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SCOTUS Tackles Arbitration Issue… Again

Thomas D. Cavenagh is a Professor of Law and Conflict Resolution at North Central College. He directs the Leadership, Ethics & Values Program at North Central College in Naperville, Illinois, and is the founder of and directs the North Central College Dispute Resolution Center.  He authored “Business Dispute Resolution: Best Practices, System Design and Case Management”, and co-authored “Alternative Dispute Resolution for Business by West Publishing Company and CyberJustice: A Guide to Online Dispute Resolution for E-Commerce” with Prentice-Hall.  He has chaired the Illinois State Bar Association Section Council on Alternative Dispute Resolution and has been widely published in a variety of professional journals including Mediation Quarterly. 

The Supreme Court has struggled over the past several terms to establish rules relative to arbitration. State courts, state legislatures and federal circuits have endeavored to limit the reach and applicability of the Federal Arbitration Act in a variety of ways that have been rejected by the Court. On the first day of the 2017 term, the Court heard oral argument in Epic Systems Corp. v. Lewis[1], a case on appeal from the Seventh Circuit and consolidated with two others.[2] The question presented in the trio of cases is a significant one:  is a contract requiring an employer and an employee to waive class action and collective proceedings and resolve employment-related disputes through individual arbitration enforceable under the Federal Arbitration Act (“FAA”), notwithstanding provisions of the National Labor Relations Act (“NLRA”) protecting concerted activity? The Seventh Circuit concluded that the answer is no, and upheld the District Court which declined to compel arbitration.

The Federal Arbitration Act provides that arbitration agreements “shall be valid, irrevocable, and enforceable” and that arbitration agreements should be enforced unless there is a clear contrary command from Congress. However, the National Labor Relations Act, provides that employees have the right to engage in “concerted activities” for “mutual aid or protection.” The employees in the Epic Systems case argue that the right to concerted activity is subverted by the Epic Systems arbitration clause.

The Court has, with respect to the FAA, been in this neighborhood before.  In 2011, the Court decided AT&T Mobility v. Concepcion[3]. In that case it held, reversing the Ninth Circuit, that a California state law which rendered class-action waivers in consumer arbitration agreements unenforceable, when certain statutory criteria were met, was preempted by the FAA.  It did so believing that the California law was plainly contrary to the objectives of Congress when it promulgated the FAA. Congress favors judicial economy and expeditious resolution of legal claims, and the FAA advances both. As a result, California could not prevent firms from compelling individual arbitration of even small damage claims when a consumer contract contains an arbitration provision, even if doing so seems a more equitable treatment of the consumer. The Ninth Circuit had, in the underlying decision, affirmed the District Court and ruled that the class-action waiver in AT&T’s consumer contracts was unconscionable under a California Supreme Court decision that supported the California law.[4]

The AT&T decision makes it clear that the FAA can be regarded not just as a statute strongly favoring arbitration, but also as a statute disfavoring public class proceedings – class arbitrations are permissible under the FAA when they required under a valid agreement. The holding leaves the states with essentially no way to prohibit contracts that protect companies from the threat of liability through class action waivers. More recently, the Court took a similar stand in support of mandatory arbitration pursuant to adhesion contracts that might appear profoundly unfair. The Court held in American Express Company v. Italian Colors Restaurant[5] that the FAA does not permit courts to invalidate contractual waivers of class arbitration on the ground that the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds any potential recovery.

In both the AT&T and American Express cases, consumers and businesses in relatively modest economic transactions accepted boilerplate arbitration provisions that eliminated the possibility of class actions and required resolution of claims through private, individual arbitration. In both cases, the damages sought were trivial to any individual, but in the context of a large class, could have meant significant payouts from the defendants. It is fair to say, the defendants, aware of that possibility, crafted the arbitration provisions precisely to protect themselves from the much more significant exposure of class litigation in a way that essentially eliminated any chance of recovery for the plaintiffs. And the Court, giving the FAA a plain reading, consistent with congressional intent, says doing so is permissible.

Returning to the Epic Systems case with that background, one thing seems clear: the Court has worked hard to protect the FAA preference for binding, private, individual arbitration in recent cases, and departing from that approach will, presumably, require a very compelling set of circumstances. Indeed, the addition of Justice Gorsuch, a textualist who relies on a close, plain-language approach to statutory construction likely advances the cause of Epic Systems which seeks to enforce the arbitration agreement based on the FAA. The FAA is clear on its face – arbitration agreements enjoy the presumption of validity – and a long line of cases (at oral argument Paul Clement, representing the employers, described that line of cases as a “well-trod path”) reinforce that presumption. To hold that the NLRA “concerted activities” language trumps the plain language of the FAA requires a degree of interpretive license that holding in favor of Epic Systems does not.

A significant majority in favor of the Epics Systems position is not likely though. Justice Breyer admonished Clement that he could not see a path for Clement’s clients to win without “undermining and changing radically” labor laws that represent the “entire heart of the New Deal.” And, Justices Kagan and Ginsburg were equally aggressive about the harmful effect of a ruling in favor of Epic Systems on organized labor. In the end, a practical concern about which the Chief Justice worried may carry the day: ruling in favor of the employees would have the effect of invalidating the employment agreements governing as many as 25 million workers;[6] it is hard to see this Court ruling in that way.

[1] Epic Systems Corp v. Lewis, Docket No. 16-285, 137 S. Ct. 908 (2017).

[2] See Ernst & Young LLP v. Morris, Docket No. 16-300, 137 S. Ct. 809 (2017); see also NLRB v. Murphy Oil USA, Inc., Docket No. 16-307, 137 S. Ct. 809 (2017).

[3] AT&T Mobility v. Concepcion, 563 U.S. 333 (2011)

[4] Discover Bank v. Superior Court, 134 Cal. App. 4th 886 (2005).

[5] Am. Express Co. v. Italian Colors Rest, 570 U.S 228 (2013).

[6] It is worth noting that the Court has already granted cert in an FAA matter for the 2018 merits docket.  That case, New Prime, Inc. v. Oliviera, Docket No. 17-340, 2018 U.S. LEXIS 1402 (2018), asks whether the FAA’s Section 1 exemption, which applies on its face only to “contracts of employment,” is inapplicable to independent contractor agreements.