Restore Federal Arbitration Act to its rightful place

OCTOBER 2017 TERM

The biggest arbitration case on the U.S. Supreme Court's docket this term is the so-called Epic trilogy, in which the Supreme Court will resolve a circuit split concerning the interplay between the Federal Arbitration Act (providing for enforceability of arbitration agreements) and Section 7 of the National Labor Relations Act (providing for employees' right to collective action).

The 2nd, 5th and 8th U.S. Circuit Courts of Appeals' have held that agreements requiring employees to waive the right to bring a class action and to arbitrate individually against employers are enforceable under the FAA and do not violate the NLRA; the 7th and 9th U.S. Circuit Courts of Appeals' have found such agreements unenforceable. The Supreme Court will soon decide which line of cases is correct.

All three cases arose when employees filed class or collective actions in federal court despite having entered into agreements with their employers requiring them to arbitrate work-related claims on an individual, rather than collective, basis. In AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the Supreme Court held that class waivers in arbitration agreements are enforceable under the FAA. But, in Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016), and Morris v. Ernst & Young, LLC, 834 F.3d 975 (9th Cir. 2016), the 7th and 9th Circuits concluded that class waivers in arbitration agreements were unenforceable because they violated the employees' right under the NLRA to engage in concerted activities.

The 7th and 9th Circuits reconciled this outcome with the FAA by way of the FAA's saving clause, under which an arbitration agreement is enforceable "save upon such grounds as exist at law or in equity for the revocation of any contract." Other courts, however, have reached a different conclusion.

For example, in Murphy Oil USA, Inc. v. NLRB, 808 F.3d 1013 (5th Cir. 2015), an employee filed an unfair labor practice charge with the National Labor Relations Board after her wage-and-hour class action was dismissed because her arbitration agreement included a class action waiver. Following an approach it first adopted in D.R. Horton, Inc., 357 NLRB 2277 (2012), the NLRB invalidated the class waiver as an unfair labor practice that interfered with employees' right under the NLRA to engage in concerted legal activity. The 5th Circuit reversed, holding that the NLRA does not override the FAA and that use of class action procedures is not a substantive right under the NLRA.

Enacted "in response to widespread judicial hostility to arbitration," the FAA requires courts to "'rigorously enforce' arbitration agreements according to their terms," including terms setting "'the rules under which that arbitration will be conducted.'" Am. Express Co. v. Italian Colors Rest., 570 U.S. 228, 232-33 (2013). Since the FAA's enactment, this judicial hostility has continued to manifest itself through "'a great variety' of 'devices and formulas'" to avoid enforcing arbitration agreements as written. Concepcion, 563 U.S. at 342.

The latest such device is the NLRB's rule -- repeatedly reaffirmed by the NLRB and adopted by the 7th and 9th Circuits in Epic Systems and Ernst & Young -- which interprets the NLRA to confer a substantive right on employees to pursue their wage-and-hour claims on a class or collective basis, and invalidates class action waivers in employment arbitration agreements by narrowing the FAA so that it does not stand in the way. In arbitral class action waivers like those at issue in the Epic trilogy, plaintiffs agree to: (1) pursue their claims in arbitration, rather than in court; and (2) proceed in arbitration on an individual, bilateral basis, rather than on a class or collective basis. The NLRB's rule effectively nullifies the Supreme Court's decisions in Concepcion, Italian Colors and many other cases, which broadly construe the FAA to provide robust protection to arbitral class action waivers requiring claims to be arbitrated on an individual, bilateral basis in accordance with fundamental attributes of arbitration.

Recognizing the vulnerability of the NLRB's approach under Concepcion and its progeny, the NLRB and the 7th and 9th Circuits relied on two arguments to shield the rule from FAA preemption. First, they claimed the NLRB's rule fell within the protection of the FAA's saving clause, which preserves from preemption "such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. Section 2. Second, they maintained that employees' right under the NLRA to "engage in ... concerted activities for the purpose of ... mutual aid or protection," 29 U.S.C. Section 157, amounted to a "'contrary congressional command'" overriding the FAA, see CompuCredit Corp. v. Greenwood, 565 U.S. 95, 98 (2012). Both of these rationales are fundamentally flawed.

The FAA's saving clause cannot shelter the NLRB's rule because the rule disfavors arbitration in precisely the manner the Supreme Court condemned in Concepcion. "Th[e] saving clause permits agreements to arbitrate to be invalidated by 'generally applicable contract defenses ... ,' but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue." Concepcion, 563 U.S. at 339. That is exactly what the D.R. Horton rule does.

While the 7th and 9th Circuits and the NLRB claimed the NLRB's rule treats arbitration clauses the same as any other contract, this claim is belied by the fact that the rule requires collective proceedings and thereby eviscerates arbitral class action waivers. "Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA." Id. at 344. As the Supreme Court held in Italian Colors, "[T]he FAA does ... favor the absence of litigation when that is the consequence of a class-action waiver, since its '"principal purpose"' is the enforcement of arbitration agreements according to their terms." 570 U.S. at 238 n.5.

Nor can the D.R. Horton rule be sustained on the ground that it amounts to a contrary congressional command in which the NLRA overrides the FAA. The Supreme Court's cases make clear that the contrary congressional command claimed to override the FAA's mandate must actually appear in the text of the other federal statute. The generic reference in Section 7 of the NLRA to employees' right to "engage in ... concerted activities for the purpose of ... mutual aid or protection," 29 U.S.C. Section 157, simply does not come close to the "clarity" the Supreme Court has required of a competing federal statute in order to override the FAA, CompuCredit, 565 U.S. at 103. The "concerted activities" provision does not mention arbitration or class actions, and contains no indication that Congress intended Section 7 of the NLRA to displace the FAA's mandate.

Accordingly, the Supreme Court should disapprove the NLRB's rule and restore the FAA to its rightful place in ensuring that employment arbitration agreements -- including their arbitral class action waivers -- are enforced according to their terms.

John and Felix Shafir have extensive litigation experience with appeals and writ proceedings arising out of efforts to compel arbitration.