Supreme Court Upholds Employers’ Uses of Arbitration Clauses to Block Class Action Lawsuits

Arbitration Clauses

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The U.S. Supreme Court has again deflected a challenge to the use in employment agreements of dispute resolution clauses that mandate arbitration and generally bar class action lawsuits. The May 21, 2018 decision was a close call for employers: a 5-4 decision with the conservative majority carrying the day. Nonetheless, this represents a major victory in their battle against expensive lawsuits that pose extraordinary financial risks.

In Epic Systems Corp. v. Lewis, the Supreme Court dealt with challenges to class action restrictions in arbitration clauses based on the National Labor Relations Act (NLRA), which protect workers’ rights to collective activities. The NLRA guarantees employees the right to unionize and sets up an enforcement scheme under the National Labor Relations Board. After it altered its prior interpretation and held in 2012 that class actions could not be barred by arbitration clauses, challenges were filed based on a conflict between the NLRA and the Federal Arbitration Act (FAA), which provides for the enforcement of mandatory arbitration agreements. In the face of a strong dissent, the Court concluded that the NLRA cannot override the FAA because Congress did not provide for it to do so.

The use of mandatory arbitration clauses that bar class action lawsuits is growing in the Commonwealth. They provide potentially huge benefits by precluding the extreme risks presented by suits involving tens, hundreds or even thousands of employees. It is now common for larger employers who could face class actions by virtue of their sizes to mandate resolution of disputes by individual arbitration, and a growing number of small companies seeks the cost and time advantages arbitration can provide. To be sure, employers who use mandatory arbitration agreements must take care not to trample on employee rights and thereby invalidate their contracts, a result that remains possible under current law. Arbitration clauses are enforced only if they are reasonable and are contained in valid contracts between employees and employers.