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Supreme Court to Decide on Legality of Class Action Waivers in Mandatory Arbitration Agreements

WASHINGTON, D.C. — On Monday, October 2, 2017, the United States Supreme Court heard oral arguments on the issue of whether a mandatory arbitration agreement set forth by an employer, which requires an employee to waive his or her right to proceed in a class or collective action, violates the NGA or the National Labor Relations Act (NLRA).

The NLRA was enacted in 1935 to protect the rights of employees and employers. Section 7 of the NLRA states “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 Section 8 of the NLRA makes it unlawful for an employer “to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in Section 7.”

The Norris-LaGuardia Act, or NGA, was passed in 1932 and effectively made yellow dog contracts illegal. Yellow dog contracts refers to an agreement in which an employee agrees, as a condition of employment, not to be a member of a labor union.  Prior to 1932, these contracts were commonly used by employers to prevent the formation of unions. In the recent Supreme Court hearings, Justice Ginsburg likened mandatory arbitration agreements with class action waivers between an employer and an employee to yellow dog contracts.

Who is Affected by Mandatory Arbitration Agreements?

It is estimated that 55 percent of non-union private employees have contracts that are covered by mandatory arbitration agreements. This includes about 60 million people.  Moreover, 23 percent of those employees have non-joint, non-class, non-collective agreements, which equates to about 25 million employees.

The employers argue that an arbitration agreement between an employee and the employer is a valid and enforceable contract based on the Federal Arbitration Act.  The question is whether that contract conflicts with federal law.

Arguments in Favor of Class Action Waivers in Arbitration Agreements

The employers argued to the Court that the protections of Section 7 and 8 of the NLRA only protects concerted activity in the workplace and does not protect concerted activity in a judicial forum or arbitration forum.

Further, they argue the class waiver agreement is akin to a plaintiff needing to establish the requirements of Rule 23 class action (numerousity, commonality, typicality, etc.). Thus, according to the employers, if Federal Rule of Civil Procedure 23 doesn’t violate the NGA or NLRA, then the arbitration agreement should not either.

In other words, the employers argued that the NGA and NLRA protect them up to the court room doors, but not once they enter the court room.

The employers seem to have the support of Chief Justice Roberts, Justice Alito, and, perhaps most critically, Justice Kennedy. Justice Kennedy’s vote could prove to be the decisive vote, as is often the case.

Justice Kennedy’s questions suggested that he believed one could still engage in concerted activity without being able to pursue a class action.  Justice Thomas and Gorsuch remained silent during the hearing, but legal scholars suspect they will side with the employer and be in favor of the arbitration agreements.

Arguments Against Class Action Waivers in Arbitration Agreements

The National Labor Relations Board and private counsel for the employees advanced their argument by making several distinctions between a procedural rule and an agreement that is forced upon an employee.  Justice Sotomayor pointed out that “[w]here you are stopping the concerted activity is in the very act of saying this can only be an individual arbitration, and individual court action.”

Sotomayor’s statement illustrates that the conduct that is arguably violating the federal laws occurs before an employee gets into the court room or arbitration forum. Rather, it occurs in the workplace when the employee commences his or her employment.

Justice Kagan made the point that the NGA specifically contemplates not enforcing such agreements in Court.  “Forget about a waiver because an undertaking in conflict with Section 7 shall not be enforceable [in Court],” justice Kagan commented.  The NGA provides “any waiver of Section 7 rights shall not be enforceable in any court.”

Although the employers continued to emphasize that the FAA permits the parties to enter into such agreements, the National Labor Relations Board and private counsel for the employees pointed to a provision in the FAA that declines to enforce agreements that do not abide by federal law.

Justice Ginsberg further criticized the employer’s position by noting that “[t]he FAA, in its inception, was meant to deal with bargains between merchants, bargains between merchants who said the arbitration forum is much less expensive, so we want to go there, rather than the court … it was commercial contracts that triggered the FAA.”

Justice Breyer weighed in favor of the employees and even went so far as to say “I haven’t seen a way that you can, in fact, win the case, which you certainly want to do, without undermining and changing radically what has gone back to the New Deal, that is, the interpretation of the Norris-LaGuardia and the National Labor Relations Act.”

What are the Ramifications of the Supreme Court’s Decision?

Employees are often victims of unlawful employer conduct. Their individual damage claims, however, are relatively small – often less than the costs of litigating the claims.

On the other hand, the unlawful conduct can result in a windfall for an employer over thousands of similarly situated employees.

For example, consider a company that employs hundreds of thousands of people, and the employer robs the employee of just a few dollars of wages every day.  Over the course of a year, the individual employee may only have several hundred dollars in damages, but in the same amount of time, the employer has saved millions of dollars in labor expenses by robbing all of the employees.

If the workers are prohibited from engaging in a collective action, they are left to litigate individual claims for just a few hundred dollars.  Those claims are essentially meaningless to the individual because they will spend more in pursuit of the unpaid wages than they are likely to recover.  Thus, the employer is rewarded for engaging in unlawful conduct at the expense of its employee.

Additionally, many caution that if employers can prevent class actions in the employment setting, it could open the door to companies eliminating a consumer’s right to proceed in a class action as well. Thus, the Supreme Court’s decision in this matter will have far-reaching consequences and should not be diminished.

The consolidated case caption is Epic Systems Corporation v Jacob Lewis, in the United States Supreme Court, Case Number 16-285.

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