The U.S. Supreme Court on Monday ruled that employers can lawfully require employees to resolve employment disputes through individual arbitration rather than by joining other employees in class or collective actions.
Although it arose in the employment law context, the Court's ruling will likely have significant implications for consumer financial services class actions, which frequently assert alleged violations of one or more federal consumer protection statutes, such as the Truth in Lending Act, the Electronic Fund Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, and the Fair Debt Collection Practices Act.
In a 5-4 decision written by Justice Neil M. Gorsuch and joined by a conservative majority, the Court found that class action waivers in employment arbitration agreements are enforceable under the Federal Arbitration Act (FAA). Furthermore, according to the Court, class and collective actions do not constitute "protected concerted activities" under the National Labor Relations Act (NLRA), because the NLRA at its core is intended to address organizational and collective bargaining rights and "does not mention class or collective action procedures or even hint at a clear and manifest wish to displace the Arbitration Act."
The decision resolved a split among the circuit courts arising from three cases pending before the Court—Epic Systems Corp. v. Lewis, NLRB v. Murphy Oil USA, and Ernst & Young, et al. v. Morris. In Epic Systems Corp. and Ernst & Young, the U.S. Courts of Appeals for the Seventh and Ninth Circuits upheld decisions by the National Labor Relations Board (NLRB) that class action waivers in mandatory arbitration agreements violate the NLRA by restraining employees' rights to engage in "protected concerted activity."
On the other hand, in NLRB v. Murphy Oil USA, the U.S. Court of Appeals for the Fifth Circuit rejected the NLRB's position, finding instead that class action waivers are enforceable under the FAA.
The cases originated with a group of employees who sued their employers, alleging they had been underpaid in violation of the Fair Labor Standards Act and analogous state laws.
However, each of the employees had signed employment agreements that contained arbitration clauses requiring them to resolve their employment disputes via individual arbitration, rather than through collective action. The employees, along with the NLRB, argued that the NLRA "effectively nullifies" the FAA with respect to class action waivers in employment contracts. The employees and the NLRB claimed that an exception existed in this instance, based on language in the FAA that declares arbitration agreements "valid, irrevocable, and enforceable," except where rendered otherwise illegal—here by the NLRA.
Acknowledging the conflict between the FAA and the NLRA, Justice Gorsuch nevertheless explained that the "policy may be debatable but the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written. While Congress is of course always free to amend this judgment, we see nothing suggesting it did so in the 'National Labor Relations Act,' much less that it manifested a clear intention to displace the Arbitration Act."
Reading a spirited dissent from the bench, Justice Ruth Bader Ginsburg expressed a belief that the majority's decision will result in a "huge under-enforcement of federal and state statutes designed to advance the well-being of vulnerable workers." Justice Ginsburg noted that for employees in these cases, the claims often involve relatively small amounts that are impractical to pursue individually. As such, the majority's "egregiously wrong" decision means that without the option to pursue claims collectively, employees with class action waivers in their employment agreements have no viable remedy for minor wage violations, and thus, presumably, they have no recourse for all but the most serious claims of wage underpayment. Justice Ginsburg pulled no punches in dissent, scolding the conservative majority for "substitut[ing] its preferred economic policies for those chosen by the people’s representatives."
In a harbinger of the Epic decision, the Court held in CompuCredit Corp. v. Greenwood that claims under the Credit Repair Organizations Act are subject to arbitration because the statute does not expressly state otherwise. The Epic ruling reinforces the principle that when Congress intends to carve out an exception to the FAA, it knows how to do so and does so expressly.
In reaching its decision, the Epic court reaffirmed the many benefits that arbitration affords individuals—"speed and simplicity and inexpensiveness." The ruling broadly supports Congress' October 2017 repeal of the Consumer Financial Protection Bureau's (CFPB) final arbitration rule that would have prohibited the use of arbitration agreements with class action waivers in consumer contracts—even though the CFPB's own data demonstrated that individual arbitration is far more beneficial to consumers than class action litigation. The ruling also reinforces the recent proposals of the Department of Education and the Centers for Medicare and Medicaid Services to jettison earlier rulemaking, which would have similarly banned the use of arbitration agreements in student loan and nursing home contracts.
Despite this victory, employers still should carefully draft or review and revise any employment arbitration agreements to ensure they will achieve the legal objectives intended.
Ballard Spahr's Labor and Employment Group routinely assists employers in drafting, reviewing, and defending the enforceability of employment and arbitration agreements.
The attorneys in Ballard Spahr's Consumer Financial Services Group pioneered the use of arbitration provisions in consumer financial services agreements. Litigators in the Group and the firm's Litigation Department regularly defend against class actions in state and federal courts around the country.
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