by Professor Martin H. Malin

Professor Malin is a Professor at IIT Chicago-Kent College of Law; Director of the Institute for Law and the Workplace; an arbitrator; and member of the NAA.

At one time, the U.S. Supreme Court held that agreements to arbitrate future claims arising under federal regulatory statutes were unenforceable because they amounted to a waiver of rights under those statutes. Beginning in the late 1970s, the Court reexamined this jurisprudence. Premised on the Federal Arbitration Act (FAA) which states that a written agreement to arbitrate “shall be valid, irrevocable and enforceable, save upon such grounds as exist in law or in equity for the revocation of any contract,” the Court reasoned that an agreement to arbitrate a statutory claim does not waive the underlying statutory rights as long as the claimant may effectively vindicate those rights in the arbitral forum.

Spurred on by the Court’s decisions, many companies inserted provisions in their contracts requiring that their customers arbitrate any claims they may have and do so only on an individual basis. These provisions expressly waived the customer’s right to bring a class action or to be part of any class action. Courts in many states found these class action waivers unconscionable and refused to enforce them. In California, for example, the state supreme court held that in consumer contracts such class action waivers were unconscionable because they effectively insulated the company from being held accountable for statutory violations that give rise to low dollar value claims. The court found unconscionability regardless of whether the class action waiver was part of an arbitration agreement or was free-standing.

Because the California law of unconscionability was a ground existing in law for the revocation of any contract, it would appear compatible with the FAA.  But in 2011, in A T & T Mobility LLC v. Concepcion, the U.S. Supreme Court held the California law of unconscionability preempted by the FAA.  The Court reasoned that the FAA embodies a strong federal policy that arbitration agreements be enforced in accordance with their terms and the California courts’ refusal to enforce the class action waiver conflicted with this policy.

In 2013, in American Express Co. v. Italian Colors Restaurant, the Supreme Court appeared to hold that the policy that arbitration agreements be enforced in accordance with their terms trumps the requirement that the claimant be able to effectively vindicate the claim in the arbitral forum for the agreement to be enforceable. In that case, Italian Colors brought a class action against American Express claiming that AmEx violated the antitrust laws by using its monopoly power to extract above-market fees from merchants accepting the American Express Card. Italian Colors demonstrated that the cost of expert assistance to prove the claim could run in excess of a million dollars and its maximum damage recovery was less than $40,000. The Second Circuit Court of Appeals held that with the class action waiver in the AmEx-Italian Colors arbitration agreement, Italian Colors could not effectively vindicate its claim in the arbitral forum and allowed Italian Colors to proceed with its class action in court.  The Supreme Court reversed, relying on the strong federal policy of enforcing arbitration agreements in accordance with their terms, even where those terms render it uneconomical to pursue the claim at all.

These Supreme Court decisions have led many employers to impose arbitration agreements with class action waivers on their employees as a condition of employment. The employers’ intent is to insulate themselves from potential class action liability. Enter the National Labor Relations Act (NLRA).

Section 7 of the NLRA declares that employees have the right to organize for purposes of collective bargaining and the right “to engage in other concerted activities for . . . mutual aid and protection.” Section 8(a)(1) makes it illegal for an employer to “interfere with, restrain or coerce” employee exercise of Section 7 rights.  In 2012 in D. R. Horton, the National Labor Relations Board (NLRB) held that an employer-imposed arbitration agreement requiring the employee to arbitrate claims on an individual basis only violates Section 8(a)(1). The NLRB reasoned that employees who seek to litigate jointly or as part of a class action to contest working conditions engage in activity protected by Section 7 and employer insistence on waiver of the right to do so violates Section 8(a)(1). The Fifth Circuit Court of Appeals, by a two-to-one vote, reversed the NLRB. The majority agreed that the NLRB’s ruling was a defensible interpretation of Sections 7 and 8(a)(1) but reasoned that it had to yield to the FAA’s policy of enforcing arbitration agreements in accordance with their terms.

In 2014, in Murphy Oil Co., the NLRB responded to the Fifth Circuit’s analysis and by a three-to-two vote reasserted its position from D. R. Horton.  The Fifth Circuit, relying on its prior decision, again reversed the NLRB.  In the span of four months this year, four other Circuit Courts of Appeals have weighed in. On May 26, by a two-to-one vote the Seventh Circuit endorsed the NRLB’s position in Lewis v. Epic Systems Corp..  On June 2 in Cellular Sales of Mo. v. NLRB, the Eighth Circuit agreed with the Fifth Circuit. On August 22, in Morris v. Ernst & Young LLP, by a vote of two-to-one, the Ninth Circuit agreed with the NLRB and the Seventh Circuit.

The primary dispute between the two positions is whether to give determinative weight to the NLRB’s interpretation of the right to engage in concerted activity for mutual aid and protection or to the federal policy that arbitration agreements be enforced according to their terms as articulated in Concepcion and Italian Colors. In light of the sharp divisions among and within the Circuit Courts of Appeals and within the NLRB itself, it is likely that the Supreme Court will ultimately resolve this dispute. How the Court does so will likely depend on the outcome of the political battle over a successor to the late Justice Antonin Scalia. Concepcion and Italian Colors were decided by votes of five-to-four and Justice Scalia wrote the majority opinion in each case.