The United States Supreme Court has issued its much-anticipated opinion in Epic Systems Corp. v. Lewis, 584 U.S. __ (2018), and two companion cases. In a decision that will be welcomed by employers, the Court has upheld the use of arbitration agreements with class action waivers that require employees to litigate any claims against their employers individually in arbitration. Specifically, the Court has held that class action waivers in arbitration agreements between employers and their employees do not violate the National Labor Relations Act (NLRA) by preventing employees from engaging in protected concerted activity.
The Supreme Court’s ruling is the culmination of years of litigation following the National Labor Relations Board’s 2012 decision in D.R. Horton, Inc., 357 NLRB No. 184 (2012), in which the Board concluded that class action waivers in arbitration agreements impermissibly interfere with the right protected under the NLRA to engage in concerted activity. The decision also resolves a split that had developed among the circuit courts. While the Second, Fifth, and Eighth Circuits had declined to recognize the so-called “D.R. Horton rule,” the Sixth, Seventh, and Ninth Circuits had issued opinions in which they agreed with the NLRB that arbitration agreements containing class action waivers violate the NLRA when they are imposed as a condition of employment.
What Does and Doesn’t Change for California Employers
The U.S. Supreme Court’s ruling in Epic Systems Corp. v. Lewis also resolves a split of sorts in California. In 2014, in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014), the California Supreme Court rejected the NLRB’s D.R. Horton decision, holding that “there is no inherent conflict between the [Federal Arbitration Act] and the NLRA as that term is understood by the United States Supreme Court.” In 2016, however, the Ninth Circuit held in Morris et al. v. Ernst & Young, LLP, 834 F.3d 975 (9th Cir. 2016), that class action waivers in arbitration agreements are unenforceable if they are imposed as a condition of employment. Class action waivers thus could generally be enforced in California state court but not in federal courts in California (unless the employee entered into the agreement voluntarily by, for example, choosing not to take advantage of an opportunity to “opt out” of the agreement). The law is now clear that inclusion of a class action waiver in an arbitration agreement between an employer and its employees does not render the agreement unenforceable irrespective of whether the employee declined an opportunity to opt out of the agreement or otherwise voluntarily accepted the agreement.
Employers should be aware, however, that the ruling in Epic Systems Corp. v. Lewis does not alter Iskanian’s holding that pre-dispute arbitration agreements cannot require employees to waive representative claims under California’s Labor Code Private Attorneys General Act (“PAGA”), under which employees can recover penalties on their own behalf and on behalf of other aggrieved employees. Nor does the ruling in Epic Systems Corp. v. Lewis affect the fact that courts may refuse to enforce an arbitration agreement based on generally applicable state law contract defenses such as fraud, duress, or unconscionability.
While the Supreme Court has now clarified the law with respect to the enforceability of class action waivers in arbitration agreements, California employers considering whether to implement arbitration programs should still seek legal advice regarding the pros and cons of arbitration in general, and how best to optimize their arbitration programs for their particular workforces in order to achieve their business goals. California employers already using arbitration agreements, with or without a class action waiver, should also obtain guidance to ensure that the substantive provisions of the agreements do not render the agreements unconscionable under California law. There is still no “one size fits all” solution to arbitration issues, but the Supreme Court’s decision provides much needed clarity regarding the circumstances in which class action waivers are enforceable so that employers can implement the arbitration programs that are right for their businesses.
We have extensive counseling and litigation experience in this area. If you would like to discuss arbitration issues further, or have any questions about this blog, please contact us.