Arbitration Agreements

Featured on Employment Law This Week: The U.S. Supreme Court takes on class action waivers.

In 2012, the National Labor Relations Board (NLRB) ruled that class action waivers in arbitration agreements violate employees’ rights under the National Labor Relations Act (NLRA). The U.S. Court of Appeals for the Second, Fifth, and Eighth Circuits disagreed, finding that these waivers do not violate the NLRA and are enforceable under the Federal Arbitration Act. More recently, the Seventh and Ninth Circuits sided with the NLRB on the issue. The Supreme Court will consider three cases in order to resolve this split, but any resolution could depend on the timing of the hearing. If the case is heard this term, before President Trump’s nominee for the vacancy on the Supreme Court is confirmed, it could end in a 4-4 tie. That would leave the law as it stands, and the split would continue.

Watch the segment below and see our recent blog post by Michael Kun.

Supreme Court Set To Resolve Class Action Waiver DisputeOn January 13, 2017, the United States Supreme Court granted certiorari to hear three cases involving the enforceability of arbitration agreements that contain class action waivers.

Whether such agreements are enforceable has been a hotly contested issue for several years now, particularly in cases involving wage-hour disputes.

The Fifth Circuit has held that such waivers can be enforceable (NLRB v. Murphy Oil, Inc.), joining the Second and Eighth Circuits in that conclusion. The Seventh (Epic Systems, Inc. v. Lewis) and Ninth Circuits (Ernst & Young LLP v. Morris) have held that they are not, determining that they violate employees’ rights to engage in collective activities under the National Labor Relations Act.

Barring the failure to confirm a new Supreme Court Justice to fill the vacant seat before the cases are argued — which could well result in a 4-4 tie — the Supreme Court’s decision to hear the Murphy Oil, Epic Systems and Ernst & Young cases would seem likely to resolve the current dispute between the Circuits regarding the enforceability of those waivers. And it would provide some much-needed guidance to employers across the country.

Whether a ninth Supreme Court Justice will be seated in time to hear the cases is questionable, though. It is possible that the case could be held over until the next term, when a full Court presumably will be seated. If that does not occur, and if a 4-4 tie resulted, the split among the Circuits would remain.

Of course, there are many cases across the country in which parties are currently debating whether class action waivers are enforceable. One would think that most, if not all, of those cases will now be stayed while the courts await the Supreme Court’s ruling.

In a case that has strategic implications for employers’ use of arbitration agreements in response to collective claims brought under the Fair Labor Standards Act (“FLSA”), the Eighth Circuit has held that former servers at an Arkansas pizzeria chain lack standing to challenge the pizzeria’s enforcement of an arbitration agreement that bars current employees from joining the FLSA collective action.  Conners v. Gusano’s Chi. Style Pizzeria, No. 14-1829 (8th Cir. Mar. 9, 2015).

In Conners, the plaintiff filed a proposed collective action lawsuit on behalf of herself and other restaurant servers, alleging Gusano’s maintained an illegal tip pool in violation of the FLSA.  One month later, Gusano’s distributed a new arbitration agreement to all current servers which required individual arbitration of all employment disputes, including Conners litigation.

The former servers, who were not subject to the new agreement and had moved for conditional class certification, argued that Gusano’s engaged in improper communication with putative class members and sought to preclude the pizzeria from enforcing the agreement against the current servers.  In arguing that they had standing to challenge the agreement, the former servers alleged that they had suffered “a concrete and particularized injury” in the form of an increased share of litigation expenses.  Even assuming that was true, the Eighth Circuit held that the plaintiffs could not show an “actual or imminent” threat because, at the time of the challenge to the agreement, no current employees had opted into the lawsuit, and there was no indication that the arbitration agreement had chilled the participation of any current employees.  Therefore, the plaintiffs lacked standing and the courts did not have jurisdiction to enjoin the enforcement of the arbitration agreement.

Companies facing potential class or collective actions under the FLSA or state wage laws in the Eighth Circuit should take heed of the pizzeria’s strategic use of arbitration agreements in this case.  Gusano’s acted quickly after the filing of the Conners lawsuit and issued a new arbitration policy.  Notably, the arbitration agreement contained an explanation of “its scope, the required procedures for invoking arbitration, the effect the agreement will have on the employee’s ability to pursue relief in court, the right of every employee to opt out of the agreement free of retaliation, and how to opt out effectively.”  Along with the new agreement, the pizzeria issued a two-page memorandum describing the agreement’s terms in “plain English” and expressly explaining to employees that their failure to opt-out of the new policy would prevent them from joining the pending lawsuit.  By doing so, Gusano’s appears to have complied with the U.S. Supreme Court’s admonishment in American Express v. Italian Colors Restaurant, 133 S. Ct. 2304 (2012), that express contractual waivers of class arbitration are enforceable.

By acting swiftly and transparently, Gusano’s may limited the scope of the proposed collective action in Conners, and companies, particularly those in the Eighth Circuit, in similar situations should take note.  This strategy, however, is not without legal risk, and courts in other circuits may have a different view of Gusano’s course of conduct.  Employers who act too hastily and heavy-handedly in procuring signed agreements may be accused of improperly coercing employees into waiving their rights, which may nullify the waiver.  Further, if a new arbitration agreement is distributed before notice of a pending collective action has been disseminated, the employer might unintentionally inform employees about, and potentially encourage them to join, the lawsuit.

There are practical considerations as well.  Seeking a waiver of class or collective arbitrations under these circumstances may damage employee relations and erode employee morale if employees perceive that their employer is attempting to unfairly restrain the rights.  In addition, an employer may be subjected to increased fees if a number of employees bring individual arbitrations or if employees file suit in court and forces the employer to move to enforce the arbitration agreement.  Each of these considerations must be weighed carefully before instituting a new policy.