U.S. Supreme Court Rules That Arbitration Agreements Can Block Employee Class Action Suits if Their Employment Contracts Provide for Same

Class actions can be a powerful tool to vindicate the rights of a group of plaintiffs, especially in cases where legal costs would deter any individual member of the group from bringing suit (see our companion article discussing KMK’s class action litigation against natural gas defendants). On the other hand, the collective threat of liability in class action litigation can pressure defendants to settle (even when the claims at issue lack merit) because defendants face too much exposure. Courts have struggled with navigating the balance between encouraging meritorious class litigation and discouraging frivolous class action suits, and companies have searched for means to protect themselves against massive class action liability. A recent decision by the U.S. Supreme Court gives businesses a powerful tool to stop class action litigation dead in its tracks.
 
In Epic Systems Corp. v. Lewis, the Supreme Court held that an employment agreement, requiring individualized arbitration of any employment dispute, prevented employees from bringing a class action for alleged violations of the Fair Labor Standards Act. This opinion allows employers to draft their employment contracts in a fashion that can bar class action lawsuits brought by their employees.
 
The employees in Epic Systems argued that the right to bring class action litigation to pursue labor violations was established in the National Labor Relations Act, which generally protects the rights of workers to unionize and bargain collectively. However, the Supreme Court held that there is nothing in the NLRA that explicitly governs litigation versus arbitration of labor disputes. In contrast, the Federal Arbitration Act specifically directs courts to enforce arbitration agreements unless the contract itself is unenforceable, for instance, if it were executed as a result of fraud. But if the contract is enforceable, so too is the arbitration clause it contains, and nothing in the NLRA dictates otherwise.
 
In other words, there is nothing wrong or improper with an employer requiring its employees to sign employment contracts that contain provisions requiring any dispute about the employment to be pursued in individual arbitration. This decision follows on the heels of the Supreme Court’s prior decision in AT&T Mobility LLC v. Concepcion, in which the Court held that a consumer contract, requiring individual arbitration of any dispute, bars a consumer class action. It marks a trend among courts to encourage arbitration and enforce arbitration agreements, and this trend provides employers with an opportunity to protect themselves against class action litigation.
 
Under the ruling in Epic Systems, an employer can prevent class action suits brought by its employees by requiring employees to sign an employment contract that requires individual arbitration of employment disputes. Similarly, under the ruling in Concepcion, a company can prevent class action suits brought by its customers by requiring individual arbitration of any dispute as a condition of sales or other transactions with customers. There are, of course, exceptions, but Epic Systems and Concepcion together give companies powerful tools to defend themselves against class action liability.
 
Too often, arbitration or mediation clauses are tacked on to the end of contracts without much thought. As the recent Supreme Court ruling in Epic Systems demonstrates, this is a mistake. Companies should carefully consider their options in deciding if arbitration or mediation clauses should be part of their contracts, evaluating such factors as the nature of their business, the types of lawsuits they might reasonably face, and the best mechanism for resolving disputes that arise. Businesses should discuss these issues with competent counsel to craft a strategy to maximize protection and minimize cost. If executed carefully and correctly, a well-drafted arbitration clause can make a huge difference in avoiding substantial class action liability.
 
If you have any questions about arbitration or mediation clauses or agreements or would like a review of the clauses or agreements that you have in place, please contact Kohner, Mann & Kailas, S.C. Attorney Ryan M. Billings at (414) 962-5110 or rbillings@kmksc.com.
 
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