Employer alert: Your arbitration clause is going to be tested at SCOTUS

August 23, 2016

(Reuters) – Something dramatic has happened in the world of employment law this summer, and sooner than later, it’s going to require the attention of the U.S. Supreme Court.

For several years, as you know, the trend in employment contracts has been to require employees to agree to mandatory arbitration of workplace disputes. These clauses typically bar workers not only from suing as a group in court but also from arbitrating as a group – precisely the kind of prohibition the Supreme Court blessed, albeit in the consumer context, in its 2011 decision in AT&T Mobility v. Concepcion.

After Concepcion, the National Labor Relations Board created a stir when it ruled in D.R. Horton v. Cuda that employment contracts mandating individual arbitration violate the National Labor Relations Act. The law safeguards workers’ right to act collectively, the labor board said, and that substantive right is not trumped by the Federal Arbitration Act.

The D.R. Horton decision was a show of defiance by the NLRB but it appeared for years to have been a futile gesture. In December 2013, the 5th U.S. Circuit Court of Appeals overturned the NLRB’s ruling. The appellate court said class action waivers in employee arbitration clauses are enforceable. It also pointed out that all of the other federal circuits to have considered that question, including the 2nd Circuit in its 2013 opinion in Sutherland v. Ernst & Young, agreed that employers can require workers to agree to arbitrate claims individually. “We are loath to create a circuit split,” the 5th Circuit said in its D.R. Horton opinion. “Every one of our sister circuits to consider the issue has either suggested or expressly stated that they would not defer to the NLRB’s rationale.”

That is no longer true.

In May, a three-judge panel of the 7th Circuit ruled in Lewis v. Epic Systems that employers cannot use arbitration clauses to strip workers of the right to act in concert. Like the NLRB in the D.R. Horton decision, the 7th Circuit said it is a violation of the National Labor Relations Act to prohibit employees from acting in concert to enforce their rights – including in classwide or collective proceedings. The Federal Arbitration Act contains a saving clause that says arbitration agreements are invalid when “grounds as exist at law or in equity for the revocation” of the provisions. According to the 7th Circuit in the Epic Systems case, the FAA’s required deference to arbitration does not cover clauses that bar workers from bringing group actions because those provisions fall under the FAA’s saving clause.

On Monday, a divided three-judge panel at the 9th Circuit sided with the 7th Circuit. In an opinion written by Chief Judge Sidney Thomas, the 9th Circuit struck down an Ernst & Young mandatory arbitration clause, which had been challenged by former employees Stephen Morris and Kelly McDaniel in a proposed overtime class action. Judge Thomas and Judge Andrew Hurwitz adopted the same reasoning as the NLRB and the 7th Circuit in the Epic Systems case, holding that employers cannot mandate individual arbitration because workers have a substantive right to bring collective actions. The 9th Circuit opinion emphasized that the problem with Ernst & Young’s clause is not that it requires employees to arbitrate disputes but that it bars workers from acting as a group, in violation of the National Labor Relations Act.

Both the 7th and 9th Circuits explicitly acknowledged they were splitting with precedent from other federal appellate courts. And as if to highlight the deep division among the circuits, the 8th Circuit issued a decision in June that sides with the 5th and 2nd Circuits, upholding a mandatory arbitration provision that includes a classwide waiver. The 8th Circuit opinion in Cellular Sales of Missouri v. NLRB is consistent with a previous 8th Circuit ruling on classwide waivers. It doesn’t mention the 7th Circuit’s contrary analysis in Epic Systems, possibly because the 7th Circuit decision preceded the 8th Circuit’s Cellular Sales decision by just a few days.

The Supreme Court is obviously going to have to figure out which line of federal appellate precedent is correct: the 2nd, 5th and 8th Circuits’ interpretation that the Federal Arbitration Act allows employers to mandate individual arbitration or the 7th and 9th Circuits’ holding that classwide waivers violate the National Labor Relations Act.

Epic Systems, which came out on the losing side of the 7th Circuit’s decision, has already signaled its intention to seek review from the Supreme Court. The company has brought in Supreme Court litigator Neal Katyal of Hogan Lovells, who was granted an extension of the deadline to file a petition for certiorari. Epic’s petition is now due on Sept. 23. The NLRB, meanwhile, is considering whether to ask the Supreme Court to take up the 8th Circuit’s decision in the Cellular Sales case, according to spokesperson Jessica Kahanek. The NLRB did not file petitions for review of the 2013 rulings by the 5th Circuit in D.R. Horton or the 2nd Circuit in Ernst & Young, but now, unlike back then, the board has strong appellate backing for its position.

When the Supreme Court agrees to resolve the circuit split, it’s going to be a gigantic case, affecting hundreds of thousands if not millions of workers who have signed arbitration provisions with classwide waivers. The amici are going to be thick on the ground on this one.

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