Epic Systems Case on Class Action Waivers in Employment Arbitration Agreements Headed to U.S. Supreme Court

See update regarding the U.S. Supreme Court’s decision in Epic Systems Corp. v. Lewis.

On January 13, 2017, the United States Supreme Court granted certiorari in N.L.R.B. v. Murphy Oil USA, No. 16-308, Epic Systems Corp. v. Lewis, No. 16-285, and Ernst & Young LLP v. Morris, No. 16-300, consolidating those cases and agreeing to review the validity of class or collective action waivers in arbitration agreements under the National Labor Relations Act (NLRA) and the Federal Arbitration Act (FAA).  The Supreme Court will ultimately resolve a federal circuit split over whether class action waivers in employment arbitration agreements are: (1) prohibited by the NLRA because such waivers violate employees’ right to engage in concerted activities; and (2) protected under the FAA.  Recent Supreme Court nominee Judge Neil Gorsuch may play a determinative role in the Court’s decision, and the decision certainly will affect employers’ ability to minimize liability exposure.

Class and Collective Action Waivers and the Long-Emerging Split of Authority.

Over the past several years, a dispute has developed between the National Relations Labor Board (NLRB or the Board) and several federal circuits as to the validity of arbitration agreements that include employee class and collective action waivers.  Arbitration agreements that require employees to arbitrate their claims rather than pursuing them in court are widely used by employers to minimize potential liability and litigation costs.  Such agreements have consistently been enforced pursuant to the FAA.  Recently, however, employers have increasingly included class and collective action waivers in these arbitration agreements.  Responding to this trend, the NLRB has consistently stated that requiring employees to waive their class and collective action rights in an arbitration agreement as a condition of employment violates the NLRA.

The NLRB’s position that these waivers violate the NLRA stems from D.R. Horton, Inc., 357 NLRB No. 184 (2012).  The Board reasoned in D.R. Horton, and its progeny, that the NLRA provides employees with the right to pursue employment claims collectively or as a class, whether in arbitration or adjudication, because such employee action is “protected concerted activity.”  Following this reasoning, the Board concluded that requiring waiver of class and collective action as a condition of employment violates the NLRA by impinging on employees’ right to engage in protected concerted activity.  The Board subsequently reaffirmed its position in Murphy Oil USA, Inc., 361 NLRB No. 72 (2014), and other following cases.  See, e.g., PJ Cheese Inc., 362 NLRB No. 177 (2015); On Assignment Staffing Services, Inc., 362 NLRB No. 189 (2015); Century Fast Foods, Inc., 363 NLRB No. 97 (2016); SolarCity Corporation, 363 NLRB No. 82 (2015); Ross Stores, Inc., 363 NLRB No. 79 (2015).  Several federal circuits took issue with the NLRB’s position, and disagreed, refusing to enforce the NLRB’s decisions.

Disagreeing with the NLRB’s position, the U.S. Court of Appeals for the Fifth Circuit in D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013), and Murphy Oil USA, Inc. v. NLRB, 808 F.3d 1013 (5th Cir. 2015), denied enforcement of the NLRB’s decision and held generally that class and collective action waivers do not violate the NLRA.  The Second and Eighth Circuits have followed suit with the Fifth Circuit, enforcing arbitration agreements that required employees to arbitrate employment claims on an individual basis.  The NLRB, however, using its obdurate “non-acquiescence policy” (the Board’s policy of seeking enforcement of its position, which has already been denied enforcement in one federal circuit, in another federal circuit to obtain a favorable judgment), found agreement with its position in the Seventh Circuit’s Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016).

The Seventh Circuit Creates a Circuit Split with its Lewis v. Epic Systems Corp. Decision—Teeing Up the Wisconsin Case, Consolidated with Two Others, for Supreme Court Review.

The Seventh Circuit (which covers Wisconsin) in Epic Systems, agreeing with the NLRB’s position, held that arbitration agreements executed as a condition of employment and that waive an employee’s class or collective action rights violate the NLRA.  In Epic Systems, Epic’s arbitration agreements mandated individual arbitration for claims involving wage and hours, and required that employees waive their class and collective action rights.  The agreements were distributed to employees via email, and employees accepted the agreement by continuing working at Epic.  After receiving the email and continuing his employment, an employee brought a collective action rather than pursuing individual arbitration to resolve his claim.  Agreeing with the NLRB’s D.R. Horton rule, the court held that class and collective action waivers violate the NLRA because the plain language of Section 7 of the NLRA, which grants employees the right to protected concerted activity, encompasses class and collective action.  The court added that the NLRA and the FAA are reconcilable, stating that the two “work hand in glove” such that the FAA allows arbitration agreements so long as they do not impinge on employees’ right to protected concerted activity.  Thus, the Seventh Circuit agreed with the Board, in opposition with the First, Fifth and Eighth Circuits.


Opposing three other circuits, the Seventh Circuit created a circuit split with its Epic Systems decision, which gave rise to the Supreme Court’s grant of certiorari.  Also, more recently, in Morris v. Ernst & Young, 843 F.3d 975 (9th Cir. 2016), the Ninth Circuit agreed with the Seventh Circuit and the NLRB.  In September 2016, the employers in Epic Systems Corp. and Ernst & Young, and the NLRB in Murphy Oil each petitioned the Supreme Court to decide the underlying issue regarding waiver of class and collective action.  The Supreme Court could split 4-4 on the issue with its current eight-justice membership, but Judge Neil Gorsuch may break that tie.


Judge Gorsuch as a Deciding Vote.

Currently, the Supreme Court has eight members and has faced several deadlocked 4-4 ties in the absence of a confirmed ninth member.  Judge Neil Gorsuch, recent nominee for the Supreme Court, may play a determinative role in such deadlocked cases, including in the Supreme Court’s review of class and collective action waivers.

Judge Gorsuch’s judicial opinions demonstrate that he may find these waivers protected under the FAA rather than in violation of the NLRA.  First, his opinions demonstrate that he most commonly sides with employers.  See, e.g., TransAm Trucking, Inc. v. Admin. Review Bd., 833 F.3d 1206 (10th Cir. 2016) (Gorsuch, J., dissenting) (stating that an employer’s decision to terminate an employee truck driver for disobeying orders was lawful, and further criticizing the majority for interpreting a statute over-expansively to conclude the termination was unlawful).  Second, his opinions also illustrate that he is disciplined in curtailing NLRB overreach.  See, e.g., N.L.R.B. v. Comm. Health Servs., Inc., 812 F.3d 768 (10th Cir. 2016) (Gorsuch, J., dissenting) (expressing that the Board’s interpretation and policy justifications for the change in law exceeded the Board’s authority under the NLRA).  And finally, Judge Gorsuch has stated that arbitration agreements must be treated just as any other contract.  See Ragab v. Howard, 841 F.3d 1134 (10th Cir. 2016) (Gorsuch, J., dissenting) (emphasizing that under the FAA, arbitration agreements must be treated just like other contracts).  These samples of Judge Gorsuch’s jurisprudence demonstrate that his opinion regarding class and collective action waivers may lie with the First, Fifth, and Eighth Circuits finding those waivers lawful.

What the Supreme Court’s Review Means for Employers.

If the Supreme Court sides with the NLRA and Seventh Circuit in its decision, employers will lose what has become an important tool for minimizing liability exposure and litigation costs.  Limiting claims to individual arbitration, rather than class or collective actions, shrinks the universe of claims that are viable for individual employees to bring based on cost-benefit analysis of litigation cost to potential judgment award.  If the Supreme Court finds that such waivers violate the NLRA, employers may find themselves subject to costly, collective and class actions, which typically drag on longer than typical litigation because of the added burden of class certification disputes, and which result in larger judgments should an employer not prevail.  For now, employers should be aware of the law in their circuit and their own arbitration agreements.  Staying aware of these two things will allow employers to ensure they are prepared to change their arbitration agreements when the Supreme Court decides the issue.

If you have questions about your employee arbitration agreement, or this article, please contact an attorney at Mallery & Zimmerman, S.C.