Employment Law Alert: U.S. Supreme Court Rules That Employee Arbitration Agreements Can Waive Class Actions

Resolving a conflict among numerous courts, but consistent with California Supreme Court precedent, the United States Supreme Court, in Epic Sys. Corp. v. Lewis, (May 21, 2018), affirmed the enforceability of class action waivers in employee arbitration agreements. A class action is a lawsuit in which one or more current or former employees sues in court on behalf of similarly affected current and former employees. Needless to say, the potential damages and litigation costs in a class action tend to dramatically exceed those at-issue in an individual employee lawsuit. The right of an employer to use a mandatory agreement to avoid class action lawsuits is a significant one that employers should consider exercising.

Epic Sys. Corp. involved three separate cases on review before the United States Supreme Court. In each case, an employee entered into an arbitration agreement with an employer. The arbitration agreements each contained a class action waiver. The plaintiffs in these cases attempted to argue that an agreement requiring individualized arbitration proceedings violated the National Labor Relations Act by barring employees from engaging in the concerted activity of pursuing claims as a class or collective action (and in fact, the Ninth Circuit – the federal circuit covering California, among other states, had previously agreed). However, the Supreme Court held that “Congress has instructed that arbitration agreements like those before us must be enforced as written.” This means that where an arbitration agreement contains a class action waiver, then it must be enforced.

The United States Supreme Court ruling was consistent with the California Supreme Court’s previous ruling in Iskanian v. CLS Transportation, 59 Cal. 4th 348 (2014), similarly confirming the enforceability of class action waivers in arbitration agreements. The U.S. Supreme Court’s decision once again highlights the importance for employers to consider the possibility of implementing arbitration agreements with class action waivers.

We have long recommended that employers discuss with legal counsel the advantages and disadvantages of requiring employees to sign mandatory arbitration agreements. Advantages include not only the ability to avoid employee class action lawsuits, but also the ability to avoid having juries decide the merit of employee lawsuits. California juries, in particular, are notorious for shocking monetary awards to employees (sometimes in the tens of millions of dollars). Disadvantages include that arbitrators sometimes have a reputation of “splitting the baby” (e.g., awarding something to a party instead of making the tougher decision to completely reject meritless claims), that the employer must pay arbitrator fees, and that arbitration awards generally are not subject to appeal on the merits. While arbitrations are often touted as being more efficient than court litigation, employers are sometimes surprised at how expensive and time consuming arbitrations can be (similar to court litigation).

California courts have ruled that employers can make it mandatory for all employees to sign arbitration agreements, so long as they are lawfully drafted. California courts are famously nitpicky when parsing the language of employee arbitration agreements to determine legality, especially with respect to any provisions that appear to tip the balance of fairness in a proceeding toward the employer. For example, California courts have found employee arbitration agreements unlawful when they tried to force employer-favorable provisions upon employees related to arbitration fees/costs (almost all of which must be paid by the employer), attorneys’ fees, arbitration location, damages limitations, and time limits to bring claims. California case law also requires that arbitration agreements provide or allow for a variety of specific procedural protections for employees to enable them to vindicate their statutory rights. Under the Iskanian case, employee arbitration agreements cannot waive the right to bring a lawsuit under the California Private Attorneys General Act (on behalf of a group of aggrieved employees).

Employers with existing arbitration agreements are often surprised to learn from counsel that their agreements do not contain valid class action waivers, and/or that their agreements would likely be ruled invalid altogether due to unlawful provisions. This is not that surprising with respect to older arbitration agreement forms, as this has been a fast evolving area of the law.

With this ruling by the U.S. Supreme Court, now is a particularly good time for employers to consider adopting arbitration agreements, or to update their existing arbitration agreements.