January 6, 2019

You Must Respect The Federal Arbitration Act’s Authority; Epic Systems Corp. v. Lewis

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A few years ago, the Supreme Court held that arbitration and class waiver clauses in a contract between AT&T and one of its cell-phone customers could not be found unenforceable as unconscionable under state law, because the Federal Arbitration Act (FAA) preempts this kind of state law. The question posed by this case is whether these kinds of arbitration clauses in employment contracts apply when an employee is trying to assert a federal right. As you may expect, this resulted in a 5-4 split between the “left” and “right” wing of the Court.

This opinion actually dealt with three different cases, which “differ in detail but not in substance.” In each case, an employee entered into an employment agreement that contained an arbitration clause governing “any disputes that may arise between them.” A dispute eventually arose, and each employee filed a lawsuit in federal court under various statutes, such as the Fair Labor Standards Act. The employer moved to compel arbitration, and the district court granted the requests. In appeal from one of those cases, the Ninth Circuit reversed, finding that the FAA did not apply if it violated another federal law, and that enforcing the FAA would violate portions of the National Labor Relations Act (NLRA).

On certiorari, the Court began its analysis with a discussion of the FAA and its savings clause. The FAA establishes a federal policy favoring arbitration agreements, and it “protect[s] pretty absolutely” parties’ choices governing arbitration, including “the rules that would govern their arbitrations.” This includes whether “to use individualized rather than class or collective action procedures.”

You might wonder if the balance Congress struck in 1925 between arbitration and litigation should be revisited in light of more contemporary developments. You might even ask if the Act was good policy when enacted. But all the same you might find it difficult to see how to avoid the statute’s application.

The employees relied upon the FAA’s savings clause to avoid arbitrations with their employers. That saving clause allows courts to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.” They argued that provision applied here because the NLRA bars employers from preventing employees from engaging in “concerted activities.” The Court disagreed.

It can’t because the saving clause recognizes only defenses that apply to “any” contract. In this way the clause establishes a sort of “equaltreatment” rule for arbitration contracts. The clause “permits agreements to arbitrate to be invalidated by ‘generally applicable contract defenses, such as fraud, duress, or unconscionability.’” At the same time, the clause offers no refuge for “defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.”

This is where the employees’ argument stumbles. They don’t suggest that their arbitration agreements were extracted, say, by an act of fraud or duress or in some other unconscionable way that would render any contract unenforceable. Instead, they object to their agreements precisely because they require individualized arbitration proceedings instead of class or collective ones. And by attacking (only) the individualized nature of the arbitration proceedings, the employees’ argument seeks to interfere with one of arbitration’s fundamental attributes.

The fact that the conflicting law arose out of federal law, rather than state law, makes no difference to this analysis.

The Court also rejected the argument that the NLRA overrode the FAA because of the canon that the Court should “strive to give effect to both” allegedly conflicting statutes.

These rules exist for good reasons. Respect for Congress as drafter counsels against too easily finding irreconcilable conflicts in its work. More than that, respect for the separation of powers counsels restraint. Allowing judges to pick and choose between statutes risks transforming them from expounders of what the law is into policymakers choosing what the law should be. Our rules aiming for harmony over conflict in statutory interpretation grow from an appreciation that it’s the job of Congress by legislation, not this Court by supposition, both to write the laws and to repeal them.

And the Court found that the original intent of the NLRA was not to authorize class or collective actions.

The notion that Section 7 confers a right to class or collective actions seems pretty unlikely when you recall that procedures like that were hardly known when the NLRA was adopted in 1935. Federal Rule of Civil Procedure 23 didn’t create the modern class action until 1966; class arbitration didn’t emerge until later still; and even the Fair Labor Standards Act’s collective action provision postdated Section 7 by years.

In doing so, the Court specifically rejected the dissent’s reliance on legislative history to interpret these statutes, saying, “legislative history is not the law.” Rather than authorize class or collective actions, the NLRA allows for concerned activities like collective bargaining, picketing, and strikes.

Lessons:

  1. Justice Gorsuch is a strong believer in the original intent framework for interpretation of texts.
  2. Arbitration agreements in employment contracts are enforceable.