Epic Change in the Class Action Landscape: Supreme Court Holds Class Action Waivers in Employment Arbitration Agreements Enforceable

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In its May 21, 2018 decision in Epic Systems Corp. v. Lewis, 584 U.S. ___, 2018 WL 2292444, the U.S. Supreme Court closed the door on efforts by employees to avoid class action waivers in arbitration agreements.  Having previously held in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), that “courts may not allow a contract defense to reshape traditional individualized arbitration by mandating classwide arbitration procedures without the parties’ consent,” the Court in Epic stated that the same holds true in the employment context:

“[A]s a matter of law the answer is clear.  In the Federal Arbitration Act, Congress has instructed federal courts to enforce arbitration agreements according to their terms – providing for individualized proceedings.”

It further held that the protections for collective activity under section 7 of the National Labor Relations Act (NLRA) do not impede class action waivers in the employment context.  Although the NLRA “secures to employees rights to organize unions and bargain collectively,” it does not speak to “how judges and arbitrators must try legal disputes that leave the workplace and enter the courtroom or arbitral forum.”  The FAA and the NLRA are not in conflict; enforcing class action waivers in arbitration agreements pursuant to the FAA impacts no fundamental principle or provision of the NLRA.

The Court again emphasized that the “savings clause” in section 2 of the FAA authorizes courts to deny enforcement of arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.” Therefore, section 2 permits as a defense to enforcement of an arbitration agreement (or class-action waiver in the agreement) only “generally applicable contract defenses, such as fraud, duress, or unconscionability.”  And such defenses may not target arbitration agreements “either by name or by more subtle methods,” for example, by challenging “fundamental attributes of arbitration,” like its individualized and less formal procedures.  The Court found that the employees’ defense to the arbitration agreements involved in Epic improperly targeted those very attributes.

In ruling that the NLRA does not prohibit class action waivers in employment arbitration agreements, the Court noted that section 7 “focuses on the right to organize unions and bargain collectively,” but “does not express approval or disapproval of class or collective action procedures.  It does not even hint at a wish to displace the” FAA.

What does Epic portend for the means of resolving legal disputes between employees and their employer?  Employers should consider the following consequences in managing the risks and costs of resolving disputes via class action procedures as compared to multiple individual actions:

  1. What policies an employer should adopt in response to Epic may depend upon how employees’ counsel adapt their strategies. If they start bringing multiple individual arbitrations, then employers may find that class action waivers do not serve the interests of efficient and less expensive resolution of legal disputes with employees.  One advantage of a class action is that it can fully and finally resolve all employee complaints regarding particular issues without having to engage in multiple lawsuits or arbitrations.  An employer in California that faces many individual arbitration proceedings, will, under the California Supreme Court decision in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000), have to pay any costs incurred by an employee that exceed what the employee would incur in bringing an action in court.  And depending upon the discovery permitted in those arbitrations, an employer could find it necessary to have company officials deposed multiple times in separate arbitrations.
  2. On the other hand, with individual arbitrations, an employer should find it easier to manage the risks of an adverse result in arbitration or litigation with regard to a particular employment practice or circumstances. It could focus on one or a few cases to determine the risk of liability exposure and then, depending on the outcome of those limited number of cases, determine whether and at what amount to try to settle all the cases or, rather, to dig in and defend the cases to the end.
  3. Another advantage of individual arbitration will be that an employer should find it easier to resist discovery of the identity of other potential claimants or of practices with regard to other similarly situated employees.
  4. In California, collective or representative claims under the Private Attorneys General Act (PAGA), Cal. Labor Code § 2698 et seq., are not subject to class action waivers in arbitration agreements.  In Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014), the California Supreme Court held that “a PAGA claim lies outside the FAA’s coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship. It is a dispute between an employer and the state, which alleges directly or through its agents—either the [California] Labor and Workforce Development Agency or aggrieved employees—that the employer has violated the Labor Code.”  The U.S. Supreme Court refused to take up Iskanian.

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