News & Updates: Epic Systems v. Lewis: United States Supreme Court Reaffirms the Federal Arbitration Act

In a long-awaited decision issued on Monday, May 21, 2018, the U.S. Supreme Court resolved a circuit split involving the enforceability of class-action waivers contained in arbitration agreements between employees and employers. The widely predicted decision is considered a victory for employers, as it upholds the validity of class waivers in the context of employment relationships. At the same time, because arbitration agreements cannot apply to PAGA claims in California, the impact is somewhat less broad for California employers.

Circuit Split

This decision arises from a series of cases in which Plaintiffs’ attorneys fought the enforceability of arbitration agreements by arguing that class-action waivers in arbitration agreements violated the federal National Labor Relations Act (NLRA) (governing union-management relations) by interfering with an employee’s right to engage in protected concerted activity under Section 7 of the NLRA. That issue was cued up for the Supreme Court in a trio of consolidated cases: Epic Systems Corp. v. Lewis, Ernst & Young LLP v. Morris, and National Labor Relations Board v. Murphy Oil USA.

Before the Court’s ruling, the Fifth, Second, and Eighth Circuits had sided with employers (enforcing arbitration agreements and holding that collective actions under FLSA may be barred by class-action waivers). In contrast, the Ninth, Sixth, and Seventh Circuits had ruled that an arbitration agreement’s bar on employees bringing any class-action dispute violated the NLRA. This Circuit division thus required resolution by the Supreme Court.

The Ruling

As was expected, the Supreme Court was split 5-4, with a majority decision authored by the Court’s newest member, Justice Gorsuch. The conclusion was simple: the Federal Arbitration Act (FAA) requires courts to enforce agreements to arbitrate, including the terms that the parties select. As to the NLRA, the Court found that the section addressing “concerted activities” spoke to the right to organize unions and bargain collectively – it does not mention class or collective action procedures, or even “hint at” a clear and manifest wish to displace the Arbitration Act. Thus, the Court found that the NLRA and FAA can be harmonized by allowing the enforcement of class waivers in arbitration agreements.

Justice Ginsberg authored a fiery dissent, targeted both at the majority opinion and the expansive sweep of the Court’s FAA precedent. As she opined, “In recent decades, this Court has veered away from Congress’ intent simply to afford merchants a speedy and economical means of resolving commercial disputes.”

The Impact

This recent decision is one in a long line of cases upholding the terms of arbitration agreements in all contexts of American life. For employers and employees, the decision reinforces what had been the law in the Second, Fifth and Eighth Circuits and had been applied by most federal courts (although the NLRB had continued to find that arbitration agreements with class waivers violated the NLRA despite those rulings).

California employers are impacted somewhat less than employers elsewhere in the country, because of California’s Private Attorneys’ General Act. While in most of the rest of the country, the Epic Systems decision means all wage-and-hour claims can be sent to arbitration on an individual basis (so long as there is a valid and binding arbitration agreement containing a class waiver), claims brought under California’s Private Attorneys General Act (PAGA) – which generally are wage-and-hour claims – may not be forced to arbitration. This rule comes from the California Supreme Court’s decision in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014), which held that representative claims under PAGA are brought on behalf of the state and are therefore not subject to pre-dispute arbitration agreements. Since then, most wage-and-hour claims have been brought as PAGA representative actions, as employees (and their attorneys) have attempted to both seek additional penalties and also avoid enforcement of arbitration agreements. The U.S. Supreme Court has thus far not taken up challenges to Iskanian.

For now, even post Epic Systems, although California employers may enforce binding arbitration agreements as to class actions, they also should be mindful that PAGA cases cannot be individually arbitrated, and wage-and-hour PAGA “representative” actions remain alive and well.