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Employers Hold Their Collective Breath re the Enforceability of “Class Action” Waivers in Arbitration Agreements -- Supreme Court to Part the Clouds this Term

The Supreme Court is currently set to answer the question of whether employees must be permitted, if they choose, to pursue relief collectively in an arbitration proceeding. Is that “concerted activity” that is protected by the National Labor Relations Act, and does that statutory provision supervene the provisions of the Federal Arbitration Act and the right to contract freely?  And specifically, is a waiver of class actions in an arbitration clause in an employment agreement enforceable?

(That of course skips the fundamental question of whether a “class action” mechanism, as it is understood in judicial litigation, is legally compatible with a commercial arbitration. But that is the subject of another posting to come.)

The Federal Arbitration Act (“FAA”) among other things protects the enforceability of arbitration agreements. Generally, applying ordinary contract law principles, it requires courts to enforce such agreements unless (a) a federal statute specifically overrides the right to contract freely or (b) enforcement of such an agreement would impinge upon a “substantive right” afforded to an individual by statute.  The National Labor Relations Act (“NLRA”), among other things, protects workers’ rights to act together in certain “concerted activity.”

The Supreme Court has already held, in AT & T Mobility v. Concepcion, 131 S.Ct. 1740 (2011), that the FAA enables companies to avoid consumer class arbitrations via a waiver of such in their consumer contracts.  Labor representatives, however, argue that the NLRA in effect prohibits such a class waiver because it would curtail a worker’s right to engage in concerted activities.

Supreme Court Agrees to Resolve Circuit Split

On January 13, the United States Supreme Court agreed to hear three cases together this term in order to resolve a split among the Circuit Courts of Appeal in that regard. The cases are (i) National Labor Relations Board v. Murphy Oil USA (No. 16-307), (ii) Epic Systems Corp. v. Lewis (No. 16-285), and (iii) Ernst & Young LLP v. Morris (No. 16-300), and they are representative of a split of holdings in the Second, Fifth, and Eighth Circuits, on the one hand, and in the Seventh and Ninth Circuits on the other.

The Fifth Circuit was the first court of appeals to rule on the issue in 2015, when it decided that collective action waivers in employment arbitration agreements do not violate the National Labor Relations Act.  The Second and Eighth Circuits followed the Fifth in reaching the same conclusion.

In May 2016, the Seventh Circuit reached the opposite conclusion, holding that the NLRA forbids collective action waivers in arbitration agreements in the employment context because bringing or participating in collective actions is protected “concerted activity,” which is a substantive non-waivable right under the NLRA. The Ninth Circuit subsequently agreed with the Seventh.

Handicapping Possible Outcomes

How will the Supreme Court rule? Recent Supreme Court decisions supporting the enforceability of class arbitration waivers in other contexts were decided by 5-4 and 5-3 votes, and were authored by Justice Antonin Scalia.  See, Concepcion and American Express v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013), respectively.

A nomination is imminent by President Donald Trump to fill the seat on the Supreme Court that has remained vacant since Justice Scalia’s death in February 2016. During his presidential campaign, President Trump promised to nominate someone ideologically similar to Justice Scalia.  According to media outlets, two current federal appeals court judges have emerged as the frontrunners for the nomination:  Neil Gorsuch and Thomas Hardiman.  Each of them was appointed to the bench by President George W. Bush, and each is considered to be strongly conservative.

The seating of a replacement conservative justice this year would preserve the Court’s ideological status quo. If that occurs during the first quarter of 2017, and if we were to believe that past behavior is a good predictor of future behavior, a 5-4 decision upholding the enforceability of collective action waivers in the employment context might seem to be a likely outcome.

However, employers can hardly be confident about that. The Court must answer a novel question by resolving an arguable conflict between two federal statutes that may create competing rights.  Additionally, Justice Kennedy, while often voting with the more conservative justices (including in the previous collective action waiver cases), has staked out a reputation as a more moderate and less predictable justice, siding with liberal members of the Court in a number of prominent cases.

A less likely but possible scenario would consider the influence of the doctrine of judicial deference to an administrative agency’s reasonable interpretation of a statute that it enforces. We can assume that the composition of the National Labor Relations Board (“NLRB”), which interprets and enforces the NLRA, will change substantially early in the Trump Administration.  If a newly constituted NLRB majority changes its current position opposing enforcement of collective action waivers, the NLRB could inform the Supreme Court of the agency’s current interpretation of the NLRA.  (Even the new acting NLRB Chairman, Philip Miscimarra, has been critical of the NLRB’s 2012 D.R. Horton decision, which identified the Board’s current position.) In that event, the deference doctrine may become a significant factor in the Supreme Court’s decision making.

However, the likely effect is far from clear. The Supreme Court has expressed inconsistent views concerning the degree of deference to be accorded an agency’s statutory interpretation when that agency takes a new position that is inconsistent with a prior interpretation.  See Judicial Deference to Inconsistent Agency Statutory Interpretation, The Journal of Legal Studies (Chicago Law School), Vol. 40 no. 1 (Jan. 2011) at pp. 85-113.  Furthermore,

“the [Supreme] Court’s holding in United States v. Mead Corporation (533 U.S. 218 [2001]) made clear that some agency statutory interpretations – particularly those that appear in less formal guidance documents or interpretative statements, rather than rules or orders – would not be analyzed under Chevron at all, but instead would be reviewed pursuant to the less deferential standard articulated in Skidmore vs. Swift & Co (323 U.S. 134 [1944]).  Under Skidmore, a reviewing court is supposed to “respect” an agency’s view, but the weight accorded to the agency’s interpretation depends on a variety of factors, including “consistency with [the agency’s own] earlier and later pronouncements” (323 U.S. at 140).”

Id. at p. 89.

What Employers Can Do While Waiting For the Supreme Court to Decide

Employers may be uncertain about what to do until the Supreme Court resolves the focal issue. Oral arguments can be expected in April, and a decision might be issued by the end of June 2017.  (Mintz Levin’s ADR Group and its Employment, Labor & Benefits group will analyze the Supreme Court’s decision when it is issued and provide further guidance to our clients.)  That is a lengthy additional period for employers to be holding their breath.

Frankly, maintaining the status quo until the Supreme Court decides the matter will be less costly and burdensome than adopting changes in the interim.

However, while waiting, employers can re-evaluate the benefits and detriments of asking employees to waive class arbitration. First, many employers assume that mandatory arbitration and a class arbitration waiver will deter individual employees from asserting relatively small claims due to the disproportionate costs relative to the potential benefits.  The initial deterrent might be the petitioner’s “filing” fee if an arbitration-administering organization like the AAA is involved, followed by the individual’s larger costs of litigating the claim.  However, enterprising plaintiffs’ counsel may still be able to assemble a large number of similar claims for arbitration, if they exist, thus spreading the costs of litigating over a substantial client pool, and then negotiate a reduced collective filing fee if necessary.  (Moreover, there would be no filing fee at all if the arbitration agreement provides for self-administered arbitration.)

Second, consolidation of many similar claims before a single arbitral panel is usually possible in any case.

Third, the rules of the administering agencies have been changing to enhance the speed and economic efficiency of their proceedings. The trend nowadays is for smaller claims to be fast-tracked by means of expedited procedures that are less costly and more rapid, and which eschew some customary processes.  In that vein, some of the new rules provide for a threshold claim amount below which the arbitral proceedings will have no oral hearings, and the arbitration will be decided on papers alone.  Employers may wish to consider whether facing a hundred claims of $1,000 each, which may be consolidated before a single arbitral panel, is preferable to facing a “class” arbitration of $100,000.  The former may be conducted in accordance with rules for an expedited proceeding, perhaps with no oral hearings, live testimony, or cross-examination, and the latter might follow regular commercial arbitration rules, with full hearings and on a regular (not expedited) time schedule.

So, whether or not your organization already incorporates a collective action waiver in its arbitration agreement, it will be helpful to re-assess, in light of the changes in the arbitration landscape, whether prohibiting collective action in an arbitration setting benefits your organization. In any case, it will be prudent to consider amending your arbitration agreement, in consideration of such changes in the arbitration landscape, to better serve your company’s purposes.

Finally, organizations that conclude that they need to minimize the risk of collective employee actions in arbitration should consult with employment counsel to determine whether amending their standard arbitration clauses will be helpful.

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