In-Depth: Supreme Court on Arbitration Agreements

The Federal Arbitration Act (FAA) was passed in 1925. It ordered courts to enforce arbitration agreements.

The National Labor Relations Act (NLRA) was enacted a decade later in 1935. It protected employees’ concerted activities, such as collective bargaining and unionization.

For 77 years, the FAA and NLRA peacefully coexisted. Courts enforced arbitration agreements in accordance with the FAA and also protected employees’ unionization and collective bargaining efforts in accordance with the NLRA. As recently as 2010, the general counsel for the National Labor Relations Board (NLRB), which enforces and interprets the NLRA, expressed the belief that arbitration agreements exist outside of the “considerations of the National Labor Relations Act.”

So what happened?

Briefly, in 2012, the NLRB reversed course on its “FAA vs. NLRA stance” in the matter of D.R. Horton, Inc. For the first time in the history of either the FAA or NLRA, the Board held that an arbitration agreement violated the NLRA, putting the FAA itself at odds with the NLRA. This decision generated a series of cases wherein employees disregarded their arbitration agreements, which were put into place as part of their employment, and tried their luck by simply filing suit in federal district court. Some of these federal district and, later, appellate courts held that the arbitration agreements were enforceable and the employees could not maintain suit, whereas others held that the agreements in question were in violation of the NLRA, pursuant to the NLRB’s recent reversal in D.R. Horton, Inc. After all, it has been long-standing practice for courts, in analyzing statutes, to defer to the judgment of the agency that is charged with interpreting and enforcing said statute.

The particulars of the cases that led to this Supreme Court decision are discussed in our earlier briefing, found here. The Court’s consolidated opinion on the three cases is referenced as Epic Systems Corp. v. Lewis (2018).

The Framework

The cruxes of the arguments in these combined cases are two-fold: (1) that the FAA “Savings Clause” allows courts to dispense with enforcement of arbitration agreements under certain circumstances applicable to the cases before the Supreme Court, and (2) that the NLRA’s protection of concerted activities extends to class and collective lawsuits, thus prohibiting any agreement that requires an employee to waive their right to such a proceeding in favor of individualized arbitration.

The FAA “Savings Clause” Argument

The plaintiff-employees argued that the FAA “Savings Clause” allows courts to reject arbitration agreements because they interfere with rights extended under the NLRA. The Court disagreed. In its view, the FAA “Savings Clause” allows courts to reject arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract,” such as “fraud, duress, or unconscionability.” AT&T Mobility LLC v. Concepcion (2011). Conversely, it does not allow courts to reject such agreements under other “defenses,” such as those that may “interfere with fundamental attributes of arbitration.”

The Court found that requiring individualized arbitration of disputes, in lieu of class action or collective proceedings, was a “fundamental attribute of arbitration.” Thus, it could not be used as a defense, as would be the case with fraud, duress, or unconscionability, such as would allow a court to refuse to enforce an arbitration agreement or class or collective action waiver.

The plaintiff-employees in the cases before the Court, as discussed in our earlier briefing, generally sought to litigate Fair Labor Standards Act (FLSA) and other state law claims as class action or collective lawsuits, ignoring their prior agreements to individualized arbitration. Since the plaintiff-employees did not argue viable defenses as would implicate the FAA “Savings Clause,” such as fraud or duress, their argument on this point was consequently rejected by the Court.

The NLRA Argument

Despite the long-standing accord between the NLRA and the FAA, the plaintiff-employees argued that the NLRA overrides the FAA because it protects concerted activities by employees. In the view of the employees, concerted activities include litigation under a class or collective action theory.

The Court rejected this argument on several grounds. First, it held that the “concerted activities” referenced in the NLRA relate to collective bargaining, unionization, and other workplace activities. But the NLRA does not discuss such activities in the context of litigation outside of the workplace. In fact, the NLRA makes no mention of class or collective proceedings. Nor is it likely, in the Court’s view, that Congress intended to forestall such proceedings in passing the NLRA in 1935, as they were “hardly known” at the time.

Second, the Court expressed that Congress enacted both the FAA and NLRA and could have chosen to repeal or otherwise explicitly override the FAA when passing the NLRA, if it had wished to alter the arbitration agreement provisions of the FAA. Yet Congress did not and has not done so. The Court also found of relevance that there was no asserted conflict between the FAA and the NLRA until 2012, i.e., 77 years after the passage of the NLRA, and that not even the NLRB had interfered with arbitration agreements until such time.

Third, the Court questioned why the plaintiff-employees had not directly argued that the FLSA displaced the FAA, since their claims were rooted in the FLSA rather than the NLRA. It presumed that this is because the Court has already addressed the issue and held against FLSA displacement of the FAA in Gilmer v. Interstate/Johnson Lane Corp. (1991). Notably, it cited the Gilmer case as standing for the proposition that an “identical collective action scheme does not prohibit individualized arbitration proceedings.” Having discussed Gilmer, the Court listed what it felt to be similar efforts to “manufacture conflicts between the Arbitration Act and other federal statutes,” effectively further shutting the lid on similar claims in the future.

The “Deference” Argument Under Chevron

Last, the Court addressed the argument that the NLRB should be extended “deference” under Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. (1984), the long-standing, seminal case under which agencies have frequently operated on the outer edges of their explicit statutory authority to interpret, promulgate, and enforce laws. The Court found that the NLRB did not merely interpret and administer the NLRA, with which it is charged, in voiding arbitration agreements. Rather, in doing so, the Board had also sought to administer and interpret the FAA, with which it is not charged, and which was improper. It is notable that the author of the Court’s opinion in the instant case, recently appointed Justice Neil Gorsuch, is known as an outspoken critic of what is called “Chevron deference.”

Our Conclusion

Briefly, the Court has upheld the right of employers to enter into arbitration agreements with their employees that require individualized arbitration of legal claims, and waive class and collective proceedings. It did so in a strongly worded opinion that is critical both of the plaintiff-employees’ arguments and the NLRB’s reversal of position in 2012. Employers should continue to watch for legislative action that may alter these rights in the future. Notwithstanding, the decision gives a strong mandate for arbitration agreements with built-in class and collective action waivers.

For the full opinion, including concurring and dissenting opinions, you may read more here.