For employers, mandatory arbitration has emerged as a leading method to avoid the costs and risks associated with traditional litigation. After Epic Systems Corp. v. Lewis, that popularity will only grow. The Supreme Court in Epic sought to address an apparent conflict between the Federal Arbitration Act (“FAA”) and the National Labor Relations Act (“NLRA”). The case arose in part after a former employee filed a class action lawsuit against his former employer alleging, among other things, violations of the Fair Labor Standards Act. The employee and employer were parties to an arbitration agreement, under which claims of individual employees could not be consolidated. The employer moved to compel arbitration pursuant to the agreement.
The employee argued the effect of the NLRA was to invalidate the agreement, whereas the employer argued the agreement was enforceable under the FAA. The stage was thus set. The FAA provides, in relevant part, that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The NLRA provides, in relevant part, that “[e]mployees shall have the right to self-organization . . . and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The question, as the Court put it, was this: “[s]hould employers and employees be allowed to agree that any disputes between them will be resolved through one-on-one arbitration?”
Writing for the majority, Justice Gorsuch answered that question in the affirmative. He explained, among other things, that neither the NLRA’s “catchall” term nor the FAA’s “saving clause” empowered the employee to bring the instant suit. Justice Gorsuch declined, as he put it, “to read into the NLRA a novel right to class action procedures.” He also discredited what he described as “efforts to conjure conflicts between the Arbitration Act and other federal statutes.” In other words, as between the FAA and the NLRA, there was simply no conflict of which to speak. An agreement to one-on-one arbitration is, therefore, generally valid and enforceable. Enter the new and improved “class action waiver.”
The Epic decision is a win for employers. That much was recognized by Justice Ginsburg, who authored a dissenting opinion. Commentators have reached the same conclusion. It should come as no surprise, therefore, that employers are seizing the opportunity to include class action waivers in their arbitration agreements. Of course, class action waivers are just one reason why employers may choose to include such agreements as a condition of employment. Arbitration is generally quicker and cheaper than trial. Unlike a jury, an arbitrator is in the profession of resolving disputes. This often results in better, more even-keeled adjudication of the facts. Moreover, arbitrators’ decisions, unlike most court orders, need not be published for public consumption.
These benefits are partly rooted in the history of the FAA. Before 1925, courts routinely declined to compel arbitration. Ever crowded dockets, however, delayed the judicial resolution of disputes. This prompted the business community to secure a more expeditious, economical means of resolving their disputes. The FAA was thus born. Nevertheless, even into the 1990’s, few employers opted for arbitration agreements as a condition of employment. Since then, the Supreme Court has consistently upheld arbitration agreements in the employment context and elsewhere. This has fueled a slow but steady trend towards employer-mandated arbitration agreements. Class action waivers are, indeed, only the most recent employer-friendly development in this area of the law.
On the other hand, arbitration has its downsides. For example, some have expressed concern that arbitrators are more likely to “split the baby” than deliver the tough, “right” decision. Moreover, the finality resulting from an arbitrator’s decision, though generally desirable for budgeting purposes, offers little protection from bad decisions by “rogue” arbitrators. In the employment context specifically, concern may arise about the enforceability of mandatory arbitration where an employee is at will. The good news is that these issues are largely mitigated through careful drafting of the underlying arbitration agreement. For example, parties can agree to select their arbitrator(s) from a specific pool of reputable, time-tested professionals. In certain cases, parties can agree to reserve the right to an appeal of the arbitrator’s decision if such a right is so desired. An arbitration agreement can also be drafted to bind an at will employee if the agreement clearly expresses that the employee’s continued employment is conditioned on the employee’s agreement to arbitrate.
These mitigation strategies highlight the importance of a well-drafted arbitration agreement. A poorly drafted agreement, by contrast, does little good for employers. That much is shown by the litany of cases which, notwithstanding the FAA, have allowed arbitrable employee claims to proceed towards judicial resolution for one reason or another. At times, these cases have turned on the most fundamental principles of contract law. At other times, they have turned on more nuanced rules applicable only to arbitration agreements in the employment context. Suffice it to say, if compelling arbitration is the goal, keeping up with the rules is key. That was true before Epic, and it remains true now. If Epic is any indication, failing to keep up with the rules will, at the very least, prevent employers from maximizing the benefits of mandatory arbitration.
By Ashlyn Smith and Ellen Adams