Does an agreement between an employer and an employee to resolve any employment disputes through individual arbitration, thereby waiving the employee’s right to pursue a class or collective action, violate the employee’s right to engage in protected concerted activity under the National Labor Relations Act (NLRA)1? That is the issue before the U.S. Supreme Court as it heard its first oral argument of the current term on the first Monday of October, 2017.
Employer Benefits of Individual Arbitration
Employers increasingly use arbitration agreements with their employees in order to avoid the expense and uncertainty associated with court litigation. By requiring that employees resolve employment disputes in front of a neutral arbitrator, employers hope to keep such matters out of the public eye while also (hopefully) speeding up what would otherwise be a lengthy and expensive court process.
But it is not merely arbitration that employers often seek. It also is individual arbitration, meaning that the agreement includes language that prevents the employee from pursuing any employment matters on a class or collective basis with other employees who have similar claims against the employer. By pre-emptively blocking class actions in employment disputes, companies may avoid large lawsuits involving hundreds, if not thousands, of employees that may put multi-million dollar damages and attorneys’ fees at stake.
Class Action Waivers Versus Employee Rights
In its 2012 controversial D.R.Horton decision2, the National Labor Relations Board (NLRB or Board), the federal agency charged with enforcing the NLRA, ruled that arbitration agreements banning employees from pursuing class actions are unenforceable as a violation of the NLRA. In that case, the company required all employees to sign a “Mutual Arbitration Agreement (MAA)” as a condition of employment. The agreement stated that all employment-related disputes had to be resolved through individual arbitration and employees waived their right to a jury forum. Employees also agreed not to pursue class or collective litigation of claims in any forum, arbitral or judicial. After an employee sought arbitration on behalf of a nationwide class of similarly situated superintendents who alleged they had been misclassified as exempt under the Fair Labor Standards Act (FLSA), the company pointed to the MAA as barring the arbitration of collective claims. The employee then filed an unfair labor practice charge asserting that the waiver of class and collective claims violated the NLRA.
In its decision, a majority of the then-members of the Board determined that class action waivers violate the NLRA by interfering with employees’ Section 7 rights to engage in concerted activities for their mutual aid and protection. The Board concluded that an employee who files a class or collective action, whether in court or arbitration, seeking to improve wages or working conditions on behalf of a group of employees is engaged in conduct protected by Section 7 of the NLRA.
In late 2013, the Fifth Circuit Court of Appeals overturned the Board’s D.R.Horton decision.3 It relied on the Federal Arbitration Act (FAA) which provides that arbitration agreements are valid, irrevocable, and enforceable. Courts routinely uphold the validity of arbitration agreements, and the Fifth Circuit stated that the NLRA would not override the FAA unless it contained a congressional command providing for a substantive class action right.4 In ruling that employment arbitration agreements containing class waivers are enforceable, the Fifth Circuit settled the issue for employers within its jurisdiction, namely in the states of Texas, Louisiana, and Mississippi.
However, the NLRB continued to pursue unfair labor practices based on class action waivers in other jurisdictions. And employers continued to challenge those rulings in court, sometimes with different outcomes. For example, in 2016, the Ninth Circuit Court of Appeals ruled that the NLRA precludes employees from waiving their right to have disputes heard collectively and an employer that requires employees to waive that right as a condition of employment commits an unfair labor practice.5 In that case, accounting firm Ernst & Young required its employees to sign agreements mandating that all legal claims against the firm be pursued exclusively through arbitration and only as individuals in “separate proceedings.” Employee Morris challenged the agreements when seeking to pursue an FLSA collective action, arguing, among other things, that the “separate proceedings” clause violated the NLRA. This time, the Ninth Circuit agreed with the NLRB, ruling that when an employer requires employees to sign an agreement precluding them from bringing a concerted legal claim regarding wages, hours, and terms and conditions of employment, the employer violates the NLRA.
The Ninth Circuit focused on the Board’s interpretation of the NLRA’s statutory right of employees “to engage in . . . concerted activities for the purpose of . . . mutual aid or protection” to include a right to join together to pursue workplace grievances, including through litigation. It characterized this as a labor law case, not an arbitration case. It stated that the problem with the contract was not that it required arbitration, but that it excluded all concerted employee legal claims. The Court explained that the same problem would exist “if the contract required disputes to be resolved through casting lots, coin toss, duel, trial by ordeal, or any other dispute resolution mechanism, if the contract (1) limited resolution to that mechanism and (2) required separate individual proceedings.”6
Circuit Split Sets Up Supreme Court Resolution
The Ninth Circuit joined the Seventh Circuit in its rejection of class waivers, but is at odds with the Second, Fifth, and Eighth Circuits which have upheld class action waivers under the Federal Arbitration Act. The split in the appellate courts on this issue made it ripe to be heard by the U.S. Supreme Court, and the highest court granted certiorari in three consolidated cases to be resolved this term.7
Change of Administration Affects Board Position Before Supreme Court
In late 2016, in the closing days of Democratic President Barrack Obama’s administration, the federal government filed a petition with the Supreme Court asking it to decide the validity of class-action waivers in arbitration agreements. The government argued on behalf of the NLRB that such agreements were unlawful. Employers Ernst & Young and Epic Systems also petitioned the Supreme Court to review their adverse decisions from other circuits on this same issue. In January 2017, just days before Donald Trump was sworn in as President, the nation’s highest court agreed to hear all three consolidated cases.
After the administration change following the inauguration of Republican President Donald Trump, by the time that the government’s briefs were due to the Supreme Court this summer, the government changed its position. It no longer supported the NLRB’s view and instead argued in favor of upholding class action waivers in the employment context. The NLRB, however, was permitted to continue to argue against the waivers, setting up the unique position of the federal government attorney from the Solicitor General’s Office arguing against the NLRB General Counsel before the Supreme Court.
Justices Seem Divided On The Issue
Not surprisingly, during oral argument in October 2017, the four more liberal justices, Justices Ginsburg, Breyer, Kagan, and Sotomayor, appeared to support the NLRB’s position. Justice Ginsburg pointed out that the “driving force of the NLRA was the recognition that there was an imbalance” between employers and employees and that there was no true liberty of contract in that relationship, leading to the protection of concerted activity.8 Justice Breyer told the attorney arguing on the employers’ behalf that he was worried that the employers’ argument was overturning labor law that goes back to the 1940s.
But Justices Roberts, Kennedy, and Alito seemed to support the position that the FAA trumps the NLRA when arbitration agreements contain class waivers. The two remaining justices, Justice Thomas and newly confirmed Justice Gorsuch, did not speak up at the oral argument. Given their conservative natures, however, both may rule against the NLRB and the employees on this issue. The Supreme Court will issue its decision sometime before the current term ends on June 30, 2018.
1 “Employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection, and shall also have the right to refrain from any or all of such activities except to the extent that such right may be affected by an agreement requiring membership in a labor organization as a condition of employment as authorized in section 158(a)(3) of this title. 29 U.S.C. §157.
2 D.R. Horton, Inc., 357 NLRB No. 184 (2012).
3 D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013).
4 737 F.3d at 360.
5 Morris v. Ernst & Young, LLP, 834 F.3d 975 (9th Cir. 2016).
6 834 F.3d at 985.
7 See Ernst & Young, LLP v. Morris, 137 S.Ct. 809, U.S., Jan. 13, 2017.
8 Transcript of Oral Argument at 5-6, Ernst & Young, LLP v. Morris, U.S., No. 16-300 (Oct. 2, 2017).
*John Husband is a partner in the Labor and Employment Group in the Denver office of Holland & Hart LLP. Mr. Husband can be contacted at email@example.com.