Arbitration Agreements Under Scrutiny from the Supreme Court by Jessica A. H. Howell


Arbitration Agreements Under Scrutiny from the Supreme Court

By Jessica A.H. Howell

The United States Supreme Court recently addressed the issue of whether employers can require employees, as a condition of their employment, to sign private arbitration agreements. These arbitration agreements preclude employees from joining together to bring suit against their employers. The Court appeared sharply divided on the issue during oral argument. The liberal justices expressed concern that the arbitration agreements violate the National Labor Relations Act, while the conservative justices signaled support for the arbitration agreements under the Federal Arbitration Act.

In early October, the United States Supreme Court kicked off what has been referred to as its “blockbuster” term and returned to the bench for oral argument. Among the various types of cases it heard, the Court addressed a controversial issue regarding employee rights—specifically, whether an employer can prevent employees from banding together to argue their employer is violating the law by denying overtime pay, minimum wage, or by discriminating against women or minorities.

Case Background

The case arose from a consolidation of three separate cases, each of which involved claims for overtime pay. NLRB v. Murphy Oil USA came from gas station employees in Alabama who allege they were underpaid, Ernest & Young v. Morris came from accountants in northern California who argue they were misclassified to make them ineligible for overtime pay, and Epic Systems v. Lewis came from technical writers in Wisconsin who also argue they were misclassified so as to not be eligible for overtime pay. All of these employees challenge the arbitration agreements they signed with their respective employers.

Recent Trend in Arbitration Agreements

Employers are increasingly requiring employees, as a condition of their employment, to waive their rights to bring claims to court or join class action lawsuits. Instead, these employees agree in their employment contracts to privately arbitrate disputes on an individual basis. Under these arbitration agreements, employees are precluded from joining together to seek overtime pay, challenge minimum wage policies, or make discrimination claims.

Conflict Between Federal Laws

The issue regarding the enforceability of arbitration agreements in employment contracts involves a conflict between two federal laws – the Nation Labor Relations Act (“NLRA”) and the Federal Arbitration Act (“FAA”).

The judiciary was once so hostile towards arbitration that arbitration agreements were never enforced by the courts. The FAA, passed by Congress in 1925 to respond to this hostility, encourages the use of arbitration as a substitute for going to court. By placing arbitration agreements on the same footing as other contracts, the FAA reinforces the validity and enforceability of arbitration agreements.

Also during the early twentieth century, employers often required employees, as a condition of their employment, to waive their rights to take collective action or join a labor union. These agreements were referred to as “yellow-dog contracts.” The origin of the name “yellow dog contracts” is explained in Joel I. Seidman’s book The Yellow Dog Contract; the phrase comes from the principle that any employee who signs his rights away “and makes himself the truckling, helpless slave of the employer” was reduced to the level of a dog. During the presidency of Franklin D. Roosevelt, Congress adopted the NLRA. The NLRA guarantees employees the right to unionize and to engage in “concerted activities” to protect their interests. Thus, “yellow dog contracts” are now illegal and unenforceable. Now, however, the issue is whether the NLRA can obstruct the very arbitration agreements that the FAA was created to enforce.

Unsurprisingly, the employees rely on the NLRA to argue they are guaranteed the right to consolidate their claims and go to court. Employee rights advocates argue the NLRA makes arbitration agreements illegal and unenforceable because they deny employees the right to engage in “concerted activities” for the purpose of “mutual aid and protection.” Employers, on the other hand, point to the FAA to argue their arbitration agreements are valid and enforceable contracts.

For the first time in over a quarter of a century, this case pits two federal agencies against each other. The National Labor Relations Board sides with the employees, while the Department of Justice sides with the employers on this issue.

The Employees’ Argument

Employee rights advocates argue that employees are unlikely to challenge company policies if they must do so individually. Moreover, even if they do challenge company policies on an individual basis, they argue that the employees are disadvantaged by not joining together in a class action suit.  Employee rights advocates maintain that if the Supreme Court allowed employers to prevent employees from collectively bringing suit, it would effectively preclude employees from trying to bring individual claims due to financial limitations and lack of sufficient resources.

For instance, approximately a dozen female employees of Sterling Jewelers (which owns and operates Jared, Kay, and Zales jewelry stores) pursued arbitration on an individual basis when they were denied pay and promotions given to their male counterparts. The employees were not aware of each other’s complaints because they had all signed agreements to channel their individual complaints through private and confidential arbitration. The women were eventually able to consolidate their cases into a class action lawsuit because their employment agreements did not explicitly prevent them from joining together to pursue legal action. Thus, the employees were able to pool together resources, hire experts, and retain attorneys—which they could not have secured as individual plaintiffs. Currently, the class action lawsuit consists of 69,000 current and former Sterling employees with added claims of sexual harassment.

The Employers’ Argument

Employers typically favor arbitration, maintaining that it is more effective and less costly than litigation. Class action suits can take years for courts to resolve. Moreover, class action suits are often abused because a single employee has the power to claim he or she is bringing the dispute on behalf of others. Even if that particular employee’s individual case is not strong on the merits, the aggregate claim can be significantly strengthened through the other class members’ claims—which ultimately makes the case more valuable. Such situations leave employers vulnerable to “blackmail settlements,” in which employees with weak cases threaten employers with class action lawsuits in attempt to coerce the employer into settling.

Additionally, employers note that pursuant to the FAA, arbitration agreements are valid and enforceable contracts. If an employee makes the choice to sign an arbitration agreement that waives any rights to go to court or join a class action lawsuit, the agreement is a binding, valid, and enforceable contract. Moreover, employees can still bring individual claims.

Hints from the Bench

The Justices appeared sharply divided on the issue. Speaking to Paul Clement, the employers’ attorney, Justice Stephen G. Breyer expressed concern that “what you are saying is overturning labor law that goes back to, for FDR at least, the entire heart of the New Deal.”

Justice Ruth Bader Ginsburg stated that with these arbitration agreements, “there is no true bargaining. It’s the employer who says that if you want to work here, you sign this.” She referred to the agreements as “yellow dog contracts,” described above. Just as before the NLRA was created, Justice Ginsburg announced that “there is no true liberty to contract on the part of the employee” with these arbitration agreements.

Chief Justice John Roberts, on the other hand, seemed concerned about a ruling in favor of the employees.  Such a ruling “would invalidate contracts for 25 million employees.” Justice Anthony Kennedy, often the swing vote on the bench, appeared to agree with the employers’ argument by noting that even under existing arbitration agreements, employees can still prepare their cases using the same attorney. Even if those cases were decided individually, Justice Kennedy indicated that these employees could still enjoy “many of the advantages of concerted action.”

Tips for Employers

The Supreme Court is expected to issue an opinion on the matter by June. Until then, while the lower courts are split on the issue, employers can likely rely on their arbitration agreements being enforced by the courts. This is because federal law, under the FAA, provides support for these agreements. Private arbitration agreements, albeit controversial, enable employers to avoid the high costs and lengthy delays of going to court.