An Epic Decision from the Supreme Court: The Supreme Court Rules Employee Class Action Waivers Are Enforceable

An Epic Decision from the Supreme Court: The Supreme Court Rules Employee Class Action Waivers Are Enforceable

Legal Sidebari

An Epic Decision from the Supreme Court:
The Supreme Court Rules Employee Class
Action Waivers Are Enforceable
May 31, 2018
Can agreements between employers and employees to arbitrate their disputes in lieu of class action
lawsuits and other collective actions be enforced in court? In Epic Systems Corp. v. Lewis, decided on
May 21, 2018, the Supreme Court answered in the affirmative, holding that the Federal Arbitration Act of
1925 (FAA) generally requires the enforcement of arbitration agreements between employers and
employees, even when such agreements preclude actions brought collectively by employees against their
employer. Epic Systems, although focused on employment contracts, implicates a broader debate about
the efficacy of arbitration agreements, particularly in the class action context. The case is the latest in a
series of 5-4 decisions from the Court applying the FAA to enforce the application of a bilateral
arbitration clause waiving class or collective proceedings. Each of these cases turned on the Court’s view
that arbitration is fundamentally an informal, bilateral procedure, and that the FAA is generally not
displaced by other federal statutes without explicit statutory language to the contrary. In this vein, Epic
Systems has potentially important implications for Congress across many of the fields in which Congress
legislates. As discussed in more detail below, the case’s broad view of the FAA’s reach, the Court’s
interpretation of how the 1925 statute interacts with other federal statutes, and the case’s implications for
how arbitration agreements can be used to limit the availability of collective legal action all underscore
the significance of arbitration agreements that preclude litigation (including class litigation) in a court of
law.
Background of the FAA and Collective Litigation. An arbitration agreement is a contract between two
parties to arbitrate all disputes between those parties before a neutral third party. Typically, an arbitration
agreement is a part of a larger contract establishing a business relationship, with the agreement calling for
all disputes arising out of that contract to be submitted to a particular arbitrator, subject to specific rules.
Prior to 1925, U.S. courts routinely refused to enforce arbitration agreements. Seeking to reverse this
policy, Congress passed the FAA, which states in relevant part that an agreement in commerce that
evidences a desire to settle disputes by arbitration “shall be valid, irrevocable, and enforceable.” The
provision, however, contains an exception to this general principle in its “savings clause,” allowing for
the nonenforcement of an arbitration agreement “upon such grounds as exist at law or in equity for the
revocation of any contract.”
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The Supreme Court has recognized that the purpose of the FAA was to increase the enforcement of
arbitration clauses and “place arbitration agreements upon the same footing as other contracts.” As a
result, for many years the Court has stated that the FAA “establishes a liberal federal policy favoring
arbitration agreements.” The Supreme Court has cited to the FAA to enforce arbitration agreements across
a wide range of commercial contexts, including securities registration, employment, and consumer
contracts.
Enforceable arbitration agreements raise the possibility that private arbitration will displace other avenues
for relief, including class actions. As is often the case in consumer and employment contexts, it is entirely
possible to have an arbitration agreement require arbitration as the exclusive forum for a claim too small
to be usually worth pursuing—after all, as the Seventh Circuit explained: “only a lunatic or a fanatic sues
for $30.” Normally, a class action or other collective procedure might allow a group of plaintiffs with
similar claims to combine them and sue collectively, thereby making up for the high cost of a suit with the
potential for a large reward. Class actions, however, have also been subject to substantial criticism for
arguably encouraging frivolous litigation and benefiting plaintiffs’ attorneys at the expense of the
economy as a whole. Given these criticisms and the potential of class actions to “raise the stakes,”
arbitration clauses often exclude, by their terms, class or collective action and require bilateral arbitration
of disputes.
In two relatively recent cases, the Supreme Court concluded that arbitration agreements under which the
parties agree to forgo class or collective action litigation are generally enforceable. First, the Court in the
2011 case of AT&T Mobility v. Concepcion considered whether the “savings clause” of the FAA, which
allows for the nonenforcment of arbitration agreements on “such grounds as exist at law or in equity for
the revocation of any contract,” could allow California courts to void bilateral arbitration agreements on
grounds of “unconscionability.” In Concepcion, the Court held, in a 5-4 decision, that the FAA preempted
a California state rule that had voided collective action waivers as unconscionable, allowing parties to
arbitration agreements to demand classwide proceedings in certain circumstances. The California
Supreme Court had concluded that bilateral arbitration clauses could be unconscionable because they
undermine “the policy at the very core of the class action mechanism”: “the problem that small recoveries
do not provide the incentive for any individual to bring a solo action.”
Justice Scalia, writing for the majority in Concepcion, however, concluded that the FAA’s savings clause
could not apply to rules that stood as obstacles to the achievement of the FAA’s objectives. The savings
clause, the Court explained, exempts agreements from the FAA where those agreements are subject to
“generally applicable contract defenses”—such as duress or unconscionability. But, as Justice Scalia
reasoned, this rule does not apply where a generally applicable defense is being applied “in a fashion that
disfavors arbitration.” As the Court explained: “[t]he overarching purpose of the FAA . . . is to ensure the
enforcement of arbitration agreements according to their terms so as to facilitate streamlined
proceedings.” Because allowing parties to agree to arbitrate individually is a “fundamental attribute” of
arbitration, the Court reasoned that the California Supreme Court’s rule would create a scheme
“inconsistent with the FAA.”
Two years after Concepcion, the Court considered a related question as to the scope of the FAA: whether
implicit policies embodied in other federal statutes, which might be undermined by the lack of access to
class actions, could override or form an exception to the 1925 law. In American Express Co. v. Italian
Colors Restaurant, in another opinion by Justice Scalia, the Court held that an arbitration agreement that
precluded classwide proceedings was enforceable, notwithstanding the fact that the plaintiffs had no cost-
effective remedy to their alleged violation of the antitrust laws. The plaintiffs argued that requiring them
to litigate their antitrust claims individually—as their contracts with American Express required them to
do—would contravene the policies of various antitrust laws because it would cost far more for them to
prove their case than they could ever receive in damages. The Court concluded, however, that this
concern was insufficient to overcome the FAA, which could only be overridden in the event of a

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“contrary congressional command.” The mere existence of the antitrust laws, which had not incorporated
class actions as an intrinsic part of their remedial schemes, did not amount to a legislative command
sufficient to override the policy of enforcing arbitration agreements according to their terms.
Background of Epic Systems. In 2012, before the Court decided Italian Colors, the National Labor
Relations Board (NLRB) ruled that Section 7 of the National Labor Relations Act of 1935 (NLRA),
which guarantees to workers “the right to self-organization, to form, join, or assist labor organizations . . .
and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or
protection,” guaranteed workers the right to pursue grievances collectively in litigation, including through
class actions. As such, the NLRB found that a class action waiver in an arbitration agreement was
unlawful under the NLRA. The NLRB further concluded that its ruling did not create a conflict with
Concepcion because (1) the FAA, as evidenced by its savings clause, was not intended to mandate the
enforcement of “illegal” agreements, and (2) the FAA could “not require a party to forgo the substantive
rights afforded by statute.” In 2017, the Supreme Court agreed to hear several consolidated cases,
including Epic Systems, from various federal circuits on the questions raised by the NLRB’s opinion.
The Opinions of the Court. In an opinion by Justice Gorsuch, the Court rejected the view of the NLRB
and the appellate courts that had agreed with it. The first question the Court considered was whether the
NLRB had correctly concluded that the FAA’s savings clause excluded agreements that were “illegal” for
requiring bilateral arbitration. The Court concluded that, with respect to this question, the case was
indistinguishable from Concepcion. Although Concepcion concerned a conflict between the FAA and
state law and Epic Systems concerned a conflict between the FAA and another federal statute, the Court
found this difference to be legally inconsequential. Applying Concepcion’s holding that the savings clause
only applied to “generally applicable contract defenses” and did not apply to any policies that interfered
with the “fundamental attributes” of arbitration, Justice Gorsuch concluded “courts may not allow a
contract defense to reshape traditional individualized arbitration by mandating classwide arbitration
procedures without the parties’ consent.” To hold otherwise, ruled the Court, would allow the savings
clause to be used to “destroy” the Act itself.
Given the Court’s conclusion that the FAA required enforcement of the arbitration agreement, the next
question the Court faced was how to reconcile the FAA with the NLRA and whether there was a conflict
between these federal statutes. Justice Gorsuch began by observing that where two statutes address
similar topics, federal courts must strive to “give effect to both” and are bound by the “strong
presumption that repeals by implication are disfavored.” Applying this principle, the Court concluded that
Section 7 of the NLRA could be reasonably interpreted to not conflict with the FAA. Specifically, Section
7’s language about concerted activities, the Court determined, did not protect the workers’ rights to
litigate as a collective entity, but instead “focuses on the right to organize unions and bargain
collectively.” The Court noted that the Section 7 provision at issue was a “catchall term” that followed a
number of other provisions dealing with collective bargaining and union organization, reasoning that
Congress would not have “tucked into the mousehole” of this term “an elephant” of collective litigation
rights serving to overrule the FAA’s presumption and the parties’ contracted-for dispute resolution
procedures. In this vein, the Court analogized the case to other rejected efforts to “conjure conflicts
between the [FAA] and other federal statutes.” In Italian Colors, for example, the parties had argued—as
they did in Epic Systems—that without a class action procedure, they could not vindicate their rights
under other federal statutes, raising a conflict between those laws and the FAA. Rejecting this argument,
Justice Gorsuch noted that just like the antitrust statutes at issue in the 2013 case, the NLRA was passed
before the development of the modern class action rules in 1966—as such, any rights afforded by the
NLRA did not incorporate those class action rules.
Lastly, the Court rejected the argument that it was bound to defer to the NLRB’s interpretation under the
administrative deference doctrine known as the Chevron rule. Justice Gorsuch stated that the case largely
turned on the interpretation of the FAA, not the NLRA. The Court indicated that it only owed deference

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under Chevron to an agency’s statutory interpretation when the agency administered the statute in
question, which was not the case with the NLRB and the FAA. Furthermore, the Court noted, the
“reconciliation” of distinct statutory regimes “is a matter for the courts,” not the agencies. Lastly, the
Court stated that the statute at issue was not meaningfully ambiguous after it had applied the traditional
canons of statutory construction.
The Court’s opinion elicited a dissent from Justice Ginsburg, joined by Justices Breyer, Sotomayor, and
Kagan, which disagreed with the majority on almost every point. According to the dissenters, the text,
structure, and history of the NLRA left no doubt that the “other concerted activities” mentioned in Section
7 include the right to pursue joint, collective and class suits. Furthermore, the dissent argued that the
FAA’s legislative history suggested that it was not intended to apply to employment contracts. According
to the dissenters, the Court since the 1980s has “veered away” from the original intent of the FAA and
expanded its application to contracts where it was not intended to apply. Lastly, even if the FAA did
apply, and even if it conflicted with the NLRA, the dissenters asserted the Court should have concluded
that the NLRA implicitly repealed the FAA in the case of a conflict.
In Justice Ginsburg’s conclusion to her dissent, she focused on possible policy consequences of the
Court’s decision. The majority opinion declined to address these policy concerns, stating that these
questions were “debatable” but the “law was clear.” The dissent disagreed, emphasizing a number of
alleged problems arising from the Court’s decision, including, among other things, under-enforcement of
federal and state statutes designed to protect workers and potential threats to the viability of class actions
in other contexts, such as in antidiscrimination lawsuits.
Takeaways. The Court’s opinion garnered much attention in the days following its issuance. One article
called the opinion “a frontal attack on the New Deal,” while another argued that it would threaten sexual
harassment claims by potentially “strengthen[ing] legal arguments that employment contracts that impose
mandatory arbitration . . . do not violate constitutional rights.” Others have disagreed, stating that the
decision represents a “victory for freedom of contract.” Regardless of the validity of the concerns raised,
it is undisputed that arbitration clauses of the type the Court upheld are ubiquitous. At oral argument, in
response to a question from the Chief Justice, counsel for the respondent asserted that about 25 million
employees are subject to similar contracts. And beyond the context of employment relations, there are
countless arbitration agreements that govern disputes in other commercial settings. Epic Systems, building
on Concepcion and Italian Colors, signals a growing body of case law from the Supreme Court adopting
a broad construction of the FAA’s general directive to enforce arbitration agreements and more narrow
construction of the 1925 statute’s savings clause and any potentially conflicting federal laws. More
broadly, the Court’s opinion contained much of interest beyond its application of the FAA —including its
commentary on the Chevron doctrine and its downplaying of the usefulness of using legislative history—
that will likely interest commentators far into the future.
Both the majority and dissent noted the primacy of Congress in resolving the underlying policy
issues. The entire dispute in Epic Systems centered on the application of two allegedly conflicting
federal statutes. Congress has the power to rewrite the rules in this sphere, and sometimes
expressly exempts certain disputes from the reach of the FAA. In addition, some bills have
already been proposed in this specific context, prohibiting arbitration of employment disputes
entirely. Another possible proposal would be to permit arbitration, but require that some form of
collective or class procedure be available. Regardless of whether Congress decides to take action
or not, it is likely that the debate surrounding collective action and arbitration clauses will
continue for some time.

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Author Information

Wilson C. Freeman

Legislative Attorney

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