Supreme Court Rules Individual Arbitration Agreements Can Require Collective Actions

Supreme Court Rules Individual Arbitration Agreements Can Require Collective Actions


The breadth and enforceability of arbitration agreements continues to play out in judicial proceedings.  In Epic Systems Corporation v. Lewis, 584 U.S. __, 138 S. Ct. 1612 (2018), three consolidated cases were presented to the United States Supreme Court, and the Court held that “federal courts [must] enforce arbitration agreements according to their terms – including terms providing for individualized proceedings.”  In other words, the Court showed deference to the parties’ arbitration agreements and ruled that the claimants could not pursue collective actions in federal court because they had committed to individualized proceedings in arbitration.


The Supreme Court used one of the cases, Ernst & Young LLP v. Morris, to provide an underlying factual background.  In Ernst & Young, the accounting firm and an employee entered into an arbitration agreement that called for the parties to arbitrate any dispute that might arise between the parties.  The agreement provided that the employee could select the arbitrator and the arbitrator could “grant any relief that could be granted by . . . a court.”  The agreement also called for individualized arbitration, with claims “pertaining to different [e]mployees [to] be heard in separate proceedings.”  After the employee’s employment ended, the employee filed suit in federal court, claiming the firm misclassified junior accountants as professional exempt employees and failed to pay overtime in violation of the Fair Labor Standards Act (“FLSA”) and state law.  Although the employee’s arbitration agreement called for individualized proceedings, the employee sought to litigate his claim on behalf of a nationwide class under the FLSA’s collective action provision.  The accounting firm filed a motion to compel arbitration, which the district court granted, but the United States Court of Appeals for the Ninth Circuit reversed, finding that the savings clause in Section 2 of the Federal Arbitration Act (“FAA”) removes the obligation of a federal court to enforce an arbitration agreement as written if the court finds the arbitration agreement violates some other federal law.  In this case, the Ninth Circuit found that arbitration agreement’s requirement for individualized proceedings violated the National Labor Relations Act (“NLRA”) by barring employees from engaging in protected concerted activity in the form of collective actions.  The Court granted certiorari.


According to the Court, the FAA requires courts to “rigorously” “enforce arbitration agreements according to their terms, including terms that specify with whom the parties choose to arbitrate their disputes and the rules under which that arbitration will be conducted.” (emphasis by Court).  Section 2 of the FAA, however, provides that courts may refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.”  In the context of this case, the employees argued that the arbitration agreements precluded class or collective actions and, thus, violated the NLRA’s protections for concerted activity.  According to the employees, illegality under the NLRA constitutes a “ground” that “exists at law . . . for the revocation” of an arbitration agreement.


The Court rejected the employees’ argument, finding that the savings clause only recognizes defenses that apply to “any” contract.  The Court explained that the savings clause permits arbitration agreements to be invalidated by “generally applicable contract defenses, such as fraud, duress, or unconscionability[,]” but “offers no refuge for ‘defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.’”  “[T]his means the savings clause does not save defenses that target arbitration either by name or by more subtle methods, such as by ‘interfer[ing] with fundamental attributes of arbitration.’”  The Court then noted that the employees did not argue they entered into the arbitration agreements by an act of fraud, duress, or unconscionability, but, instead, they attacked only the individualized nature of the arbitration proceedings, which concerns the arbitration’s attributes.  Because the employees attacked the arbitration’s procedures, the Court concluded that the savings clause did not apply and the Court should enforce the terms of the arbitration agreements as written.


The Court then turned to the employees’ argument that the NLRA in its own right requires the arbitration agreements to be found unlawful.  In essence, the employees argued the NLRA and FAA were in conflict.  The Court noted, however, that the party making such an argument “bears [a] heavy burden of showing ‘a clearly expressed congressional intention’” that the two statutes address the same topic and cannot be harmonized.  The Court further noted that there is a “stron[g] presum[ption]” that such “repeals by implication are ‘disfavored.’”  The Court then analyzed Section 7 of the NLRA.  According to the Court, Section 7 “focuses on the right to organize unions and bargain collectively[,]” but “[i]t does not express approval or disapproval of arbitration[,]” “mention class or collective action procedures[,]” or “even hint at a wish to displace the [FAA].”  Thus, the statutes were not in conflict.


The Court continued with its analysis of the NLRA, addressing issues that are beyond the scope of this post.  Importantly, however, the Court did ultimately note that it has been presented with several cases over the years where parties tried to establish a conflict between other federal statutes and the FAA and every one of those attempts have failed.  The Court further bolstered its finding that there was no conflict between the statutes by commenting that “even a statute’s express provision for collective legal actions does not necessarily mean that it precludes ‘individual attempts at conciliation’ through arbitration.”


The Court ultimately held that “Congress has instructed that arbitration agreements like those before us must be enforced as written” and “[b]ecause we can easily read Congress’s statutes to work in harmony, that is where our duty lies.”  As a result, the Court reversed the decisions in Epic Systems and Ernst & Young, and affirmed the decision in the third case (Murphy Oil).


The Supreme Court’s decision in Epic Systems is important because it reinforces the deference courts should give to arbitration agreements.  It also is important because it reinforces the conclusion that parties may waive their right to collective action by entering into arbitration agreements that do provide for individualized proceedings.  For companies that prefer to resolve disputes through arbitration, which certainly is not universal, this case supports those endeavors.