By Julie Werner & Ed Zimmerman

Julie Werner is Senior Counsel with Lowenstein Sandler LLP’s Employment Group.  Ed Zimmerman chairs the firm’s Tech Group.

On Monday, the United States Supreme Court (“USSC”) will hear arguments in a matter fundamental to how employers and their employees and contractors argue about rights and entitlements.  The USSC can, in these matters, equip employers with powerful tools to shut down cases that look like the currently raging Uber class action and the important Microsoft class action (2000), the latter of which resulted in thousands of contractors becoming employees and receiving benefits and equity.

The USSC arguments on Monday in Epic Systems Corp. v. Lewis, Ernst & Young LLP v. Morris, and NLRB v. Murphy Oil USA, Inc. will focus on whether arbitration clauses in the employment or independent contractor context result in enforceable waivers of a worker’s right to bring or participate in a class action. These arguments underscore the rift in federal circuit courts of appeals regarding the interpretation of arbitration agreements as class action waivers in employment and other independent contractor agreements.

Artist, then wine merchant, then artist, Jean Dubuffet’s sculpture outside the Royal Academy of Arts in London. Dubuffet’s sculpture strikes us as a perplexed worker on the way to or from work.

Arbitration agreements are controversial:  those who favor arbitration believe that disputes decided privately outside the courtroom result in more equitable outcomes though perhaps more favorable to the defendant; opponents believe that secretive processes bias against individuals and consumers, especially where one party to the agreement has greater sophistication and resources.

Congress passed the Federal Arbitration Act (the “FAA”)[i] in 1926, now yielding 90 years of policy favoring arbitration.  As a further strategy to minimize the risk of exposure even in arbitration, businesses have increasingly included class action waivers in their arbitration agreements.  These provisions seek to deter individuals from taking action, particularly when the disputed amount makes legal action cost-prohibitive.  In American Express Co. v. Italian Colors Restaurant,[ii] for example, a dispute arose against American Express regarding Amex’s imposition of certain charges.  Although the agreement between American Express and the merchants required arbitration and included a class action waiver, the merchants filed a class action, contending that if each had to proceed individually in arbitration, the cost of expert analysis would exceed the amount of the recovery.  The USSC was unmoved by this argument, holding that the FAA does not permit courts to invalidate a class action waiver even if the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery.

Similar to American Express’s agreement with merchants, many employers have included class action waivers in arbitration agreements with their employees to limit risk of employment class actions. The various national Uber litigations have been focused, in large part, on procedural issues related to whether the waiver Uber’s drivers have signed means that their work for Uber hinges upon an implied obligation to waive their right to bring or participate in a class action. This procedural aspect of these cases has consumed more ink and discussion than the substance of whether the drivers were properly classified as contractors or employees.

The National Labor Relations Board (“NLRB”) has asserted that class action waivers in arbitration agreements violate the National Labor Relations Act (a 1930s law that applies to all base level employees, even absent a union) because the NLRB asserts that language interferes with an employee’s statutory right to “concerted activity.”  In 2013, the Fifth Circuit Court of Appeals rejected the NLRB’s view in DR Horton, Inc.v. NLRB[iii], holding that class action waivers did not violate the NLRA.  The Fifth Circuit took this same position again in 2015 in Murphy Oil USA v. NLRB[iv], holding class action waivers permissible and not violative of the NLRA.   In 2016, the Second Circuit Court of Appeals took the same view as the Fifth Circuit in Patterson v. Raymours Furniture Co.[v]

But in a split among the circuit courts considering this issue, in 2016, the Seventh Circuit Court of Appeals in Lewis v. Epic Systems[vi] took the opposite view: holding that class action waivers do indeed violate the NLRA.  Similar to the Seventh Circuit, in 2016 the Ninth Circuit Court of Appeals also held class action waivers impermissible in arbitration agreements in Morris v. Ernst & Young,[vii] a case that impacted the language in E&Y’s employment agreements with its staff.