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When business owners call my office looking for guidance because their accountant, fellow business owners, colleagues, or friends told them they should talk to an employment lawyer about their fears and concerns surrounding an employee issue, I ask a series of questions to get a better understanding of what is going on in the business.  One of the questions I ask is:

Do you have an arbitration agreement?

9 out of 10 times there is a pause and a response that ranges from

“can you tell me what that is”

and

“I’m not sure.”

It’s understandable because unless you’re a doctor’s office, arbitration agreements aren’t part of your everyday life.  However, these businesses are missing out on a great tool that could be used in their favor if they value privacy, expediency, and cost-savings should a dispute arise with an employee.  Especially given the Supreme Court’s decision in Epic Systems Corp. v. Lewis.  Below is an article I wrote on the decision that was recently published in the Orange County Lawyer’s Magazine.  Although aimed at attorneys, it gives employers a better idea of what an effective tool it is that should be a part of your employment suite of documents.  If you have questions about arbitration agreements and class waivers, feel free to schedule a call.

[Originally published as Epic Systems Corp. v. Lewis: Class Waivers in Arbitration Agreements and Why Even Non-Employment Lawyers Should Care, by Andrea W. S. Paris, in Orange County Lawyer Magazine, October 2018, Vol. 60 No. 10 on page 44.]

Justice Neil Gorsuch authored the majority opinion in Epic Systems Corp. v. Lewis, 138 S.Ct. 1612 (2018), which held that Congress has instructed that arbitration agreements providing for individualized proceedings (and precluding class action lawsuits or class arbitration) must be enforced as written. Id. at 1632. In short, the Arbitration Act (FAA) requires courts to enforce arbitration agreements as written, even in the employment context, regardless of the language of Section 7 of the National Labor Relations Act (NLRA), absent a showing that the contract is illegal under contract formation theories.

Epic Systems consolidated three Fair Labor and Standards Act (FLSA) cases: Epic Systems Corp. v. Lewis, from the Seventh Circuit of the United States Court of Appeals; Ernst & Young v. Morris, from the Ninth Circuit; and National Labor Relations Board v. Murphy Oil USA, Inc. from the Fifth Circuit. Each case concerned an arbitration agreement that precluded class action lawsuits and class arbitration. Employees must bring individual claims against their employers in arbitration.

The employees in those cases argued that arbitration agreements requiring class waivers are unenforceable because: (1) Waiver of collective and class arbitration is contrary to Section 7 of the NLRA’s guarantee of workers’ rights “to self-organization . . . and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection;” and (2) Since collective and class waivers in arbitration clauses are illegal under the NLRA, they are unenforceable under the FAA’s savings clause, which allows courts to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.” See, 29 U.S.C. § 157, 9 U.S.C. § 2, and 29 U.S.C. § 157.

The Court gave highest deference to the FAA’s protection of parties’ rights to contract. Noting that the Supreme Court had “often observed that the Arbitration Act requires courts ‘rigorously’ to ‘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.’ [Citation.]” Epic Systems, 138 S.Ct. at 1621. In this case, the Court concluded that the parties “proceeded to specify the rules that would govern their arbitrations, indicating their intention to use individualized rather than class or collective action procedures. And this much the Arbitration Act seems to protect pretty absolutely.” Id. (citing AT&T Mobility, LLC v. Concepcion, 563 U.S. 333 (2011)).

Despite the dissent’s persuasive argument that the unequal bargaining power between an employer and employee renders an analysis based on the freedom to contract disingenuous, at least in this context, practitioners will face a steep uphill battle in efforts to challenge procedures outlined in an arbitration clause.

A Narrow Interpretation of the FAA’s Savings Clause

Unfortunately for plaintiffs, the savings clause “can’t save their cause.” Id. at 1622. The Court concluded that “the savings clause recognizes only defenses that apply to ‘any’ contract” and, quoting Concepcion, notes that the savings clause “permits agreements to arbitrate to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability.” Id. Thus, attacks on arbitration clauses “that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue” will likely fail. Id. (internal quotation omitted). According to the Court, “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.” Id. (internal quotations and citations omitted). Thus, practitioners attacking an arbitration clause are now limited to attacking arbitration agreements as they would attack any other contract.

The FAA Alone Governs Arbitration Clauses Absent Specific Statutory Language Stating Otherwise

The Court concluded that no deference is due to the NLRB’s (the agency tasked with enforcing the NLRA) determination that class waivers in arbitration agreements contradict the NLRA, because the NLRB didn’t interpret its own statute, the NLRA, in isolation. Instead it interprets it in a way that limits the work for a second statute, the FAA. Id. at 1629.

After a lengthy analysis of the language of the FAA and Section 7 of the NLRA, the Court also conclude that there was no conflict between the two statutes. Section 7 was interpreted narrowly to protect the right of workers to organize unions and bargain collectively, but was silent on arbitration. According to the Court, Section 7 “does not express approval or disapproval of arbitration. It does not mention class or collective action procedures. It does not even hint at a wish to displace the Arbitration Act . . . .” Id. at 1629.

The Court also narrowly interpreted Section 7’s catchall phrase of protecting “other concerted activities for the purpose of . . . other mutual aid of protection” as only “protect[ing] things employees ‘just do’ for themselves in the course of exercising their right to free association in the workplace.” Id. at 1625. Section 7 does not extend to protecting ‘the highly regulated, courtroom-bound ‘”activities”’ of class and joint litigation.” Id. The dissent takes a different view that “[b]y joining hands in litigation, workers can spread the costs of litigation and reduce the risk of employer retaliation. [Citation.]” Id. at 1637 (dis. opn.). Thus, workers’ ability to band together to pursue work-related claims in concert in any forum, if not in court, then in arbitration is a “concerted activity.” Id.

The opinion closed with the statement that “[w]hile Congress is of course always free to amend this judgment, we see nothing suggesting it did so in the NLRA—much less that it manifested a clear intention to displace the Arbitration Act.” Id. at 1632. Thus, holding the FAA’s protection of an arbitration agreement’s terms practically inviolate absent Congress’s explicit statement otherwise.

Epic Systems’ Implications in California

To help understand Epic Systems’ implications in California, I sought the help of a few local attorneys and an arbitrator. Kerri N. Polizzi, an associate at Kring & Chung, LLP believes that “Epic Systems provides clarity on both sides, allowing attorneys a better opportunity to both counsel employer clients and to strategize the prosecution of employees’ claims.” Interview with Kerri N. Polizzi (August 20, 2018). Counsel for employers, and all larger businesses for that matter, should and will likely ensure that their clients institute arbitration agreements with class waivers. Thus, Epic Systems appears to put the nail in the coffin of employees’ ability to band together to seek redress for Labor Code violations with small individual damages in any forum.

However, California employers should not breathe a sigh a relief yet because California allows employees to bring representative actions under the Labor Code’s Private Attorneys General Act of 2004 (PAGA). See, Lab. Code § 2698 et seq. PAGA authorizes an employee to seek civil penalties on behalf of the state for Labor Code violations committed against the employee and fellow employees, with most of the proceeds of that litigation going to the state. Ali Bushra, Principal Attorney at The Bushra Law Firm believes that one of the unintended consequences of Epic Systems will be an increase in PAGA claims. Interview with Ali Bushra (August 17, 2018). Joel Grossman, mediator and arbitrator with JAMS agrees and notes that “the power of class action waivers has led to many PAGA-only filings, and this trend will certainly continue. It remains to be seen whether a conservative U.S. Supreme Court will enforce a PAGA waiver in an arbitration agreement, that is a provision whereby the employee can only seek damages for his or her own personal loss, but cannot serve as a representative for other aggrieved employees.” Interview with Joel Grossman (August 16, 2018) Polizzi agrees that “we’ll know more . . . once the court decides Lawson.” The California Supreme Court granted review of the California Court of Appeal’s decision in Lawson v. ZB, N.A., 18 Cal. App. 5th 705 (2017) to determine whether recovery sought under Labor Code Section 558 are in fact penalties not subject to arbitration, or recovery of the employee’s wages subject to arbitration, including class waiver.

However, Marc Phelps, Partner at The Phelps Law Group, notes that “PAGA isn’t all it’s built up to be by some attorneys. The statute of limitations is one year and 75% of the recovery goes to the state. While better than nothing, it’s not much of a check on corporate behavior and it approximates a single plaintiff discrimination case in terms of a plaintiff’s attorney’s incentive to pursue the claim.” Interview with Marc Phelps (August 20, 2018). Defense attorneys would argue that although not as large a recovery for plaintiffs as a class or collective action, PAGA claims are still very costly for employers and continue to be an effective deterrent.

The California legislature continues to seek ways to protect employees from the unequal bargaining power in arbitration agreements with the recent passing of Assembly Bill 3080 (AB 3080). As of the writing of this article, Governor Jerry Brown has yet to sign the bill into law. This bill has two prongs: the first addresses the #MeToo movement, while the second amends the Labor Code to make the mandatory waiver of “any right, forum, or procedure for a violation of [the Fair Employment and Housing Act] or [the Labor Code]” as a condition of employment or continued employment an unlawful employment practice. A.B. 3080, 2017–2018 Assemb., Reg. Sess. (Ca. 2018). It would also make it illegal for an employer to retaliate, terminate, or otherwise discriminate against an employee for refusing to waive the right to file a complaint in court. Id. Should Governor Brown sign the bill into law, employees would have to affirmatively and voluntarily opt-in to arbitration agreements. However, we will likely see another Supreme Court opinion on whether a state could regulate the voluntariness of an arbitration agreement. By then, Justice Anthony Kennedy’s seat will be filled, and the Supreme Court’s makeup will be different from the one that issued Epic Systems.

Why Non-Employment Law Attorneys Should Care

You may wonder, “why should I care about Epic Systems if I do not practice employment law?” Grossman’s answer to this question was two-fold:

First, law firms are also employers. It is important for attorneys in large or small firms who employ secretaries, paralegals, messengers, or other non-exempt workers to be familiar with employment law so that they can establish legal policies and avoid lawsuits by their employees. Second, employment law often finds its way into all sorts of other scenarios, such as mergers and acquisitions. The more a lawyer knows about employment law, the better he or she can run the firm, and the better he or she can assist clients in what appear to be non-employment matters that may have an employment component. Grossman interview, supra.

Additionally, Epic Systems provides us with a glimpse into Justice Gorsuch’s jurisprudence. Polizzi observed there is a lot of discussion about this case as “one of the most high-profile cases that Justice Gorsuch has written. It seems safe to say there were plenty of practitioners following this case for insight into the Court more than for insight into employment law.” Interview with Kerri N. Polizzi, supra. Indeed, litigants likely will attempt to apply Epic Systems’ reasoning in other situations. “Attorneys in all fields should be anticipating arguments that implicate each federal statute that does not contain an express congressional command to override the Federal Arbitration Act.” Id.

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