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SCOTUS Upholds Mandatory Individualized Proceedings in Arbitration Agreements

Earlier today the Supreme Court announced its decision in Epic Systems Corp. v. Lewis, holding in a 5-4 split that arbitration agreements providing for individualized proceedings must be enforced. Arbitration provisions in employment contracts are quite common and often include language specifically limiting employees to individualized arbitration proceedings as opposed to class action proceedings or joint-arbitration.

Oral argument in this case was originally held back in October, where attorneys representing the employer’s interests argued that the Court’s decision in this case is dictated by the Federal Arbitration Act (FAA). Under the FAA, arbitration agreements “shall be valid, irrevocable, and enforceable.” They argued that because the FAA is so clear in its support for enforcing arbitration agreements as written, it could only yield when faced with an explicit contrary Congressional command. Arguing on behalf of the United States (which had originally sided with the employees before the change in the Administration), Deputy Solicitor General Jeffrey Wall stressed that the case was “at the heartland of the FAA” and “at best, at the periphery of the National Labor Relations Act (NLRA).” Section 7 of the NLRA provides workers with the right to band together to pursue an action, but once they arrive at a forum they are bound by the rules of that forum. If the forum is a courthouse, they are bound by class action rules. If the forum is the National Labor Relations Board, they are bound by the rules of the Board, which do not provide for class actions. Here, the forum is individual arbitration, which the employees themselves agreed to. Section 7 does not extend to dictate the rules of the forum, and therefore under the FAA the arbitration agreements providing for individualized proceedings must stand.

Attorneys representing the interests of employees argued that the impact of the NLRA is much greater. Section 7 of the NLRA provides employees with the right to engage in “other concerted activities for the purpose of…other mutual aid or protection.” Employees banding together to pursue legal claims is exactly the type of concerted activity the NLRA seeks to protect, and so an employer cannot bar an employee from bringing a collective action unless there is a different forum available to allow such an action. The FAA simply places arbitration agreements on the same footing as other contracts, and any provision that would strike down a contract would also strike down an arbitration agreement. Section 8 of the NLRA makes clear that contractual provisions that conflict with Section 7 are unlawful, so therefore the arbitration provisions prohibiting joint-action cannot stand.

Writing for the majority, Justice Gorsuch explained that while the policy behind enforcing individualized arbitration is debatable, under the Federal Arbitration Act Congress clearly instructed federal courts “to enforce arbitration agreements according to their terms—including terms providing for individualized proceedings.” For the NLRA to override the FAA, Congress would need to have shown a “clear and manifest” intention to displace one Act with another, and that was not shown here. Justice Gorsuch noted that class or collective actions were hardly known when the NLRA was adopted in 1935, and it is therefore unlikely that Congress wished to confer these rights in Section 7 of the NLRA through the use of the catchall term “other concerted activities for the purpose of…other mutual aid or protection.”

This decision once again shows the Court’s willingness to defer to arbitration agreements and uphold their enforceability. The decision will be welcomed by employers across the county who faced the potential of a commonly-used arbitration provision becoming suddenly unenforceable.  

KMK Legal Alerts and Blog Posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.

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