U.S. Supreme Court Rejects NLRB’s “Triple Bank Shot” Attack on Mandatory Arbitration Agreement Class Waivers

By Patrick J. Hoban*

On May 21, 2018, the U.S. Supreme Court held that mandatory employment arbitration agreements that require employees to waive the right to class litigation do not violate the National Labor Relations Act (“NLRA”). See Epic Systems Corp. v. Lewis, Nos. 16-285, 16-300, 16-307, 2018 U.S. LEXIS 3086 (May 21, 2018). The Supreme Court’s decision rejected the National Labor Relation Board’s (“NLRB”) strenuous, six-year fight to establish that class litigation is protected, concerted activity under Section 7 of the NLRA and that its limitation in the employment context is unlawful. Because of the Court’s decision, employers are now free to require that employees waive the right to engage in class litigation as part of a mandatory arbitration agreement.

In 2012, after eight decades of peaceful coexistence between the Federal Arbitration Act (“FAA”) and the NLRA, the NLRB took the position that employment arbitration agreements that require waiver of class litigation rights are unlawful. See D.R. Horton, Inc., 357 NLRB 2277 (2012). Specifically, the NLRB found such agreements violated Section 7 of the NLRA, which protects, among other things, employees’ “concerted activities for purpose of . . . other mutual aid or protection.” 29 U. S. C. §157. The NLRB’s position in D.R. Horton was contrary to its own policy, established as recently as 2010. The NLRB based its change in direction on its interpretation that Section 7 protected all collective activity, including class litigation, whether related to union organizing or not. The NLRB’s position also was based on its interpretation that the FAA’s “savings clause” rendered employment arbitration agreements that included class waivers unenforceable. The U.S. Court of Appeals for the Fifth Circuit rejected the NLRB’s D.R. Horton position and refused to enforce it. See D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013).

Despite this rebuke in the Fifth Circuit, the NLRB maintained its position that class litigation waivers in mandatory employment arbitration agreements violated Section 7. See Murphy Oil USA, Inc., 361 NLRB 771 (2014). On appeal, the Fifth Circuit again rejected the NLRB and noted that nothing had changed since its decision in D.R. Horton, just two years before. Murphy Oil USA, Inc. v. NLRB, 808 F.3d 1013 (5th Cir. 2015). Nonetheless, in the years that followed, the NLRB relied on its D.R. Horton and Murphy Oil analysis to strike down dozens of mandatory arbitration agreements all over the country. In many cases, federal courts refused to enforce the NLRB’s decisions. However, the NLRB’s position was successfully advanced in the Seventh and Ninth Circuits. See Lewis v. Epic Sys. Corp., 823 F.3d 1147 (7th Cir. 2016) and Morris v. Ernst & Young, LLP, 834 F.3d 975 (9th Cir. 2015). The Sixth Circuit also sided with the NLRB in NLRB v. Alternative Entertainment, Inc., 858 F.3d 393 (6th Cir. 2017). Contrary to the Fifth Circuit’s prior holdings, the Seventh and Ninth Circuits held that class litigation is a “concerted activity” protected by Section 7 and adopted the NLRB’s interpretation of the FAA. With a split among the circuit courts, the Supreme Court granted certiorari and consolidated the appeals of Epic Systems, Ernst & Young, and Murphy Oil. In each of those cases, the employee-plaintiffs had attempted to bring collective/class actions alleging, among other things, wage and hour claims under the Fair Labor Standards Act (“FLSA”).

In Epic, the Supreme Court rejected the NLRB’s argument regarding the FAA and held that it did not invalidate arbitration agreements because they required or prohibited arbitration of class claims. The Court also rejected the argument that the NLRA trumps the FAA in all matters ostensibly related to collective employee activity – such as employment-based class actions. Instead, the Supreme Court instructed that class or collective actions were largely unknown when Section 7 was enacted in 1934, noting specifically that even the FLSA’s collective action provisions were enacted several years after Section 7.

In a key section of its decision, the Supreme Court examined Section 7 and concluded that its protection of “concerted activities for purpose of . . . other mutual aid or protection” could not reasonably include class litigation as the NLRA’s broader provisions address organization and collective bargaining but make no mention of arbitration or collective litigation. The Court further explained that Congress had expressly prohibited arbitration of statutory claims under other federal statutes and its failure to do so in the 84-year history of the NLRA meant it did not intend to place arbitration within Section 7’s reach.

Dissecting the NLRB’s argument that its prohibition of class arbitration waivers aided enforcement of the FLSA, the Supreme Court questioned why the FLSA itself did not prohibit such waivers. Dismissing the NLRB’s argument that the NLRA controls claims under the FLSA and overrides the FAA, the Court described this logic as “a sort of interpretive triple bank shot, and just stating the theory is enough to raise a judicial eyebrow.”

Finally, the Supreme Court held that no deference is due the NLRB’s position. The Court noted that, as recently as 2010, the NLRB’s General Counsel had taken a position opposite to the NLRB’s position in D.R. Horton in 2012. The NLRB provided no rationale for the change. The Court further explained that it owed no deference to the NLRB’s interpretation of the FAA, noting that it has “never deferred to the [NLRB’s] remedial preferences where such preferences potentially trench upon federal statutes and policies unrelated to the NLRA.”

Four justices joined in a dissent authored by Justice Ginsburg. The dissent argued that the FAA does not “permit employers to insist that their employees, whenever seeking redress for commonly experienced wage loss, go at it alone.”

In sum, the Supreme Court’s decision in Epic rejected the NLRB’s argument that NLRA-protected rights trumped the provisions of the FAA and the national policy favoring arbitration of employment disputes. The Supreme Court further announced that the NLRB’s authority does not extend to interpretation or enforcement of other federal statutes. Finally, the Court hints that the NLRA’s “bread and butter” focus is union organizing and collective bargaining and that the NLRB strains its authority when it reaches beyond that core jurisdiction.

After Epic, employers may include class litigation waivers in mandatory arbitration agreements without fear of attacks based on the NLRA, unless Congress passes legislation in the future limiting that right. However, employers must continue to ensure that arbitration agreements do not bar employees from accessing administrative agency procedures and the right to file charges with the NLRB or EEOC, as current jurisprudence prohibits such restrictions. Employers may continue to require employees to agree that they are limited to arbitration remedies and waive any remedy available through administrative agencies.

*Patrick J. Hoban, an OSBA Certified Specialist in Labor and Employment Law, regularly represents employers before the National Labor Relations Board and practices in all areas of labor relations. For more information about the Supreme Court’s decision in Epic or any other labor or employment matter, please contact Pat at pjh@zrlaw.com or 216.696.4441.