action waivers in employment arbitration agreements are enforceable. Id. at *32-*55.

After the Horton I decision, many federal circuit courts had the opportunity to revisit the same issue. Three of the federal circuits that have addressed this issue have declined to agree with the NLRB's interpretation of the NLRA. See D.R. Horton, Inc. v. Nat'l Labor Relations Bd. ( Horton II ), 737 F.3d 344 (5th Cir. 2013) (directly reversing the NLRB's decision in Horton I ); Sutherland v. Ernst & Young LLP , 726 F.3d 290, 297 (2d Cir. 2013) (holding that collective action waivers are permissible in an arbitration context); Cellular Sales of Missouri, LLC v. Nat'l Labor Relations Bd. , 824 F.3d 772, 776-77 (8th Cir. 2016) (same). In so holding, these federal circuit courts found that the FAA establishes a liberal policy favoring arbitration agreements that should be enforced according to their terms, that the NLRA does not contain a congressional command exempting the statute from the application of the FAA, that the right to use class action procedures is procedural, not substantive, and accordingly, arbitration agreements, even those including class action waivers, must be enforced pursuant to the FAA. See, e.g., Horton II, 737 F.3d at 362.

The U.S. Courts of Appeal for the Seventh and Ninth Circuits, however, have agreed with the NLRB on this issue. See Lewis v. Epic Sys. Corp. , 823 F.3d 1147, 1151-52 (7th Cir. 2016); Morris v. Ernst & Young, LLP , 834 F.3d 975, 980 (9th Cir. 2016). In so holding, these federal circuit courts have held that “[c]oncerted activity — the right of employees to act together — is the essential, substantive right established by the NLRA.” Morris, supra, 834 F.3d at 980 (citing 29 U.S.C. § 157) (emphasis added).

Accordingly, class action waivers are not enforceable under the NLRA when they require aggrieved employees to use arbitration — yet forbid concerted activity in those arbitration proceedings, resulting in the employees being prevented from initiating concerted legal action in any forum in violation of the NLRA. Id. at 983-84. Further, because these circuits viewed the NLRA as conferring a “substantive right” on employees, as opposed to a procedural right, that right could not be preempted, or waived, by the FAA. Id. at 985-86.

On Jan. 13, 2017, the Supreme Court granted certiorari in three cases that had decided this issue, including Lewis v. Epic Sys. Corp. and Morris v. Ernst & Young LLP, to resolve this circuit split.

Implications for Employers

It is anticipated that employers are anxious to have a definitive answer from the Supreme Court on this issue. As the jurisprudence currently stands, there are two main quandaries for employers.

First, those employers with employees in numerous circuits are facing inequity with respect to the terms and conditions of their employees' employment. For example, a retailer that operates outlets and has employees in California and New York is faced with the prospect of a class action arbitration waiver that is unenforceable in the former forum and valid in the latter. This creates inefficiencies with respect to time and money, as it prevents an employer from using a standard arbitration agreement, having a standard employment agreement, and having uniform human resource training of employees.

Second, the NLRA does not protect “supervisors,” such that even those employers who operate in one jurisdiction must use different terms and conditions of employment for its “supervisors” as opposed to “employees.” Ostensibly, “supervisors” in any jurisdiction can validly be required to submit to class action arbitration waivers because they are not within the aegis of the NLRA. As the amicus brief submitted by the National Association of Manufacturers, the Coalition for a Democratic Workplace, and the National Retail Federation states, “[d]etermining which employees are 'supervisors' under the NLRA is a Sisyphean task because of the NLRB's unpredictable positions, opaque tests and results-oriented case law.”

Employers and their interest groups consistently argue that bilateral arbitration benefits employers because it offers speed, efficiency, and informality. Employers would much prefer to prevent class actions, even in the arbitration context, for many reasons.

For employers, class actions, even in the arbitration context, are significantly more expensive to litigate than individual claims. More individuals usually leads to more damages — and class actions may require an employer to seek specialized outside counsel who may charge higher fees. A survey of approximately 350 companies shows class actions in the employment context cost those employers approximately $462.8 million in 2014 alone. See the 2015 Carlton Fields Jorden Burt Class Action Survey. These litigation costs can cause chaos for an employer, leading to layoffs, higher consumer prices and instability with the Boards of Directors and shareholders. Due to the staggering costs of class actions and dangerous implications thereof, employers are often pressured into settling questionable claims (which in turn may motivate employees to bring more class or collective actions, starting the cycle over again).

Moreover, class actions are messy for employers, as they may involve multiple forums or multiple choice of law issues. While the multiple forum issue can be resolved through arbitration, the choice of law issue may not be depending on the types of claims at issue.

Finally, given the private nature of arbitration, employers enjoy a cloak of confidentiality that is not present with traditional litigation in a public forum. This protection, particularly in an age where it is easy to search court dockets, may prevent employers from facing meritless copycat suits from professional plaintiffs or backlash from consumers. This protection is essentially vitiated when an arbitration involves a class of employees instead of one specific employee.

As such, employers have an interest in ensuring that arbitration agreements entered into between employers and employees are enforced according to their terms, as required by the FAA. Waivers for class or collective actions in arbitration agreements give employers peace of mind and the assurance of avoiding particular litigation expenses unique to class and collective actions.

Should the Supreme Court determine that such class action arbitration waivers are unenforceable in the employment context, however, employers will have to incentivize their employees and prospective employees to sign separate, negotiated agreements, and provide additional compensation, benefits, or vacation time. While these will add to the increased costs faced by the employer, such incentive costs pale in comparison to the cost of class action litigation or arbitration.

Implications for Employees

Class actions are a tremendous tool for aggrieved employees, particularly those with smaller claims, because they enable these smaller claims to be aggregated and resolved en masse, whether through arbitration or litigation. This aggregation further incentivizes counsel that may not ordinarily take on such claims to engage in such litigation or arbitration, providing an advocate for these aggrieved employees where they may not have one. While one employee's $1,000 wage and hour claim may not be attractive to an attorney working on a contingent fee basis, 100 employees with similar claims can often prove lucrative for an attorney. Further, consolidating these claims in a class context prevents numerous repetitive individual claims, whether before a court or an arbitrator. Accordingly, should the Supreme Court uphold the decisions of the U.S. Courts of Appeal for the Second, Fifth and Eighth Circuits and find that employment-related class action arbitration waivers are enforceable, this could forego an important procedural tool for aggrieved employees.

However, class actions are not a panacea for employees, and, in fact, can be a disservice to employees such that they can also benefit from class action waivers in arbitration. Congress has recognized this as much in enacting the Class Action Fairness Act of 2005, 28 U.S.C. §§ 1332(d), 1453, & 1711-1715, noting that “abuses of the class action device” have “harmed class members with legitimate claims and defendants that have acted responsibly” and that “[c]lass members often receive little or no benefit from class actions, and are sometimes harmed,” including where “counsel are awarded large fees, while leaving class members with coupons or other awards of little or no value.”

The tendency of class or collective actions to settle claims on a generalized or formula basis can harm each individual employee by devaluing individual claims, while only truly benefiting class counsel who receives a hefty award of fees. Further, individual treatment of claims is much better for an employee with a stronger case than putative class representatives.

Many employee grievances are individualized, and therefore cannot be pursued as part of a class or collective action, such as an employee who alleges that he was sexually harassed by his supervisor. Similarly, employees with hybrid individual and class claims may be pressured to forego their individual claims for the sake of representation in a class action. For example, an employee who was sexually harassed, but also prevented from taking his rest breaks by a common policy, may be pressured to forego his individual claim in order to be represented by counsel on his class rest break claim.

Employees also benefit from the efficiency, lower cost, and speed of arbitration. See Concepcion, 563 U.S. at 348. In the employment context, employers often pay for virtually all arbitration costs, which is a benefit to the employee. Also, employees can reach resolution of their individual claim in a matter of months instead of years. Employees may also benefit from the cloak of confidentiality that arbitration provides, particularly if the employee has sensitive claims that he or she may not want available through a simple Google search.

Accordingly, even if the Supreme Court agrees with the Second, Fifth and Eighth Circuits in finding class action arbitration waivers in the employment context enforceable, this will not prevent an employee from bringing an individual suit against his or her employer in arbitration, with all benefits appurtenant thereto.

Conclusion

The resolution of this issue by the Supreme Court will, hopefully, provide both employers and employees with a solid roadmap of what to expect with respect to class action waivers in arbitration agreements in the employment context. At the very least, a concrete resolution to this issue will provide both employers and employees with clear direction nationwide going forward.

*****
Ryan Saba is a Partner with Rosen Saba, LLP, a Beverly Hills-based civil litigation and trial law firm. He can be reached at 310-285-1727 or [email protected]. Krystle Meyer is an Associate with the firm. Reach her at 310-285-1727 or [email protected].