The Supreme Court Tackles Arbitration in the Workplace

Since 2011, employers have increasingly required their workers to sign employment contracts that combine arbitration clauses with class action waiver clauses. The result is to close the courthouse, and even arbitration, doors to their employees because an individual employment dispute, as opposed to an aggregate action, simply isn’t valuable enough to support a lawyer’s time. On Monday things came to a head in this context when the Supreme Court heard oral argument on the Murphy Oil trio of cases.

The Legal Arguments

In the Murphy Oil cases, the question was whether employment contracts requiring class action waivers could be imposed on employee contracts. To understand the arguments, one must first understand that the arbitration cases that allowed the combination of arbitration and class action waivers, relied on the Federal Arbitration Act of 1925 (“FAA”). The FAA was enacted 97 years ago and primarily for commercial disputes between two businesses.  In 2011, the Supreme Court expanded its application to consumers rights cases and expressly allowed arbitration clauses with class action waivers.

The National Labor Relations Act (the Act) is another old statute. Section seven of the Act makes it illegal to restrict what is called “concerted activity.” Specifically, Section 7 of the Act guarantees employees “the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection,”, or two workers acting together to fight for their employment rights.

Lastly, the FAA has what is called a “savings clause”, which is an exception to its application. The savings clause reads as follows: “A written provision… to settle by arbitration a controversy thereafter arising out of such contract or transaction… shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (emphasis added). Thus, by its own language the FAA cannot be applied to illegal contracts.

Therefore, the question in Murphy Oil was whether an arbitration with a class action waiver contract is illegal in the employee setting in light of the NLRA’s guarantee of concerted activity.

The Justices

As so often is the case, the Court appeared evenly split on the philosophical lines of conservative and liberal. Justices Breyer, Ginsburg, Kagan and Sotomayor all asked pointed questions of the lawyers supporting the employers’ ability to require arbitration and class action waiver clauses. Justice Breyer was particularly hard on the lawyers:

• “I’m worried about what you are saying is overturning labor law that goes back to, for FDR at least, the entire heart of the New Deal. What we have here is a statute, two of them, Norris-LaGuardia, the NLRA, which for years have been interpreted the way Justice Kagan said. They say that they protect the joint – joining together, those are the words, joining together, those are the words of interpretation – you could have two workers [who] seek to improve working conditions through resort to administrative and judicial forums.” – Breyer
• “I haven’t seen a way that you can, in fact, win the case, which you certainly want to do, without undermining and changing radically what has gone back to the New Deal, that is, the interpretation of Norris-LaGuardia and the NLRA.” – Breyer

Justice Ginsburg pointed out that the premise of the FAA was lacking – two parties actually reaching an agreement. She began by acknowledging that employees are not really negotiating, but instead, they are in a take-it-or-leave-it situation.

• “The FAA, in its inception, was meant to deal with bargains between merchants, bargains between merchants who said the arbitration forum is much less expensive, so we want to go there, rather than the court… it was commercial contracts that triggered the FAA.” – Ginsburg

She reminded everyone that the history of Section 7 of the NLRA was based on outlawing use of “yellow dog” contracts, which required works to promise never to join a union in order to be hired.

• “These contracts amount to ‘Yellow Dog’ contracts.” – Ginsburg

Justice Kagan was very terse and concise in her analysis, pointing out that anything that attacks concerted activity is illegal, and thus is unenforceable in court.

• “The NLRA provides that ‘any waiver of Section 7 rights shall not be enforceable in any court.’” – Kagan
• “I mean that’s what it is. It’s saying I used to have this right for concerted activity, and now I don’t.” – Kagan

The employer lawyers tried to argue there is no waiver of Section 7 when the parties reached an agreement to arbitrate and file class actions.

• “I don’t think the way to see a traditional bilateral arbitration agreement is as a waiver of a Section 7 right or an NLGA right. It is just an effort by the employer and the employee to agree to set the rules for the forum of arbitration when you get there.” – Petitioner

Setting aside Justice Ginsberg’s point that the employment contract was not actually negotiated, Justice Kagan saw no room for the parties to reach such an agreement.

• “[F]orget about a waiver because an undertaking in conflict with Section 7 shall not be enforceable [in Court].” – Kagan

If the liberal Justices’ questions and comments are telling, there are at least four votes against upholding employment contracts that include arbitration and class action waiver clauses.

The next blog post will present the questions and comments of the conservative and swing vote members of the Court