The Supreme Court Rules That Class Action Waivers Are Enforceable

As I noted in a prior post, the differences between arbitration and litigation go well beyond the fact that arbitration generally is a quicker and less expensive process. As such, there are a host of reasons why a company may want certain disputes – including, but not limited to, those brought by its own employees – resolved through arbitration. Similarly, companies almost always want to avoid the risk of being sued in a class action. Recently, the U.S. Supreme Court, in its consolidated decision in Epic Systems Corp. v. Lewis; Ernst & Young LLP v. Morris; and NLRB v. Murphy Oil USA, Inc., ruled that class action waivers are enforceable.

As Justice Gorsuch noted at the outset, while the three consolidated cases had different facts, they each essentially revolved around the same related questions:

Should employees and employers be allowed to agree that any disputes between them will be resolved through one-on-one arbitration? Or should employees always be permitted to bring their claims in class or collective ac­tions, no matter what they agreed with their employers?

In the Ernst & Young case, Stephen Morris entered into an employment agreement with E&Y, stating that (i) all disputes between the two had to be arbitrated, and (ii) claims “pertaining to different employees [must] be heard in separate proceedings.” Nevertheless, when Morris felt that he was misclassified as a professional employee and not provided with overtime pay in violation of the Fair Labor Standards Act, he filed a class-action lawsuit in federal court.

Not surprisingly, E&Y responded by moving to compel arbitration, and the district court granted that motion. The Ninth Circuit reversed the district court decision, however, reasoning that (i) Section 2 of the Federal Arbitration Act states that agreements to arbitrate are enforceable, “save upon such grounds as exist at law or in equity for the revocation of any contract,” and (ii) there were grounds to revoke the contract in this case, because the waiver contravened 29 U.S.C. §157, which grants employees the right to engage in “concerted activities” – to wit, pursuing a class action for alleged violations of the NLRA. Put another way, Morris and the other employee/parties to these lawsuits argued that it would be illegal for them to waive their right to pursue class actions.

Ultimately, and for a multitude of reasons, the Supreme Court ruled that there was nothing illegal about waiving the right to pursue a class action, and there was no other basis on which the employees could disavow their agreements to refrain from pursuing class actions against their employers. So if you’re concerned that employees in your business might want to file a class action, or even band together and sue jointly, consider obtaining their agreement not to bring such actions (either with or without also obtaining their agreement to arbitrate disputes). As the Supreme Court has now made clear, such a waiver will be accorded the same presumption of validity as any other business term.