U.S. Supreme Court Permits Employer Use of Class Action Waivers in Employee Arbitration Agreements

[co-author: Alex Katsnelson]

In one of its most important employment law decisions in decades, the U.S. Supreme Court has ruled that an employer's use of a class or collective action waiver (class waiver) in a mandatory employment arbitration agreement must be enforced as written and its inclusion in the agreement does not violate the National Labor Relations Act (NLRA).¹ While tens of millions of employees in the U.S. are already subject to arbitration agreements, many employers do not include class waivers in their agreements or use arbitration agreements at all. Because Epic Systems gives most employers the green light to include class waivers in their employment arbitration agreements, the decision is certain to result in the growing use of both arbitration agreements and class waivers, and therefore will have significant ramifications for employment litigation, including fewer employee class actions.

Background

Prior Supreme Court Precedent on Class Waivers

Prior Court cases have upheld the use of class waivers in the context of a mandatory consumer arbitration agreement.² In these cases, the Court has underscored the broad reach of the Federal Arbitration Act (FAA), which generally provides that arbitration agreements "shall be valid, irrevocable, and enforceable…"³ As a result, lower courts "must 'rigorously enforce' arbitration agreements according to their terms, including terms that 'specify with whom [the parties] choose to arbitrate their disputes,' and 'the rules under which that arbitration will be conducted.'"⁴

State court decisions have mostly followed the Court's lead and have similarly upheld class waivers absent valid contractual defenses generally available under applicable law, e.g., fraud, duress, or unconscionability.⁵ For example, in Iskanian, the California Supreme Court determined that the Court's precedent establishes that the FAA prevents states from mandating or promoting procedures incompatible with arbitration, and accordingly preempted a California court-adopted rule that made enforcing class waivers difficult.⁶ Similarly, a New York court determined that the Court's class waiver rulings undermine any argument that an employee enjoys an absolute right to pursue a class or collective action.⁷

NLRB D.R. Horton Decision

Notwithstanding this Court precedent, in D.R. Horton, Inc., the National Labor Relations Board (NLRB) held that "employers may not compel employees to waive their NLRA right to collectively pursue litigation of employment claims in all forums, arbitral and judicial."⁸ In reaching its conclusion it determined that class and collective litigation of claims pertaining to employment terms and conditions constitutes "protected concerted activity" under the NLRA.⁹ Further, the NLRB noted that it had previously found unlawful "employer-imposed, individual agreements purporting to restrict Section 7 rights," including those requiring employees to pursue claims against their employer only individually.¹⁰ Finally, the NLRB concluded that there existed no conflict between the NLRA and the FAA that prevented enforcement of the class waiver.¹¹

Courts Split on Whether to Follow D.R. Horton

Following the NLRB's D.R. Horton decision, federal and state courts alike have issued conflicting decisions on whether an employer violates the NLRA by requiring employees to sign an agreement precluding them from bringing a class claim (in any forum) regarding wages, hours, and terms and conditions of employment. For example, the Ninth (which includes California and Washington), Sixth, and Seventh Circuits followed D.R. Horton and held that such class action waivers violate the NLRA and cannot be enforced. In contrast, the Eighth, Eleventh, Fifth (which includes Texas), and Second (which includes New York) Circuits upheld class waivers in arbitration agreements and determined that the FAA mandates enforcement of class waivers, and that otherwise lawful class waivers did not violate the NLRA.

D.R. Horton's conclusion that a class waiver is unlawful under the NLRA also created confusion in the state courts. For example, California's Supreme Court refused to follow D.R. Horton and found that a class waiver did not violate the NLRA (provided it does not preclude a claim under PAGA, California's Private Attorneys General Act of 2004). In contrast, a New York appeals court went the other way and held that employee class waivers violated the NLRA and cannot be enforced.¹²

In Epic Systems, the Court resolved this conflict and addressed the FAA and NLRA concerns raised by class waivers in employee arbitration agreements.

The Supreme Court's Analysis

In Epic Systems, the Court framed the 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 employers?"¹³ In a 5-4 decision, the Court said the answer to these questions was clear: "Congress has instructed federal courts to...