Class Action Waiver Disputes Get Their Day in High Court

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By Lawrence E. Dubé and Madison Alder

The U.S. Supreme Court heard arguments Oct. 2 in three consolidated cases— NLRB v. Murphy Oil USA, Inc., Epic Systems Corp. v. Lewis,and Ernst & Young LLP v. Morris—presenting the question whether employers can enforce employment agreements that bar employees from pursuing employment-related claims in class or collective lawsuits or arbitrations.

The issue is vital to employers, who have adopted arbitration procedures to sidestep costly class actions. Employees, in turn, will be watching to see whether they can be required to arbitrate grievances against employers one at a time in proceedings that may make it impractical for them to pursue small claims against large corporations.

The justices didn’t tip their hand on a ruling, which is expected next year, but their questions showed a concern about arbitration agreements curbing the rights of employees under the National Labor Relations Act.

The court’s “liberals came out guns ablazing,” Marshall B. Babson, a former NLRB member who represents employers at Seyfarth Shaw LLP, told Bloomberg BNA Oct. 2. “One might think they were acting concertedly” in a campaign to bring Chief Justice John Roberts and Justice Anthony M. Kennedy over to their point of view, Babson said.

“As usual,” Kennedy “was the most difficult justice to read,” Edward Berbarie, a shareholder with Littler Mendelson told Bloomberg BNA. “In my opinion, I thought he asked a couple of question that suggest employees can still retain their rights and benefits under the National Labor Relations Act without the ability of class proceedings, but I think he is the big question mark.”

The National Labor Relations Board’s chief lawyer defended at the oral argument the NLRB’s position that such class action waivers illegally restrict the right of employees to band together in “concerted” activity under the protection of federal labor law.

However, employers—with the backing of the Justice Department—argued the Federal Arbitration Act and Supreme Court precedent support the enforcement of arbitration agreements, including those that contain class waivers.

Critical Dispute Over Arbitration Pacts

The NLRA gives private sector employees, including those without union representation, the right to engage in concerted activity for their mutual aid and protection. The FAA provides for the enforcement of arbitration agreements.

The pivotal legal issue before the court is whether employers can enforce arbitration agreements against employees, including agreements that require workers to waive their rights to participate in class or collective actions, such as wage and hour actions.

The stakes are high. More than 55 percent of nonunion private sector employees in the U.S. have arbitration agreements in their workplaces, according to a recent report from the Economic Policy Institute, and many employers have added class action waivers to those agreements.

Employer Challenge Meets Resistance

Because class and collective actions can cost employers millions of dollars and may even threaten the economic survival of smaller businesses, the business community has been alarmed by the NLRB’s challenge to class action waivers.

Epic Systems and Ernst & Young are challenging court rulings that allowed employees to proceed with wage and hour lawsuits against the companies under the Fair Labor Standards Act. The Seventh and Ninth circuits cited the NLRA in rejecting the companies’ argument that employee arbitration agreements barred collective actions, but attorney Paul D. Clement, representing both employers, told the justices the NLRB overstepped its authority in attempting to outlaw class action waivers.

The Supreme Court has repeatedly enforced the FAA, Clement said, and has never held that the right of employees to engage in concerted activity means employees can insist on class or collective proceedings under laws like the FLSA that are outside the federal labor board’s jurisdiction.

The NLRA may protect employees against retaliation if they band together to pursue legal claims, but it shouldn’t be interpreted to let the NLRB determine what procedures are available in court or arbitrations, he said. The NLRA only gets an employee to the “door” of a forum, but it doesn’t set the rights of employees inside the forum, Clement said.

But Clement encountered a barrage of questions from the court’s liberal justices on the effect of class action waivers on concerted activity under the NLRA.

Clement, who served as solicitor general of the U.S. from 2005 to 2008, tried to persuade the court that the NLRA only protects action in the workplace, but several justices were skeptical of that claim. Justice Stephen Breyer voiced concern about “overturning labor law back to the New Deal.”

Justice Ruth Bader Ginsburg compared mandatory employment arbitration agreements to pre-NLRA “yellow dog” contracts that required employees to waive their rights to unionize. She asked Clement, “what about strength in numbers” that employees need to pursue small claims against an employer in a practical way.

Justice Elena Kagan said it’s “clear” that the right of employees to act in a concerted manner extends outside the physical bounds of the workplace, and Breyer told Clement that “I haven’t seen a way” the employers can win the cases before the court “without undermining” the NLRA.

Roberts, Alito Question NLRB Theory

Justices Clarence Thomas and Neil M. Gorsuch did not speak or ask questions during the one-hour argument, but Chief Justice Roberts and Justice Samuel A. Alito pressed NLRB General Counsel Richard F. Griffin.

Appearing before the court just weeks before the end of his four-year term as the board’s general counsel, Griffin stressed that the NLRB hasn’t targeted arbitration for discriminatory treatment. In fact, the lawyer argued, the board favors the use of arbitration to resolve employment disputes but considers class waivers illegal if they block employees from using any form of concerted litigation or arbitration to vindicate employment rights.

A contract that violates the NLRA is illegal, and the FAA doesn’t require the enforcement of illegal contracts, Griffin said.

Roberts questioned what the board’s position would be if an employee and employer agreed to arbitrate disputes before a forum with rules that limited class or joint proceedings against an employer. The chief justice posed a hypothetical rule that set a minimum number of employees for a class action. He asked whether the NLRB would consider such a dispute resolution system an unlawful interference with employee rights.

Griffin responded that if an employer wasn’t imposing the bar on concerted activity, the NLRB couldn’t find an unfair labor practice, but Roberts and Alito questioned how the court could distinguish employer policies barring class procedures from court or forum rules that have the same effect.

Labor Lawyers See Divided Court

Babson noted that the day’s arguments focused on the rights of employees under the NLRA, with little comment from the justices about the FAA and court precedent giving that statute a broad interpretation. He didn’t offer a prediction about the outcome of the consolidated cases, but said it would be “very, very unfortunate” if the court finds that class action waivers are unlawful and unenforceable.

Ron Chapman of Ogletree, Deakins, Nash, Smoak & Stewart in Dallas, who successfully argued the first appellate court decision to reject the NLRB’s class action waiver theory, told Bloomberg BNA Oct. 2 that the court’s liberal justices were “passionate” about allowing employees to pursue collective legal action, but he believed questioning by Roberts and Alito revealed a preference for the employers’ position.

Chapman said Justice Kennedy, the “key vote” in the cases, asked questions that seemed to express a view that employees have options to pursue concerted activity under the NLRA without being guaranteed the right to use class action procedures.

Chapman predicted the court will decide 5-4 in favor of the employers.

Tyler Newby, who defends companies class actions at Fenwick & West in San Francisco, told Bloomberg BNA Oct. 2 he agrees with the 5-4 prediction.

Brian Markovitz, a principal in Maryland’s Joseph Greenwald & Laake, where he represents employees, told Bloomberg BNA Oct. 2 that he believes that because the NLRA was enacted after the FAA, the court should simply find that the federal labor law supersedes the arbitration statute. He acknowledged the case may end in a 5-4 decision favoring the employers, but he said “maybe Kennedy could surprise me” and change the outcome.

Dust Hasn’t Settled on Major Battle

The NLRB might be satisfied if an employment agreement committed employees to use an arbitration process that permitted class procedures, but most employers wouldn’t agree to such a process. Class-based proceedings in arbitration are considered unpredictable and uncontrolled, Babson said.

If employers are forced to allow employees to use a forum with class or collective action procedures, the lawyer said, the cases will go into federal or state courts and there will be a “flood” of new cases pressing wage and hour claims and other issues.

Babson said the ground could shift beneath the NLRB before the Supreme Court issues a decision in Murphy Oil, Epic, and Ernst & Young.

With the recent confirmation of Republican member William J. Emanuel, the board has a 3-2 Republican majority for the first time in years.

Babson predicted the new board will revisit the legality of class waivers, and won’t wait for a high court ruling before deciding whether to overrule the board’s current position on the issue. Such a shift could occur within months, and could affect the Supreme Court’s view of the pending cases, Babson said.

But Chapman told Bloomberg BNA, “Until the Supreme Court rules on this issue, employers will be faced with the current state of confusion that they see now.”

Clement argued for Epic Systems Corp. and Ernst & Young LLP. Griffin argued for the board. Principal Deputy Solicitor General Jeffrey B. Wall argued for the Department of Justice as an amicus curiae supporting Epic, Ernst & Young, and Murphy Oil USA. Daniel Ortiz of the University of Virginia School of Law argued for the employees in Epic and Ernst & Young.

To contact the reporters on this story: Madison Alder in Washington at malder@bna.com; Lawrence E. Dubé in Washington at ldube@bna.com

To contact the editors responsible for this story: Terence Hyland at thyland@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

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