SCOTUS finally delivered its decision today in Epic Systems Corp. v. Lewis, the consolidated case that addresses whether employers can require employees to give up their right to class or consolidated litigation as part of an arbitration agreement.  In a 5-4 decision authored by Justice Gorsuch, the Court found that class action waivers are enforceable under the FAA, and nothing in the labor laws preclude that conclusion.

As usual, how the Court frames the question gives away its answer.  Justice Gorsuch began the majority opinion by asking: “Should employees and employers be allowed to agree that any disputes between them will be resolved through one-on-one arbitration?”* In contrast, Justice Ginsburg’s dissent frames the issue as “Does the [FAA] permit employers to insist that their employees, whenever seeking redress for commonly experienced wage loss, go it alone, never mind the right secured to employees by the National Labor Relations Act . . . ‘to engage in . . . concerted activities’ for their ‘mutual aid or protection'”?

The majority opinion started by painting the NLRB’s opposition to class action waivers as a sudden shift after 77 years of peaceful coexistence with the FAA.  It then finds that the NLRA cannot be applied via the savings clause of Section 2 of the FAA because it interferes with one of arbitration’s fundamental attributes — individual resolution — and therefore is not the type of defense that applies to any contract. (It cites Concepcion for the proposition that individual resolution is fundamental to arbitration.)

After finding nothing in the FAA itself that would prevent enforcement of the class action waivers at issue, the majority opinion looks to see if the NLRA clearly and manifestly indicates that Congress intended to override the FAA.  It finds no statutory or contextual evidence of that clear intent.  It also made short work of the employees’ argument for Chevron deference to the NLRB.  [One of the best lines from the opinion is in that section.  Noting that Chevron was based, in part, on the idea that policy choices should be left to the executive branch which voters can hold accountable, the majority writes: “whatever argument might be mustered for deferring to the Executive on grounds of political accountability, surely it becomes a garble when the Executive speaks from both sides of its mouth, articulating no single position on which it might be held accountable.”]

Interestingly, the majority decision acknowledges that there is a vigorous policy debate over the merits of class action waivers in arbitration.  At multiple points during the opinion Justice Gorsuch bows to the possibility that the FAA could be flawed: “You might wonder if the balance Congress struck in 1925 between arbitration and litigation should be revisited in light of more contemporary developments.”  And later “This Court is not free to substitute its preferred economic policies for those chosen by the people’s representatives.”  But each time he returns to the idea that the Court is bound by the law to rigidly enforce arbitration agreements.  In her dissent, Justice Ginsburg agrees that Congress is now the right branch of government to act.  The dissent states: “Congressional correction of the Court’s elevation of the FAA over workers’ rights to act in concert is urgently in order.”

The dissent would hold that Section 7 of the NLRA does guarantee the right to pursue collective litigation and trumps the FAA.  The dissent reviews the text and legislative history of the NLRA to support its conclusion and addresses the majority’s arguments.  What I found most interesting in the dissent, however, was its review of the legislative history behind Section 1 of the FAA.  Apparently, organized labor was concerned about the FAA’s impact, and Herbert Hoover amended the legislation to specifically exclude workers’ contracts.  Congress passed the amended version and labor withdrew its opposition.  [Justice Ginsburg’s research on that topic may come in handy next term when the Court addresses the New Prime case.]

This is the result that everyone expected based on oral argument and the current politics of the court.  But still, when I read the “Justice Gorsuch delivered the opinion of the Court,” I can’t help feeling like it should say “Justice Gorsuch delivered on President Trump’s promises of a conservative court.”  Would it have been better to just let the new appointments to the NLRB reverse the Board’s course of action, much like the reversals of other agencies, and save the Court from this particular insertion into politics?

*  (Do you hear that growly “one on one” from this song when you read that?   Maybe it’s just me.)

 

In National Labor Relations Board v. Alternative Entertainment, Inc., No. 16-1385, 2017 WL 2297620 (6th Cir. May 26, 2017), the Sixth Circuit joined the Seventh and Ninth Circuits in upholding the NLRB’s decision that barring an employee from pursuing class action or collective claims violates the NLRA. Already lined up on the other side of a growing Circuit split are the Second, Fifth, and Eighth Circuits.

In Alternative Entertainment, Inc., the NLRB claimed that language in both the employment contract and the employee handbook used by Alternative Entertainment, Inc. (“AEI”) “violated the NLRA by barring employees from pursuing class-action litigation or collective arbitration of work-related claims.” Alternative Entertainment, Inc., 2017 WL 2297620 at *1.

Joining the Seventh Circuit’s critique of the Fifth Circuit’s logic in D. R. Horton, the Sixth expressly takes on the Fifth stating “the Fifth Circuit started with the wrong question.” When the Sixth asks the question it believes is the right one–if the NLRA is compatible with the FAA–the Court finds them in “harmony” and holds the employer’s ban on concerted action violates the NLRA. As a result, the court found the ban is also unenforceable under the FAA’s saving clause. According to the Sixth, the NLRA bans contracts that interfere with “employees’ right to engage in concerted activity, not because they mandate arbitration.” Any contract provision that interfered in this way would be illegal, which is in full accord with the FAA’s rejection of any contract that “undermine[s] employees’ right to engage in concerted legal activity.”

The Sixth’s second disagreement with the Fifth Circuit is expressed by the Sixth’s use of Chevron deference (arguing in the alternative, after stating there is no statutory ambiguity). The Sixth accepts the NLRB’s permissible construction of the NLRA’s right to concerted activity as a substantive, not procedural right.

In a partial dissent, and referring to the “manifestation of hostility toward arbitration,” Justice Sutton references the history of judicial protection and support of arbitration agreements provided over time. Specifically, the dissent objects to the majority’s overreaching use of Chevron, and states the majority opinion ignores Concepcion’s rejection of similar arguments harmonizing the NLRA with the FAA. (The majority opinion, however, distinguishes the kind of arbitration provision used by AEI and the kind of arbitration provision used by the employer in Concepcion.)

One question here is why would the Sixth Circuit bother drafting and filing this opinion when SCOTUS has already accepted review of this issue? It is possible the Sixth decided to issue this opinion in an effort to intentionally level the sides of this split by adding its voice to the Seventh and Ninth Circuits. It is also possible that since arguments had been heard in November 2016, opinions had already been formed by the time SCOTUS granted cert. on the question in January 2017. Either way, SCOTUS is expected to opine later this year on cases consolidated as National Labor Relations Board v. Murphy Oil USA, Inc., which will resolve the growing divide among the circuits. In granting cert., SCOTUS acknowledged the extent of the Circuit split as it existed in January—and footnoted this Sixth circuit case along with four other potential cases from the Third, Fourth, Eleventh and the D.C. Circuits. SCOTUS saw this one coming their way. I look forward to reading the resolution of this split.

ArbitrationNation thanks Jaclyn Schroeder, a law student at Mitchell Hamline School of Law, for researching and drafting this post.

Of all the federal circuit courts, I was not expecting the 7th Circuit to venture out on a limb to support the NLRB’s interpretation of the National Labor Relations Act (NLRA) as precluding class arbitration waivers.  After all, the 7th Circuit gets affirmed more than other circuit courts by SCOTUS, earning it a reputation for being fairly conservative.  Yet, contrary to the five other circuits that have already disagreed with the NLRB interpretation, the 7th Circuit just became the first to step out in support of the Board’s precedent.

In Lewis v. Epic Systems Corp., 2016 WL 3029464 (7th Cir. May 26, 2016), the arbitration agreement between the employer and its employees called for individual arbitration of disputes and waived “the right to participate in or receive money or any other relief from any class, collective, or representative proceeding.”   Nevertheless, a technical writer (of all the unlikely heroes…) sued the employer in federal court asserting violations of labor laws.  When the employer moved to compel individual arbitration, the employee responded that the arbitration agreement violated the NLRA.   The district court agreed with the employee, and the 7th Circuit affirmed.

Knowing that it was creating a circuit split, the unanimous panel supported its result with as much precedent and analysis as it could muster.  The opinion’s logic is this: Section 7 of the NLRA gives employees the right “to engage in other concerted activities,” and filing class actions constitutes “other concerted activities,” by virtue of federal precedent as well as the statute’s legislative history.  Furthermore, the Board’s interpretation of the NLRA is entitled to deference.  Therefore, the Court held, because the employer forced its employees to agree to a contract that stipulated away the employees’ right to class and collective action, it was unenforceable.

The panel then addressed whether the FAA “overrides” the interpretation of the labor laws.  Finding that the two statutes were not in conflict, the panel rejected any notion that the FAA altered the result.  In particular, the opinion notes that on the whole, the NLRA is very pro-arbitration and therefore does not conflict with the federal policy favoring arbitration.  It then attempts to deal with the pro-class-action-waiver language in Concepcion and Italian Colors by pointing out that: 1) it was dicta, dicta, dicta; and 2) the savings clause in Section Two recognizes that arbitration agreements may be made invalid by other laws.

Would this panel have been so bold if there were not an equally divided 8 justices on the Supreme Court?  I don’t know.  But, I do know that if this decision (and the NLRB precedent) wins the day, and if the recent CFPB proposed regulations are issued and upheld, it will represent a fundamental shift in the use and value of arbitration agreements for large companies that contract with hundreds (or thousands or millions) of employees and consumers at once.

Post script: The 7th Circuit did not persuade the 8th Circuit to change its mind on this issue.  Just a week after the Lewis decision, the 8th Circuit decided Cellular Sales of Missouri v. NLRB, 2016 WL 3093363 (8th Cir. June 2, 2016), in which it reaffirmed its 2013 ruling that the NLRB was simply wrong in concluding that class-action waivers violate the labor laws.  However, the 8th Circuit did affirm the Board’s finding that the company violated the NLRA by drafting an arbitration agreement that would lead a reasonable employee to believe it waived or limited their rights to file unfair labor practice charges with the NLRB.

 

Finding that some of its previous pronouncements were leading district court judges astray, the Ninth Circuit clarified its precedent regarding the scope of review of labor arbitration awards. “We conclude that it is time for us to retire the use of ‘plausibility’ as a term to describe the courts’ role in reviewing labor arbitration awards.” Southwest Regional Council of Carpenters v. Drywall Dynamics, Inc., 2016 WL 2909241 (9th Cir. May 19, 2016).

In Drywall Dynamics, the district court had vacated the arbitration award for two reasons.  It found the arbitration panel’s interpretation of the labor contracts was not “plausible”, and it found the award violated a clear public policy.  The Ninth Circuit un-vacated the arbitration award, and took the occasion to clarify the limited bases for vacating labor arbitration awards.

First, the court tackled its precedent.  Although there are “a long line of” cases that required an arbitrator’s decision to be based on a “plausible interpretation of the contract,” the court found that was “in sharp contrast to the judicial ‘hands off’ approach long required in labor arbitration cases.” Therefore, the court took the opportunity to make clear that the only relevant inquiry on the merits of the award is whether “the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority.”

With respect to the public policy exception, the court noted that is also narrow. When there are “countervailing policy considerations,” it is not appropriate to vacate an arbitrator’s decision on public policy grounds.

In this case, the court found the panel did construe and apply the contract, and that there were competing policy considerations, so the award must be affirmed.

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The Ninth Circuit is not the only appellate court affirming arbitration awards (and clarifying bases for vacatur). The Supreme Court of Oregon affirmed an arbitration award last month, over an objection that the arbitrator did not have authority to grant the awarded remedies. Couch Investments, LLC v. Peverieri, 2016 WL 1593701 (Or. Apr. 21, 2016).  And last week the Supreme Court of Texas affirmed an arbitration award in a trust dispute.  In its opinion, Texas’s highest court held that the bases for vacatur set forth in the Texas  General Arbitration Act are exclusive.  “[A] party may avoid confirmation only by demonstrating a ground expressly listed in” that statute. Hoskins v. Colonel Clifton Hoskins, 2016 WL 2993929 (Tex. May 20, 2016).  (Read more at Disputing.)

This week the Eighth Circuit confronted an interesting question: if a union member believed he failed a drug test, and therefore agreed his employer could terminate him if he tested positive again, can the arbitrator invalidate that agreement if the union member never actually failed the drug test? The appellate court answered yes, reversing the district court, in Assoc. Elec. Coop., Inc. v. IBEW, Local No. 53, 2014 WL 1910604 (8th Cir. May 14, 2014).

The employee’s story proves that sometimes being proactive is not wise. The employer conducted random drug testing. Its employee of 28 years informed management that he would test positive because he had recently smoked marijuana. In response, the employer and employee signed a last chance agreement (LCA), providing that if the employee was found under the influence or in possession of drugs again, he would be terminated. The employee was suspended without pay and had to immediately begin chemical dependency treatment. A week later, the employee found out that the random drug test did not reveal the presence of marijuana. Despite that, both parties treated the LCA as remaining in force. When a follow-up urine sample revealed the presence of a prescription drug that the employee had not been prescribed, the employer terminated him pursuant to the LCA.

The union submitted the dispute to arbitration under the parties’ Collective Bargaining Agreement (CBA). The arbitrator found the LCA was unconscionable because the initial drug test was negative. Therefore the termination lacked “just cause” under the CBA. The arbitrator awarded the employee back pay from the date of the random drug test.

The district court vacated the arbitrator’s award. It concluded that the arbitrator lacked authority to ignore the LCA.

The Eighth Circuit reversed. It held that LCAs are binding in arbitration only when they: 1) involve the union; and 2) resolve pending disciplinary proceedings governed by the CBA grievance process. In this case, the LCA did not involve the union and did not resolve any pending disciplinary proceeding. Therefore, the LCA did not supersede the CBA and its requirement of just cause for termination. The court noted that “it is customary and appropriate for arbitrators to pass upon claims for reformation for mutual mistake, often applying principles more liberal than judicial equity…” The Eighth Circuit found that the arbitrator was only authorized to award back pay from the date of termination, not the date of suspension, however, because only the termination was timely raised in arbitration. (That issue drew a dissenting opinion.)