Arbitration Agreements

Three months ago, the United States Supreme Court issued its decision in Epic Systems Corp. v. Lewis, holding that the National Labor Relations Act (“NLRA”) does not prevent the use of arbitration agreements with class and collective action waivers covered by the Federal Arbitration Act (“FAA”). (See our discussion of Epic here.) The Court of Appeals for the Sixth Circuit has now similarly concluded in Gaffers v. Kelly Services, Inc.that the Fair Labor Standards Act (“FLSA”) does not bar such arbitration arrangements. While this is not a surprising outcome in light of the Supreme Court’s ruling, the decision underscores the influence that Epic has had and will continue to have as courts evaluate efforts to evade promises to arbitrate.

Case Background

A former employee of a business that provides outsourcing and consulting services sued the company in an FLSA collective action in the Eastern District of Michigan, alleging failure to pay virtual call center support workers for time spent logging into and out of the network and addressing technical problems. More than 1,600 workers opted into the lawsuit. Although the named plaintiff did not agree to arbitrate disputes with the company, approximately half of the opt-in plaintiffs did, and their agreements specified that arbitration would be on an individual basis.

The company moved to compel individual arbitration for those opt-in plaintiffs who signed arbitration agreements. The plaintiffs opposed the motion, arguing that the NLRA and the FLSA render the arbitration agreements unenforceable. The district court denied the motion to compel arbitration, and the company appealed.

The Sixth Circuit’s Decision

1. Under Epic, the NLRA does not render the agreements unenforceable.

The Sixth Circuit noted at the outset that Epic “answers half of this case.” (Slip Op. at 1-2.) In light of the Supreme Court’s recent decision, the plaintiffs’ NLRA-based challenge to the arbitration agreements with class action waivers was unavailing. “[A]s it relates to the NLRA, the Supreme Court heard and rejected these arguments last term in Epic.” (Id. at 3.)

2. The FLSA’s collective action provision does not conflict with the FAA.

The Court then turned to the plaintiffs’ FLSA-based contentions. Their first argument was that “the FLSA’s collective-action provision and the Arbitration Act are irreconcilable and that the former therefore displaces the latter.” (Slip Op. at 3.) Relying on Epic, the Court explained that “a federal statute does not displace the Arbitration Act unless it includes a ‘clear and manifest’ congressional intent to make individual arbitration agreements unenforceable.” (Id.) That standard, as the court saw it, requires that Congress “do more than merely provide a right to engage in collective action. Instead, Congress must expressly state that an arbitration agreement posed no obstacle to pursuing a collective action.” (Id. (citation omitted).)

The FLSA “provides that an employee can sue on behalf of himself and other employees similarly situated.” (Slip Op. at 3.) Thus, “it gives employees the option to bring their claims together” but “does not require employees to vindicate their rights in a collective action, and it does not say that agreements requiring one-on-one arbitration become a nullity if an employee decides that he wants to sue collectively after signing one.” (Id.) The Court, therefore, was able to “give effect to both statutes: employees who do not sign individual arbitration agreements are free to sue collectively, and those who do not sign individual arbitration agreements are not.” (Id.)

3. These arbitration agreements are outside the FAA’s savings clause.

The Sixth Circuit then focused on the plaintiffs’ second FLSA-based argument: that the arbitration agreements fall within the FAA’s savings clause. That portion of the law “allows courts to refuse to enforce arbitration agreements ‘upon such grounds as exist at law or in equity for the revocation of any contract.’” (Slip Op. at 4 (quoting 9 U.S.C. § 2).) Specifically, the plaintiffs asserted that “because the FLSA gives the employees a right to pursue a collective action, the agreements that the employees signed . . . requiring them to pursue individual arbitration are illegal and therefore unenforceable.” (Id.)

The Court explained that the savings clause “includes an ‘equal-treatment’ rule: individuals can attack an arbitration agreement like they would any other contract, but they cannot attack the agreement simply because it is one involving arbitration.” (Slip Op. at 5.) The court pointed out that under Epic, defenses that “interfere with the ‘fundamental attributes of arbitration’ are . . . insufficient.” (Id. at 5 (quotation omitted).) As shown in Epic, “one of arbitration’s fundamental attributes is its historically individualized nature.” (Id.) Thus, objecting to an agreement because it requires individualized arbitration “does not bring a plaintiff within the territory of the savings clause[,]” or else litigants “could use this contract defense to attack arbitration itself.” (Id.) As the court observed, “[t]hat selective treatment is exactly what Epic says is not allowed.” (Id.)

What the Decision Means for Employers

The Sixth Circuit’s holding confirms that the Supreme Court set a high bar in Epic for parties to argue that statutes other than the FAA provide a basis for courts not to enforce arbitration agreements. A number of significant issues remain for the courts to decide, however, including the applicability of the FAA to independent contractor agreements in the transportation industry (set for oral argument in the U.S. Supreme Court on October 3, 2018), as well as whether claims under California’s Private Attorneys General Act must now be arbitrated. In addition, employers must remain mindful that courts continue to scrutinize arbitration agreements for elements of substantive and procedural unconscionability. Whether and to what extent Epic may affect how courts evaluate unconscionability remains to be seen.

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.