“Arbitration in America” – A Summary of the Senate Judiciary Committee Meeting

By Echo K.X. Wang 

An April 2 Senate Judiciary Committee hearing, “Arbitration in America,” chaired by North Carolina Republican Lindsey Graham, examined the values of the practice, focusing on mandatory arbitration clauses in consumer contracts.

The Senate is closely divided on the subject. Democrats have pushed strongly against mandatory arbitration clauses in reaction to Supreme Court decisions. In the past two months, several bills limiting or eliminating mandatory arbitration clauses in consumer contracts have been introduced.

In February, Rep. Hank Johnson, D., Ga., joined Sen. Richard Blumenthal, D., Conn., to introduce the Forced Arbitration Injustice Repeal Act–the FAIR Act–in the House (H.R. 1423), which would “prohibit predispute arbitration agreements that force arbitration of future employment, consumer, antitrust, or civil rights dispute.” (Text and information can be found at https://bit.ly/2UTQoeO.)

More recently, on April 10, Sen. Sherrod Brown, D. Ohio, introduced another bill, Arbitration Fairness for Consumers Act (S. 630), which would restrict mandatory arbitration and class action waivers in contracts that relate to a “consumer financial product or service.” (S.630 can be found at https://bit.ly/2UvCuQs).

The bill would reverse last fall’s vote by the Senate to overturn Consumer Financial Protection Bureau rules that barred mandatory pre-dispute arbitration combined with class processes in litigation and arbitration in consumer financial services contracts. The CFPB rule, which had been in the works for more than four years, was rescinded by a 51-50 Senate vote, with Vice President Mike Pence casting the deciding vote.

For more details on these bills and more, see Vincent Sauvet, New Push Coming for Familiar Arbitration Bills? CPR Speaks blog (April 3) (available at https://bit.ly/2UynZeJ).

While the proposals are facing pushbacks from Republicans and business owners, the committee meeting provided a venue for the two sides to engage in discussions. Most important, the fact that Sen. Graham organized and led this meeting signals that there is a bipartisan opening for negotiation on arbitration reform.

In his initial statement, Graham noted that while arbitration has a place in society, everything good for business is not necessarily best for society. The hearing, he said, therefore sought to address the applicability of arbitration where it conflicts with social issues, in matters including sexual harassment and employment disputes.

Sen. Blumenthal followed, noting that “a right without remedy is [a] dead letter.” Throughout the meeting, Chairman Graham repeatedly stated he wanted to find a “middle-ground” solution to allow businesses to thrive while at the same time provide consumer protection.

But during the two-hour hearing, the divergent views clashed more than they found common ground. The Judiciary Committee listened to testimony from a small business owner, a Navy Reservist, practitioners on both sides, and business owners, all focusing on whether there should be a limit or bar to the use of “forced” arbitration agreements.

The hearing participants discussed the degree to which mandatory arbitration harms consumers, the effects of class-action waivers, and the way that businesses can be affected by mandatory arbitrations.

Sens. Graham and Blumenthal, as well as Sen. Dianne Feinstein, D., Calif., and Sheldon Whitehouse, D., R.I., spoke in favor of establishing limits to the arbitration use.

Kevin Ziober, a Newport Beach, Calif., Navy reservist and federal employee, spoke about his experience in which he was forced to arbitrate an employment dispute. Ziober worked as a federal employee for six months when he signed a mandatory arbitration agreement as a condition to keep his job.

When Ziober left his job to join the Navy Reserve, he was fired from his position on the last day of work. As a result, he was forced to arbitrate his rights under the Uniformed Services Employment & Reemployment Rights Act. Ziober argued that “no Americans should be denied the choice to enforce their rights.”

In response to a question from Sen. Joni Ernst, R. Iowa, on the impact of being forced into arbitration, Ziober described the anxiety and hardship he faced after being fired, knowing that he would not have a job after serving in the military. Ziober advocated that “an option to go to court should be something all servicemen be allowed.”

Prof. Myriam Gilles, a professor at New York’s Benjamin N. Cardozo School of Law, argued that when the Federal Arbitration Act was enacted in 1925, Congress intended to help ensure businesses so that their “agreements to arbitrate with each other can be enforced.” But, she said, the FAA was never meant to be applied to massive employment arbitrations that strip away individuals’ rights under state and federal law, providing a litigation shield for companies. Nor was it meant to be used in take-it-or-leave-it boilerplate agreements against individuals with no bargaining power, according to Gilles.

In response to a question from Sen. Graham, Gilles clarified that she does not wish to “do away” with arbitration. “We only want to get rid of arbitration clauses that are forced upon consumers and employees who have no choice,” she said.

Prof. Gilles also spoke extensively against class action bans, noting that it is often too expensive and time intensive for each individual to arbitrate their cases alone. As a result, forced arbitration provisions are shielding companies from liability, she said.

Alan Carlson, an owner and chef of Italian Colors Restaurant in Oakland, Calif., described his experiences with arbitration clauses as a small business owner. Carlson said he was forced to arbitrate a claim with the credit card company American Express, which took more than 10 years to conclude, and included a trip to the U.S. Supreme Court that sent him to arbitration. (See American Express Co. v. Italian Colors Restaurant, 559 U.S. 1103 (2010) (available at http://bit.ly/2Zb41FD).)

He said he was “shocked” when he learned that the documents he signed included a mandatory arbitration clause. He noted that small businesses like his have no bargaining power to negotiate contracts with credit card companies, while big companies like Walgreens and Safeway have the power to negotiate and remove mandatory arbitration clauses in their contracts with those same companies.

Carlson stated that “small businesses do not get their day in court because they have no power,” and that it is impossible for small businesses to hold large corporations accountable for their actions.

Carlson’s statement evoked strong empathy in Sen. Blumenthal, who echoed the unfairness that the big companies had their day in court, but Carlson was denied his. In response to questions from Blumenthal and Sen. Amy Klobuchar, D., Minn., Carlson stated that mandatory arbitration handcuffs and prevents small businesses from “getting a fair shot of leveling the playing field.” In addition, Carlson stated that the companies often don’t give contracting parties enough time to get through all the fine print “unless you have an attorney on hand.”

  1. Paul Bland, Jr., executive director of Washington,, D.C., public interest law firm Public Justice, argued that forced arbitration clauses are “rigged and unfair.” He notes that it is getting harder to challenge arbitration clauses, and the clauses are often written to the disadvantage of consumers.

As examples, Bland cited to a Consumer Financial Protection Bureau report that suggests even when a person is directed to read an arbitration provision, only 9% of the people knew it means they cannot go to court.

Furthermore, Bland cited an instance where a rape victim was forced to arbitrate, and was given a choice to select from a list of arbitrators. But, explained Bland, all of the arbitrators were defense attorneys that he said presumptively are pro-corporations.

Previous witnesses Kevin Ziober and Alan Carlson affirmed this point, stating that neither of them had a choice in selecting their arbitrators. Chairman Lindsey Graham expressed concern about this practice, and stated that he will look into the issue.

New Jersey Democratic Sen. Cory Booker spoke passionately against arbitration provisions, arguing that it unfairly stacks the deck against consumers and impedes individuals’ ability to seek redress. Citing a study suggesting that big corporations win 98% of arbitrations, Booker exclaimed, “This is not justice. This is not equal justice. This is corporate favoritism.”

Finally, Sen. Dick Durbin, D. Ill., suggested that mandatory arbitration clauses should be barred from student agreements to attend for-profit college, especially those that guarantee job placement. He said that in these situations, the arbitration clauses especially harm middle-income people.

Durbin noted that that if a student starts with a busboy job, goes to a for-profit school paying tens of thousands of dollars yet still comes out a bus boy, the school considers that a “placement” and can’t be sued for misrepresentation.

Arbitration proponents then had a chance to fire back, demanding that consumer arbitrations be allowed to continue.

Sen. Chuck Grassley, R., Iowa, advocated to have more transparency in arbitration clauses to help bring accountability. He said that “consumers should know what they are agreeing to.” He raised the concern that banning mandatory pre-dispute arbitration clauses may impose extraordinary costs to corporations, which may in turn result in the costs being passed down to consumers.

Alan Kaplinsky, a partner at Ballard Spahr in Philadelphia and longtime business arbitration advocate, argued that arbitration under the FAA is important for companies. He said that the arbitration system is dynamic, and most of the times it works for both companies and individual consumers. He also rejected the argument that arbitration provisions offer no choices for consumers.

When questioned by Sen. Grassley about best practices to enforce transparency in arbitration clauses, Kaplinsky noted that it is important to draft arbitration agreements to “create fundamental fairness, give the consumer or employee the right to reject or opt out of the arbitration within some reasonable period of time.” He notes that these are not practices “required” under existing arbitration rules such as those issued by providers like the American Arbitration Association and JAMs.

Kaplinsky agreed with Sen. Grassley’s point that banning arbitration would create billions of dollars in costs for corporations, in addition to costs in defending against potential influxes of class action suits.

Victor E. Schwartz, a co-chair at the Public Policy Practice Group of Shook, Hardy, & Bacon, and a well-known as a Washington tort reform advocate and a supporter of class-action restrictions, also argued for consumer arbitration. He said that arbitration is generally a cheaper and faster alternative to litigation.

Schwartz also argued that consumers have the duty to read contracts and agreements, even if the clause is buried within the agreement. He rejected the view that consumers lack choice, noting that consumers enter binding arbitrations willingly. “You can choose to go to an employment office that does not require you to sign binding arbitration,” he said.

In addressing the argument that mandatory class action waivers harm the ability to address smaller claims, Schwartz countered that most employees are not eligible for class action anyway, given that the cases are usually factually different, and therefore class action is not a viable alternative.

Finally, Schwartz criticized plaintiffs’ attorneys, noting that since they usually are not paid by the hour, they are unlikely to accept litigation cases to represent employees in small claims cases. Thus, he said, in cases involving claims of $20,000-$30,000, arbitration is likely the only way for employees to get their claims addressed.

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To read further about this committee meeting from a different perspective, see Ellis Kim, “Arbitration Gets the Spotlight at Senate Judiciary Hearing,” Law.com (April 2) (available at https://bit.ly/2Ug7KxU).

A video of the hearing, as well as transcripts of the individuals’ remarks, is available from the Senate Judiciary Committee here: http://bit.ly/2KBiB6c.

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The author is a Spring 2019 CPR Institute intern, and a student at Brooklyn Law School.

 

New Push Coming for Familiar Arbitration Bills?

By Vincent Sauvet

Democrats in Congress late last month announced their intention to focus their efforts on passing new legislation to ban mandatory arbitration in several types of disputes. A package of bills, some still awaiting introduction, would target the arbitration of employment, consumer, antitrust and civil rights disputes.

The bills are mostly updates of long-running efforts, some dating back to the 1990s, that seek to limit processes that interfere with consumers’ and workers’ abilities to file suits against product and service providers, and employers—especially those that targeted class actions.

Now, at least some of the bills appear to be gaining more publicity and increasing support in the wake of controversy over mandatory processes.

This legislative effort will be spearheaded by the Forced Arbitration Injustice Repeal, which its sponsors are referring to as the FAIR Act of 2019. It was announced by Sen. Richard Blumenthal, D., Conn., and Rep. Hank Johnson, D., Ga., both longtime opponents of mandatory arbitration, with the bill’s introduction on Feb. 28.

H.R.1423 and S.610 would “amend title 9 of the United States Code with respect to arbitration.” The flagship of the current crop of proposals targeting arbitration, the bill is co-sponsored by 32 Senate Democrats along with independent Vermont Sen. Bernie Sanders.  The number of House Democrats co-sponsoring the legislation has risen to 171 in the month since it was introduced, from 147.

The FAIR Act would ban arbitration in employment, consumer and antitrust disputes, as well as in civil rights disputes. The bill is a rebranding of the previous Congress’s Arbitration Fairness Act of 2018, also by Blumenthal and Johnson, covering the same issues.

In conjunction with the broad FAIR Act, several bills tackling more specific issues have also been announced.

The first is the Ending Forced Arbitration of Sexual Harassment Act of 2019, sponsored by Rep. Cheri Bustos, D., Ill., a reintroduction of her bill from the previous session, which had been co-sponsored by Pramila Jayapal, D., Wash., and, on the Senate side, New York Democrat and presidential candidate Kirsten Gillibrand.  Jayapal is co-sponsoring the new bill, along with—significantly–a New York Republican, Elise Stefanik.

The bill would ban mandatory arbitration of sex discrimination disputes by banning any predispute arbitration agreement between an employer and employee arising out of conduct that would form the basis of a claim based on sex under Title VII of the Civil Rights Act of 1964. Although this would be subject to some limitations, the prohibition would not apply to arbitration provisions contained in a contract between an employer and a labor organization, or between labor organizations.

Another bill, the Restoring Justice for Workers Act, would go even further than ending the arbitration of sexual harassment claims. It would establish an outright ban of mandatory arbitration clauses in employment contracts.

The bill was introduced in the previous 115th Congress, last October, by Rep. Jerrold Nadler, D. N.Y., and Sen. Patty Murray, D., Wash., seeking to make illegal any predispute arbitration agreement when related to an employment dispute, which would include sexual harassment. It also would pose further restrictions on post-dispute arbitration agreements.

The proposal was an immediate Congressional reaction to the U.S. Supreme Court’s Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (May 21, 2018), which it would have overturned. But the bill had trouble getting bipartisan support, and likely will suffer the same issues in the current Congress, where it has not yet been introduced.

A bill announced and introduced with the FAIR Act included the Arbitration Fairness for Consumers Act, S.630, sponsored by Ohio Democratic Sen. Sherrod Brown, which would tackle the specific issue of mandatory arbitration in financial adviser and broker contracts.

While Brown has focused primarily on student loans and credit card agreements, the bill is in fact broader in scope.  It would prohibit any predispute arbitration agreement and joint-action waivers related to any consumer financial product or service dispute.

Another bill introduced with the FAIR Act, the Safety Over Arbitration Act would render void any predispute agreement compelling the arbitration of claims alleging facts relevant to a public health or safety hazard. The bill, S.620, was introduced by Rhode Island Democratic Sen. Sheldon Whitehouse.

As an interesting side note, the bill would also compel the arbitrator of such a claim to provide to the parties a written explanation of the factual and legal basis for his decision. While most arbitrators provide such explanation already, there is no legal requirement to do so.

Under the sponsorship of Sen. Patrick Leahy, D., Vt., the Restoring Statutory Rights and Interests of the State Act, S.635, was also reintroduced. The bill would prohibit any predispute arbitration agreement providing for the arbitration of claims brought by an individual or small business concern and arising from the alleged violation of a state or federal statutory or constitutional provision. The bill is nearly identical to its previous iterations, which were introduced but ultimately died in the 114th and 115th Congresses, and is most likely to suffer the same fate.

The Justice for Servicemembers Act also should be reintroduced soon by Reps. David Cicilline, D., R.I., and Connecticut’s Sen. Blumenthal. Like the versions in the previous three Congressional sessions, the bill aims to end the use of arbitration in cases under the Uniform Services Employment Rights Act.

Finally, the Fairness in Long-Term Care Arbitration Act was also announced by Rep. Linda Sanchez, D., Calif. While there is no text available yet, the bill would end the use of arbitration clauses in nursing home agreements.

These announced attempts at legislative change regarding arbitration use come up at a time when arbitration has suffered from bad press. The #MeToo movement made arbitration, which usually is conducted out of the public’s view, appear as a tool to silence victims. Although the broader controversy over mandatory arbitration in employment and labor disputes traditionally has been the legislative target of Democrats, the specific issue of sexual harassment moved the subject into broader view, drawing attention from a larger section of the political spectrum.

Still, the broader bills, such as the FAIR Act, the Restoring Justice for Workers Act and the Arbitration Fairness for Consumers Act are unlikely to gather enough support in order to pass in the current Congress. They will, for the most part, face the same Republican opposition that have defeated similar proposals.

But new, more-specific bills–those providing small incremental changes that exhibit more potential for bipartisan support–are more likely to succeed. Given the current political climate, the Ending Forced Arbitration of Sexual Harassment stands a good chance of advancing. Several businesses such as Google, Microsoft, Uber and Lyft have effectively banned the arbitration of sexual harassment claims and sometimes other employment matters.

Though there are only three co-sponsors, the early appearance of a House Republican could indicate the bill’s broader appeal.

These moves, collectively, provide at least some momentum. “I’m encouraged that some of the leading companies are voluntarily changing their practices… but we can’t rely on everyone to do the right thing voluntarily” Sen. Blumenthal said.

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The author, an international LLM student at the Benjamin N. Cardozo School of Law in New York, is a 2019 CPR Institute spring intern.

Mandatory Shareholder Arbitration: J&J View Passes SEC’s Test

By Shannon Collins

A no-action letter last month put the U.S. Securities and Exchange Commission’s stamp of approval on Johnson & Johnson’s move to bar a shareholder vote at its annual meeting on the use of mandatory arbitration for securities disputes between the company and its shareholders.

Last spring, U.S. Securities and Exchange Commission chairman Jay Clayton discussed the possibility of supporting a mandatory arbitration provision that would bar class actions as part of an initial public offering, according to two Reuters articles. See Alison Frankel, “SEC chair Clayton is in no rush for mandatory shareholder arbitration,” Reuters (April 27, 2018) (available at https://reut.rs/2EJlRX4), and Alison Frankel, “The case against mandatory shareholder arbitration,” Reuters (Aug. 22, 2018) (available at https://reut.rs/2Tmptby).

While arbitration is an invaluable dispute resolution tool, the use of mandatory processes in consumer and employment cases with class-action waivers generated controversy before the Supreme Court signed off on permitting them last year in employment cases, and in 2011 in consumer contracts.

In IPOs, mandatory individual arbitration would eliminate shareholder class actions, which is a mechanism frequently used to prosecute securities fraud suits—often after share price fluctuations following the initial offerings.

The class-action model allows for more shareholders to participate in litigation against fraud and have their voices heard, while individual arbitration may remain confidential and result in varying terms and decisions, according to a coalition of organizations seeking to bar mandatory shareholder arbitration under the securities laws.  See Letter to SEC Chairman Jay Clayton, (Jan. 16, 2018) (available at http://bit.ly/2NJdRJs).

Clayton’s comments caused an uproar from several organizations and resulted in the formation of a consumer-group coalition, Secure Our Savings. SOS comprises the Consumer Federation of America and the Consumers Union, along with attorneys from the American Association for Justice, Public Justice, and Public Citizen, among many others.

Johnson & Johnson has been the center of attention of mandatory shareholder arbitration news. Hal Scott, a Harvard Law professor who represents a trust that owns J&J shares, issued an open letter to the health care giant on behalf of the trust encouraging a shareholder proposal for mandatory dispute arbitration, including disputes involving securities fraud.

Micah Hauptman, financial services counsel at Washington, D.C.’s Consumer Federation of America, wrote in response to an email inquiry that he believes such clauses “would violate the federal securities laws and would be inconsistent with longstanding SEC policy on the matter. In addition, such clauses would violate state law because they would exceed the bounds of the internal affairs doctrine.” See also Barbara Roper and Micah Hauptman, “A Settled Matter: Mandatory Shareholder Arbitration Is against the Law and the Public Interest,” Consumer Federation of America (Aug. 15, 2018) (available at http://bit.ly/2UpR1ZR).

In response to Scott’s proposal, New Brunswick, N.J.-based J&J submitted a request to the SEC asking for a no-action letter that would allow the company to exclude the mandatory arbitration proposal from J&J’s annual meeting proxy statement.

The basis of J&J’s exclusion is 1934 Securities Exchange Act Rule 14a-8(i)(2), which allows for companies to exclude shareholder proposals “if the proposal would, if implemented, cause the company to violate any state, federal, or foreign law to which it is subject.” J&J said it believed that the proposal would cause it to violate federal securities law, as well as New Jersey state law.

J&J claimed in its letter to the SEC that the proposal violates Exchange Act Section 29(a), which voids provisions that “bind[] any person to waive compliance with any [part of the act] . . . or of any rule or regulation thereunder.”

The U.S. Supreme Court has held that Section 29 applies only to waivers of substantive provisions, not procedural provisions. Shearson/American Express v. McMahon, 482 U.S. 220 (1987) (available at http://bit.ly/2ECOyVh). Therefore, J&J could not claim that mandatory arbitration violates Exchange Act Section 27 (granting exclusive jurisdiction of claims under the act to U.S. District Courts).  J&J instead argued that mandatory arbitration would violate Exchange Act Rules 10b and 10b-5 prohibiting securities fraud.

Though J&J noted that the Supreme Court has held that arbitration provisions do not cause a waiver of compliance with substantive Exchange Act provisions, the SEC has allowed for exclusion of arbitration proposals based partially on arguments of Section 29(a) violations. J&J relied on those exclusions as precedent.

J&J also raised public policy concerns, arguing that arbitration agreements should be made on an individual basis rather than by corporate organizational documents.

In contrast, Hal Scott assured in his supporting statement that his proposal in no way violates state or federal law. (See the link above to the J&J letter on the SEC’s website; Scott’s proposal and supporting statement are exhibits.)

He wrote that the Supreme Court has held that mandatory individual arbitration provisions aren’t in conflict with the federal securities laws, and that New Jersey law allows for the provision because the state views corporate bylaws as a contract between corporations and stockholders.

Scott supported his proposal by highlighting the billions of dollars companies can spend on shareholder lawsuits. “We believe arbitration is an effective alternative to class actions,” he wrote. These suits also can be frivolous and result in a waste of both time and money for all parties involved, according to Scott.

After evaluating the parties’ arguments on the complex securities laws, Commissioner Clayton released a Feb. 11 statement backing the J&J request. The SEC response assured that, should J&J exclude Scott’s shareholder proposal, the SEC would not seek enforcement action.

Clayton’s statement emphasized that the no-action response is neither an acknowledgment nor a denial that Scott’s proposal violates Rule 14a-8(i)(2), but rather is just a statement that the proposal will not be enforced.

The New Jersey laws carried the no-action determination. Clayton states that no New Jersey precedent applies to the matter perfectly, but he seemed to be more inclined to believe that the proposal could violate state law.

That view was reinforced by a determination by N.J. Attorney General Gurbir Grewal, who advised the SEC in January that the proposal violates New Jersey law. “We view this submission as a legally authoritative statement that we are not in a position to question,” wrote SEC Corporation Finance Division attorney-adviser Jacqueline Kaufman in the agency’s no action letter.

In a Wall Street Journal article, Clayton indicated that he “wants to avoid a brawl” for now over a topic as divisive as this one, choosing instead to toe the line rather than spark a political fight.

With news of this SEC decision, Hal Scott remains optimistic about the possible future of mandatory shareholder arbitration. He spoke to Reuters about plans to appeal the SEC’s recommendation and discussed his reaction to the filing.

While he is unconvinced the appeal will succeed, he sees opportunity for future proposals like the one he submitted to J&J in the SEC’s deliberate omission of an affirmative statement regarding the legality of mandatory shareholder arbitration in the no-action letter.

This, according to Scott, is the most significant development so far. According to the Reuters article, the move “leaves open the prospect of mandatory shareholder arbitration for corporations based in states whose corporate codes would permit it.”

With the SEC permitting exclusion of shareholder proposals for mandatory arbitration, it raises a question of whether any company undertaking an IPO will be able to implement such a proposal.

The SEC at least appears hesitant to make a ruling on whether it believes mandatory arbitration violates any state or federal laws. If the SEC continues to allow exclusions like J&J’s, however, it may effectively result in the SEC taking the position that these arbitration provisions likely violate state or federal law.

A determination like this may be best left for Congress, rather than the SEC—though Clayton, according to Reuters, has vowed to have the full commission decide the issue of shareholder arbitration and the FAA, rather than piecemeal Corporation Finance Division opinions, when the time is ripe.

Regardless, this is an unsettled area of law that, once resolved, potentially will have immense impact on the landscape of public offerings, corporate governance, litigation and ADR.

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The author, a CPR Institute Spring 2019 intern, is a student at the Benjamin N. Cardozo School of Law in New York.

Amicus Preview: New Prime’s New Look at Mandatory Arbitration

By Sara Higgins

For the second year in a row, the Supreme Court is kicking off its new term with a focus on arbitration.

This year’s case, New Prime, Inc. v. Oliveira, No. 17-340—which will be argued tomorrow, the Court’s third day of arguments in the new term—focuses on whether the Federal Arbitration Act Sec. 1 exemption language from the act’s application for certain “contracts of employment” encompasses independent contractor agreements.

The case—an appeal from Oliveira v. New Prime Inc., 857 F.3d 7 (1st Cir. 2017)(available at https://bit.ly/2tEzlkr)—is potentially significant for many workers, though it isn’t attracting the attention of the 2017-2018 term’s kickoff argument, Epic Systems v. Lewis.  That case, decided in May, strongly backed the use of mandatory arbitration in conjunction with waivers of class arbitration and litigation processes in workplace disputes. See CPR Speaks blog coverage at https://bit.ly/2xPvFMk; see analysis at Russ Bleemer, “While Plaintiffs’ Lawyers Strategize, the Supreme Court’s Strong Backing Likely Will Grow Mandatory Processes,” 36 Alternatives 97 (July/August 2018)(available at https://bit.ly/2QsxLJ5).

The Court is still one justice short of the longstanding nine-judge bench, as the Senate continues its fight over the nomination of D.C. Circuit Court Judge Brett M. Kavanaugh to succeed retired Justice Anthony Kennedy.

So a 4-4 outcome looms. The Court could order a rehearing after its decision to include Kavanaugh or another new justice if a party asks for it. See Court Rule 44, available at https://bit.ly/2NE6ouV.

Despite a shift to a “gig” economy for many workers, the number of independent contractors the New Prime case focuses on actually shrunk since about a decade ago, according to a report earlier this year by the U.S. Department of Labor’s Bureau of Labor Statistics, to 6.9% of total U.S. employment in 2017, from 7.4% in 2005.

But the more than 10 million workers in these arrangements often see mandatory arbitration in their work agreements, as do millions more in so-called contingent employment situations which, depending on their agreements, may be covered by whatever the Court decides in New Prime.

The Court’s FAA backing in general employment cases in Epic Systems points to a similar decision in New Prime. But groups backing individual independent contractors are drawing a contrast, and argue that these workers should be treated different and not compelled to arbitrate against the companies with which they contract.

The case is summarized at Mark Kantor, “U.S. Supreme Court Grants Cert to Decide “Who Decides” “Independent Contractor” Employment Arbitration Case,” CPR Speaks blog (available at https://bit.ly/2RpwP9E), and Ginsey Varghese, “Supreme Court Will Decide Independent Contractor Arbitration Case,” 36 Alternatives 59 (April 2018)(available at https://bit.ly/2xW5MdN).

Below are highlights of amicus views filed in the case that back the petitioner, trucking company New Prime, along with statements about the filing party’s interest in the case.  The petitioners’ amicus supporters were required to file first. In a CPR Speaks post to follow shortly, we will examine the views of the respondent employees’ friend-of-the-Court supporters.

In support of petitioner New Prime seeking reversal:

  1. American Trucking Associations, Inc.
  • American Trucking Associations is an Arlington, Va.-based group that represents the trucking industry with members including companies and state organizations. ATA regularly represents “the common interests of the trucking industry in courts.” Many of its member companies contract with owner-operators who may enter into agreements to arbitrate disputes that arise during the course of their business relationship.
  • The amicus brief says that the First Circuit decision upends the expectation that the FAA will require motor carriers and their independent contractors to arbitrate any disputes that arise between them under their agreements, including in some cases the question whether a given dispute is arbitrable. Even where both sides agreed to arbitrate, “[t]his sweeping, idiosyncratic holding . . . would mean that owner-operators and carriers . . . could never expect those agreements to be enforced under the FAA. . . .” The decision undermines the federal policy favoring arbitration, to the detriment of motor carriers and independent owner-operators.
  1. The U.S. Chamber of Commerce and the Society for Human Resource Management
  • The Chamber regularly files amicus curiae briefs in business cases, and has emphasized an anti-class action stance that incorporates a strong endorsement for individual arbitration in many Supreme Court and federal appellate court cases. The Chamber notes that its members and affiliates regularly rely on arbitration agreements in their contractual relationships. The SHRM, based in Alexandria, Va., represents 300,000 human resources professionals world-wide.
  • The brief says that independent contractors are not covered by the FAA Sec. 1 exemption from arbitration for “contracts of employment.” The brief says that participants on both sides in the “rapidly expanding” independent contractor market “rely upon the enforceability of agreements between businesses and independent contractors.”
  • If the decision below is allowed to stand, the brief says, “untold thousands of arbitration agreements would be called into question.”
  • Before the First Circuit decision, courts uniformly understood that FAA Sec. 1 “’contracts of employment’ means what it says: a contract between an employer and an employee—not an agreement with an independent contractor to perform work.”
  • The panel majority also failed to recognize that its interpretation is inconsistent with the context in which the Sec. 1 exemption was enacted—against the backdrop of other federal laws that recognize the long-established distinction between employees and independent contractors.
  1. Cato Institute
  • The conservative Washington, D.C., think tank focuses on free enterprise and often speaks out on the freedom to contract: “This case is important to Cato because it concerns the freedom of individuals and businesses to structure their economic relations through contractual agreement.”
  • Cato takes an historical approach to criticizing the appellate court decision and urging reversal. At the time of the FAA’s 1925 enactment, Cato wrote, contracts of employment referred to traditional employer–employee relationships, not independent contractor arrangements. Courts embraced the same distinction in applying the common law, as did the legal dictionaries and treatises of the time. The FAA’s text is plain: only certain agreements establishing traditional employer– employee relationships are exempt from the FAA’s scope—that is, transportation workers like the seamen and railway employees the statute names.
  • Statutory history, including contemporaneous state laws, confirms that the FAA’s contracts-of-employment exemption is limited to traditional employer– employee relationships, and doesn’t include independent contractors.
  1. New England Legal Foundation
  • NELF is a conservative free-market advocacy group in Boston.
  • It makes a statutory construction argument to restrict the FAA Sec. 1 exclusion from application for transportation workers to the enumerated seamen and railroad employees, and the phrase “any other class of workers” is narrowed by the “ejusdem generis” rule, meaning “of the same kind.” This means that undefined statutory terms should be construed consistently with their immediate context, not in isolation from that context.
  • This also means that statutory terms should be interpreted consistently with the statute’s overarching purpose—here, the FAA’s purpose to enforce arbitration agreements according to their terms. This purpose, coupled with the traditional statutory construction rules, mandates a narrow interpretation of the exemption contained within Section 1 of the FAA.
  • The NELF argues that, based on the immediate context of the phrase “contracts of employment” in 9 U.S.C. Sec. 1, the FAA’s purpose, and a plausible historical explanation for the exemption, “contracts of employment,” must define an employer-employee relationship, not an independent contractor relationship.
  • When interpreted properly, in its immediate context, “contracts of employment” modifies “seamen” and “railway employees,” which are the two prominent classes of transportation employees in the statute, not independent contractors.
  • The FAA’s overarching purpose counsels in favor of enforcing, not exempting, arbitration agreements under the FAA.
  • The FAA’s exemption for seamen and railroad workers allowed those employees to sue employers for work-related injuries under two contemporaneous statutes—“a liberalized tort remedy.” Notes the NELF, “Since independent contractors are not covered by the [those acts], Congress would have no reason to exempt them from the FAA’s scope.”

 Customized Logistics and Delivery Association

  • CLDA is a nonprofit Washington trade association that advocates for the interests of delivery companies. New Prime is of significant interest to CLDA because of the common industry practice of using independent owner-operators to transport cargo. These independent owner-operators are crucial to the structure of many of the carriers’ businesses, as they often provide the equipment and services carriers need to meet the changing demands of their businesses. Carriers frequently rely on arbitration provisions in their contracts with owner-operators to ensure that both parties have an efficient and cost-effective means through which they can resolve their disputes.
  • The CLDA relies on a general argument about arbitration’s effectiveness in urging the nation’s top Court to reverse.
  • The First Circuit decision, which applied an overly expansive interpretation of the FAA exception, would render unenforceable the arbitration agreements used by the largest segment of the CLDA membership—small operators with one to 50 operators and annual revenue below $1 million. That would leave both the carriers and owner-operators subject to the threat of lengthy and costly litigation.
  • The First Circuit decision “not only conflicts with the holdings of other federal courts, it directly conflicts” with the FAA’s central goal, “to ensure that arbitration agreements between contracting parties are enforceable by the parties, thereby safeguarding each party’s access to an efficient and cost-effective alternative to litigation.”
  • “In order to achieve these goals, the determination of ‘whether a contract qualifies as a ‘contract of employment’’ within the meaning of Section 1 of the FAA “requires a categorical approach that focuses solely on the words of the contract.” In re Swift Transportation Co. Inc., 830 F.3d 913, 920 (9th Cir. 2016)(Ikuta, J., dissenting).
  • The CLDA states that “[c]ourts should not be allowed to make factual determinations regarding the employment relationship of the contracting parties for two reasons. First, to do so deprives the parties of the benefits of arbitration by forcing the parties to expend valuable resources in a preliminary court battle. Second, a threshold factual determination means that the parties must essentially litigate the merits of the case. This in turn creates uncertainty as to the enforceability of the contract at execution.”

 

The author was a 2018 CPR Institute summer intern and is a student at Northeastern University School of Law. Alternatives editor Russ Bleemer assisted with research.

Epic Systems vs. #MeToo: What Now?

By Anna M. Hershenberg & Sara Higgins

Panelists and audience members came together to discuss workplace dispute resolution in the wake of the U.S. Supreme Court’s Epic Systems v. Lewis decision, analyzing the impact of mandatory arbitration and class actions waivers in light of the #MeToo movement as it continues to raise awareness of the pervasive culture of sexual harassment in the workplace, and society generally.

More than 100 in-house employment counsel from Fortune 500 companies, corporate defense attorneys, counsel from the plaintiff’s bar, as well as noted academics and neutrals attended a CPR Institute mini-symposium last month on the intersection of the Supreme Court’s decision in Epic Systems v. Lewis, No. 16-285 (May 21)(available at https://bit.ly/2rWzAE8) and the #MeToo movement.

The two-panel program discussed anticipated responses from state and federal legislatures and the plaintiff’s bar, the pros and cons of mandatory arbitration for employment disputes and what makes an employment disputes program successful in light of new, competing priorities from the perspective of all stakeholders.

The event started with a CPR members-only meeting of CPR’s Employment Disputes Committee members.  The meeting featured an exclusive interview with Anil K. Chaddha, Lead Counsel of Labor, Employment and Benefits at General Motors, about his experience with employment ADR throughout his career.

The program was then opened up to the public where CPR Institute Chief Executive Officer and President Noah Hanft led off by noting that CPR is working to bridge the gap between the two sides of these types of contentious discussions, and provides an avenue for discourse and cooperation between plaintiff’s counsel and corporate defense to tackle common issues.  [Follow CPR Events at www.cpradr.org/events-classes/upcoming, on Facebook and on Twitter].

The first panel, titled “Was Epic Systems Really Epic: Responses to Epic and the Next Battlegrounds for Mandatory Arbitration,” was moderated by Washington, D.C. based neutral Mark Kantor, who is an adjunct professor at Georgetown University Law Center and a member of CPR’s Panel of Distinguished Neutrals.

Kantor broke down the Epic Systems case and discussed both its immediate impact and far-reaching implications with panelists Christopher C. Murray, a shareholder in the Indianapolis office of Ogletree, Deakins, Nash, Smoak & Stewart, P.C., who co-chairs the firm’s Arbitration and Alternative Dispute Resolution Practice Group, and Fran L. Rudich, a partner in Rye Brook, N.Y.’s Klafter Olsen & Lesser.

In Epic Systems, Kantor explained, the Supreme Court upheld the enforceability of class action waivers. He noted that, in writing for the majority, Justice Neil Gorsuch concluded:

The policy may be debatable but the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written. While Congress is of course always free to amend this judgment, we see nothing suggesting it did so in the NLRA—much less that it manifested a clear intention to displace the Arbitration Act. Because we can easily read Congress’s statutes to work in harmony, that is where our duty lies.

The panel largely agreed that, from the employer’s perspective, this holding decisively shifts the balance in favor of mandatory arbitration with class action waivers.

From the employees’ perspective, Rudich previewed the plaintiff’s bar’s anticipated response: plaintiffs’ attorneys will now make concerted efforts to bring multiple, individual cases against the same employer as a workaround to class action waivers.  Rudich warned, “be careful what you wish for,” because employers that seek to avoid class matters are going to get exactly that, numerous individual employment dispute arbitrations, potentially with repetitive evidentiary and discovery requests.

The panel also discussed the burgeoning federal and state laws taking aim at mandatory arbitration, including that more states are poised to adopt California-style private attorney general (“PAGA”) laws to supersede employment class actions.

After a brief intermission, a second panel, “Epic Systems v. #MeToo: What Now? Best Practices for Workplace Disputes Program Design,” which included Sarah E. Bouchard, a Philadelphia-based partner in Morgan, Lewis & Bockius LLP; Lisa J. Banks, a named partner in Washington, D.C.’s Katz, Marshall & Banks LLP; Peter J. Cahill, Executive Director and Associate General Counsel at Ernst & Young LLP in New York; Diane Dann, Senior Vice President of Employment Law at Mastercard Inc. in Purchase, N.Y., and Kathleen McKenna, a partner at event host Proskauer, took the stage to focus on practical guidance for designing workplace disputes programs in the midst of the #MeToo movement.

The panelists discussed the legal, business and public relations implications for implementing employment disputes programs with mandatory arbitration in today’s climate.  They debated whether carving sexual harassment claims out of mandatory arbitration – like Microsoft, Uber and Lyft have done — is workable solution.

The employer-side and employee-side counsel agreed that the Tax Cuts and Jobs Act of 2017’s conditioned use of nondisclosure agreements (NDAs) in sexual harassment suits may make it harder to settle these types of claims.  Because the law attempts to disincentive the use of NDAs without regard to the wishes of the victim, it forces the parties to find work-arounds to the law where (as often happens) victims do not wish to have these disputes resolved publicly.  The panelists explained that most victims don’t want to be Gretchen Carlson — the journalist and advocate who brought a 2016 sexual harassment complaint against the chairman of Fox News – but instead want to move on with their lives without calling attention to the situation.

Panelists seemed to agree generally that incorporating opt-in or opt-out clauses into workplace dispute resolution programs might be a useful tool for assault victims who aren’t interested in publicly calling out their attackers.

Some tips for preventing sexual harassment in the workplace that the panel discussed included thoroughly vetting new hires’ pasts; evaluating the corporate culture from the top down; training bystanders who witness harassment to report it, and serving less alcohol – and more water — at business functions.

The panelists concluded that the #MeToo movement is broader than just sexual harassment – it has challenged how women are treated in the workplace and how they are compensated.

The program was followed by a networking cocktail reception.

 

Hershenberg is Vice President of Programs and Public Policy at the CPR Institute. Higgins is a CPR Institute Summer 2018 intern.

Arbitration Practice After Epic Systems

By Russ Bleemer

Today’s U.S. Supreme Court decision backs the use of employer-imposed bars on class-action processes. See Epic Systems Corp. v. Lewis, No. 16-285 (opinion in the consolidated cases is available at https://bit.ly/2rWzAE8).  The case is summarized on this CPR Speaks blog here: https://bit.ly/2KEuXFN,   with Justice Clarence Thomas’s concurrence summarized the blog at https://bit.ly/2wYEKEB, and Justice Ruth Bader Ginsburg’s dissent examined on CPR Speaks here: https://bit.ly/2rXQFgT.

So what’s next?

Mandatory individual employment arbitration, with a waiver of class/collective processes, means simply that business can require employees to go it alone in addressing problems about the workplace.

A recent study found that mandatory arbitration use already had been soaring on its own over the long-term—see Alexander J.S. Colvin, “The growing use of mandatory arbitration,” Economic Policy Institute (April 6, 2018)(available at https://bit.ly/2HxgQUL–even as earlier studies found that employers prefer more conciliatory processes (see the Alternatives article cited below).

Employers surely will continue to restrict class processes.  For many, the ADR process was a sideshow to the ability to limit class actions. New employment arbitration programs will be faced with the same legitimacy questions that adopters over the past 20 years have had to address, and now, with the higher-profile, perhaps more worker skepticism.

Plaintiffs’ lawyers will be forced to assess new approaches for dealing with clients’ work problems without the prospects of bigger matters.

The bottom line, of course, is that leading lawyers on both sides have been ready for today’s decision in the consolidated cases. Both already have begun maneuvering while now facing the decision they are still analyzing.

* * *

The cases involve arbitration provisions that kick in due to class waivers which prohibit employees from joining class processes—litigation or arbitration—in favor of mandatory, predispute, individualized arbitration to resolve disputes with their employers.

The decision is actually on three cases—NLRB v. Murphy Oil (No. 16-307), from the Fifth U.S. Circuit Court of Appeals; Ernst & Young v. Morris (No. 16-300), from the Ninth Circuit, and the Seventh Circuit’s Epic Systems—that had been consolidated into the Court’s 2017-2018 term’s kickoff argument on Oct. 2, with four attorneys arguing the case on behalf of the parties in all three cases.

The long-contested issue began with the release in 2012 of an opinion by the National Labor Relations Board. The administrative decision, which found that class waivers illegally violated the National Labor Relations Act’s Sec. 7 allowing employees to take concerted action to confront their employer, was overturned repeatedly by the Fifth U.S. Circuit Court of Appeals in numerous cases.  See below.

The NLRB ruled that the class waivers eliminated by the FAA’s Sec. 2 savings clause, which enforces arbitration agreements “save upon such grounds as exist at law or in equity for the revocation of any contract.” The Fifth Circuit rejected that view on the ground it infringed on arbitration under the Federal Arbitration Act, a position strongly echoed today by the U.S. Supreme Court in the majority opinion written by Justice Neil Gorsuch.

The class waivers in question require workers, from collectively bargained rank-and file to executive suites, to address disputes with their employers in individual arbitration. While unions can agree to mandatory predispute arbitration on behalf of their members, the cases involved white-collar employees and nonunion workers with little bargaining power.

The Court had definitively permitted mandatory arbitration contract clauses accompanied by class waivers for products and services contracts where consumers have little or no bargaining power. See AT&T Mobility LLC v. Concepcion, 563 U. S. 333 (2011)(available at https://bit.ly/2KJc8RE).

The Federal Arbitration Act-focused decision today now settles how arbitration is used in workplace matters.

Cases challenging the class waivers that provided for mandatory arbitration flooded the federal courts, starting in the Fifth Circuit, which reversed the NLRB’s 2012 decision, In re D.R. Horton, 357 NLRB No. 184, 2012 WL 36274 (Jan. 3, 2012)(PDF download link at http://1.usa.gov/1IMkHn8), enforcement denied in relevant part, 737 F.3d 344 (5th Cir. 2013)(Graves, J., dissenting)(PDF download link at http://bit.ly/1XRvjrM), reh’g denied, No. 12-60031 (Apr. 16, 2014).

The Fifth Circuit became the venue of choice for employers seeking to reverse the NLRB’s finding that they had violated labor law by requiring class waivers and arbitration as a condition of employment. The New Orleans-based federal appeals court issued dozens of opinions countering in their reasoning, and then officially reversing in their holdings, the many NLRB decisions in which the board, an independent Washington agency, followed its D.R. Horton decision.  The reversal, however, only applied to law in the circuit in which the decision was made.

A circuit split emerged, from the Seventh and Ninth Circuits–first the Seventh Circuit’s Epic Systems Corp. v. Lewis (No. 16-285), which became today’s lead Supreme Court case won by the employer, then with the case of Ernst & Young v. Morris (No. 16-300), from the Ninth Circuit.

The Court accepted the cases, along with NLRB v. Murphy Oil (No. 16-307), one of those Fifth Circuit decisions reversing the NLRB–which itself is a party in the case–and then consolidated the three cases with Epic Systems as the lead more than a year ago.  The argument in the cases kicked off the Court’s current term on Oct. 2.

For details on the arguments, see the blog by Alternatives’ publisher, the CPR Institute, CPR Speaks, at Mark Kantor, “Supreme Court Oral Argument on NLRB Class Actions vs. Arbitration Policy,” CPR Speaks (Oct. 2)(available at http://bit.ly/2fLwU9C), and Russ Bleemer, “The Class Waiver-Arbitration Argument: The Supreme Court Transcript,” CPR Speaks (Oct. 3) (available at http://bit.ly/2yWjWuf).

Kantor noted that the NLRB’s ruling that mandatory arbitration teamed with class waivers were illegal might have disappeared on its own with Trump administration appointees now installed as commissioners ready to reverse the Obama-era D. R. Horton administrative decision.

Regardless, Kantor noted, “This dispute is a reminder that many aspects of arbitration in the U.S. are now a partisan political issue, with regulatory measures addressing arbitration shifting back and forth as political party control shifts back and forth.”

In his majority opinion, Gorsuch used almost the same language.  See the end of CPR Speaks post on the dissent and the majority reaction here: https://bit.ly/2rXQFgT

* * *

For now, today’s Supreme Court has cleared up history’s questions by resolving the overarching issue, with the details to be worked out in employment policies, ADR sessions and, eventually, courtrooms nationwide.

Still, how that plays out in practice is far more in question than it was even a few months ago.

Arbitration has been under attack recently for its frequent use of confidentiality provisions by the #MeToo movement.  The ADR process has been a target in high-profile matters such as Gretchen Carlson’s settlement with her former employer, Fox News.

Microsoft CEO Brad Smith announced that the company would stop using mandatory employment arbitration with respect to sexual harassment claims (which was shortly followed by Uber and Lyft) and legislation barring the process has been proposed. Elena Gurevich, “Predispute Arbitration Would be Barred for Sex Harassment Claims under Legislative Proposal,” CPR Speaks blog (Jan. 25)(available at http://bit.ly/2FUyv4V).

And yet, the license to use arbitration has produced unintended consequences for employers.  A class of employees decertified by a California federal court bombarded national health club 24-Hour Fitness with hundreds of individual arbitrations earlier in the decade, forcing the company to settle all at once.  The decertification–over the claims’ content and unrelated to the class waiver issue—pushed the company to be more aggressive about defending its arbitration clauses, though the Supreme Court didn’t accept its case as part of the consolidated cases decided today. Jessica Goodheart, “Why 24 Hour Fitness Is Going to the Mat against Its Own Employees,” Fast Company (March 13)(available at http://bit.ly/2pkDPIm)

That hardline stance may be an anachronism, despite apparent backing from the Supreme Court today. Employers five years ago were exhibiting a much stronger preference for “mediation and other interest-based processes over mandatory arbitration and other rights-based processes.” David B. Lipsky, J. Ryan Lamare and Michael D. Maffie, “Mandatory Employment Arbitration:  Dispelling the Myths,” 32 Alternatives 133 (October 2014)(available at https://bit.ly/2s11Aqd).

That article also questioned whether employees were increasingly being subject to mandatory arbitration.  And new data from the same source, the Cornell University ILR School—see Colvin article linked above–indicates that the number has soared, more than tripling since the 1990s.  According to Colvin, more than half of employers now have mandatory arbitration, both with and without class waivers, with more than half the nation’s nonunion workers covered by the agreements.  That’s up from only two percent in 1992. Alexander J.S. Colvin, “The growing use of mandatory arbitration,” Economic Policy Institute (April 6, 2018)(available at https://bit.ly/2HxgQUL).

Whether more workplace conflict is diverted to resolution methods via human-resource departments’ open-door policies or mediation remains to be seen.  But the growing presence of mandatory arbitration at least guarantees more court cases that will drill down into finer points involving arbitration use—the limits and parameters will be under scrutiny more than the extent of the practice.

Next up for the Supreme Court’s arbitration scrutiny is Oliveira v. New Prime Inc., No. 17-340, which will investigate whether courts or arbitrators decide the arbitrability of a case where Federal Arbitration Act Sec. 1 exemption removing a case from arbitration applies. The case, which will be heard in the fall, could authorize further expansion of the reach of class waivers and mandatory arbitration to independent contractors from today’s employees’ decision. Early speculation is that Epic Systems makes Oliveira an easy call for the employers.

And three weeks ago, the Court took a second arbitration case for next year, Lamps Plus Inc. v. Varela, No. 17-988, which will examine the issue of whether the Federal Arbitration Act “forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements.”

Today’s Epic Systems decision will overshadow whatever happens in those cases for human resources executives and in employment lawyers’ offices for longer.  The battleground may move to legislatures.

* * *

Meantime, players on both sides have begun to assess it. They are elated—or searching for words, depending on their side of the employment fence.

Referring to the FAA, Cliff Palefsky, of San Francisco’s McGuinn Hillsman & Palefsky, who has represented employees in the 24- Hour Fitness litigation above, says that the Court “took a statute that Congress expressly said doesn’t apply to employment and used it to preempt the nation’s most significant labor and civil rights laws.”

Palefsky, who worked on an amicus brief filed in the consolidated cases on behalf of 10 labor unions and the National Employment Lawyers Association, and who is has been active on the employees’ side in the cases for years, says he’s still reviewing the decision, but adds, “It was an intellectually and legally indefensible political assault on worker’s rights.”

On the other side, Evan M. Tager, a Washington, D.C., Mayer Brown partner who has argued many arbitration cases on employers’ behalf, says, “The Court reaffirmed in the strongest possible terms that conditioning the enforcement of arbitration provisions on the availability of class-like procedures frustrates the purposes of arbitration and is not permissible absent a clear congressional command.”

Tager worked on Mayer Brown’s amicus brief on behalf of the U.S. Chamber of Commerce in the consolidated cases.  He also represented the petitioner in AT&T Mobility, and says he was glad that the Court decision today reasserted that case’s view that FAA Sec. 2 doesn’t save the NLRB’s view that class waivers violated public policy, which he notes was “indistinguishable” from the rule invalidated 2011 case.

Christopher Murray, an Indianapolis shareholder in Ogletree Deakins–the firm that brought D.R. Horton to the Fifth U.S. Circuit Court of Appeals where it was overturned, leading to today’s decision (the firm also submitted an amicus brief on behalf of trade associations in the consolidated cases)—says, “Today’s decision affirms what almost everyone already knew before the NLRB’s 2012 D.R  Horton decision: The NLRA has nothing to do with class-action procedures used by other decision makers to adjudicate claims under other statutes. Rather, the FAA gives parties the right to determine the procedures they’ll use in arbitration, including the right to arbitrate individually.”

Murray–who authored this month’s Alternatives cover story, “No Longer Silent: How Accurate Are Recent Criticisms of Employment Arbitration?” 38 Alternatives 65 (May 2018)(available at https://bit.ly/2rYmned), and who co-chairs his firm’s Arbitration and ADR Practice Group—adds, “This is a good decision for parties interested in any form of alternative dispute resolution because it confirms those parties are best situated to agree on the procedures to be used to resolve their disputes quickly, effectively, and fairly, and courts are generally not permitted under the FAA to second-guess those procedures.”

.

 

Russ Bleemer is the editor of CPR’s award-winning publication, Alternatives.

The Dissent, and the Majority’s Push Back

By Russ Bleemer

The divisive battle over class waivers associated with mandatory arbitration, settled today in the Supreme Court with strong backing for Federal Arbitration Act supremacy over the National Labor Relations Act, was almost destined for a closely divided Court.

It’s unlikely any Court watchers were surprised by the majority’s 5-4 opinion in Epic Systems Corp. v. Lewis, No. 16-285 (opinion in the consolidated cases is available at https://bit.ly/2rWzAE8), written by Justice Neil Gorsuch, the Court’s newest member, especially in light of the arguments, which kicked off the term last Oct. 2.  [For details on the arguments, see the CPR Speaks: Mark Kantor, “Supreme Court Oral Argument on NLRB Class Actions vs. Arbitration Policy,” (Oct. 2)(available at http://bit.ly/2fLwU9C), and Russ Bleemer, “The Class Waiver-Arbitration Argument: The Supreme Court Transcript,” (Oct. 3) (available at http://bit.ly/2yWjWuf).]

The Court delayed the case from the previous term apparently with an eye to a full Court that would avoid a 4-4 split that would have allowed different laws depending on the circuit decisions.  In the interim, Gorsuch was confirmed.

His opinion today for the majority strongly backs the waivers and employers’ ability to require workplace disputes to be resolved in individual arbitration.  It is summarized on this CPR Speaks blog here: bit.ly/2KEuXFN 

Justice Clarence Thomas’s concurrence is summarized on CPR Speaks here: https://bit.ly/2wYEKEB.

And the generally expected lengthy dissent emerged too, authored by Justice Ruth Bader Ginsburg, who was joined by Justices Stephen G. Breyer, Sonia Sotomayor, and Elena Kagan.

“The Court today subordinates employee protective labor legislation to the [Federal] Arbitration Act,” notes Ginsburg at the dissent’s outset. “In so doing, the Court forgets the labor market imbalance that gave rise to the [Norris-LaGuardia Act] and the [National Labor Relations Act], and ignores the destructive consequences of diminishing the right of employees ‘to band together in confronting an employer.’ NLRB v. City Disposal Systems Inc., 465 U. S. 822, 835 (1984).”

The dissenters immediately asked for an intervention: “Congressional correction of the Court’s elevation of the FAA over workers’ rights to act in concert is urgently in order,” Ginsburg writes.

Ginsburg outlined her attack on the majority’s view in two intertwined points:  an analysis of “the extreme imbalance once prevalent in our Nation’s workplaces, and Congress’ aim in the NLGA and the NLRA to place employers and employees on a more equal footing,” as well as a counter-analysis of the FAA’s reach, which “does not shrink the NLRA’s protective sphere.”

Tracing the history of the nation’s labor movement, Ginsburg notes that actions enforcing “workplace rights collectively fit comfortably under the umbrella ‘concerted activities for the purpose of . . . mutual aid or protection.’ 29 U.S.C. § 157”—the NLRA’s Sec. 7, at the heart of the consolidated cases decided by the Court.

She notes that the Court’s view that the NLRA doesn’t protect class litigation is counter to the statute’s “text, history, purposes, and longstanding construction.”

The core dissent argument over Sec. 7 is the activity it enumerates.  Gorsuch, writing for the majority, describes a “regulatory regime” for the law that offers “specific guidance” for protective activities.  Ginsburg attacks the majority’s view that the NLRA doesn’t discuss employees’ collective litigation, about which Gorsuch noted that “it is hard to fathom why Congress would take such care to regulate all the other matters mentioned in [§7] yet remain mute about this matter alone—unless, of course, [§7] doesn’t speak to class and collective action procedures in the first place.”

But the dissent counters that NLRA Sec. 7 only discussed collective bargaining representatives’ selection with specificity. Ginsburg notes that the section didn’t offer “specific guidance” about forming labor organizations, the right to strike, or “other concerted activities” as provided in the law.

Later specific guidance on “some of the activities protected” under the law doesn’t “shed[] any light on Congress’s initial conception” of Sec. 7’s scope, which protects “numerous activities for which the [NLRA provides no ‘specific’ regulatory guidance.”

The dissent blasts the Court’s view that the employees should realize that with class action rules they use also provide inherent limits—that they can be contracted away in favor of individualized arbitration.

“The freedom to depart asserted by the Court,” writes Ginsburg, “is entirely one sided.” She concludes the section noting that NLRA Sec. 7 rights include the right to pursue collective litigation, and therefore “employer-dictated collective-litigation stoppers, i.e., ‘waivers,’ are unlawful.”

* * *

Similarly, Ginsburg analyzes the FAA’s history to conclude that it should not override NLRA protections she and her colleagues say are present in the labor statute. “In recent decades,” the dissent says, “this Court has veered away from Congress’ intent simply to afford merchants a speedy and economical means of resolving commercial disputes.”

Specifically, the dissent cites Gilmer v. Interstate/Johnson Lane Corp., 500 U. S. 20, 23 (1991)—which provided that the FAA authorized arbitration of Age Discrimination in Employment Act claims as long as the remedies available in courts were also available in arbitration—and Circuit City Stores Inc. v. Adams, 532 U. S. 105, 109 (2001), which opened FAA application up to a wide range of employment contracts containing arbitration clauses.

“Few employers imposed arbitration agreements on their employees in the early 1990’s,” Ginsburg writes. “After Gilmer and Circuit City, however, employers’ exaction of arbitration clauses in employment contracts grew steadily. “

The dissent calls that application “exorbitant,” and said it pushed the National Labor Relations Board to confront the issue in In re Horton, 357 NLRB No. 184, 2012 WL 36274 (Jan. 3, 2012)(PDF download link at http://1.usa.gov/1IMkHn8).

“As I see it,” Ginsburg writes, “in relatively recent years, the Court’s [FAA] decisions have taken many wrong turns. Yet, even accepting the Court’s decisions as they are, nothing compels the destructive result the Court reaches today.”

She continues her FAA analysis by noting that the NLRA prohibition doesn’t discriminate against arbitration in violation of the arbitration law. “That statute neither discriminates against arbitration on its face, nor by covert operation,” notes the dissent, adding, “It requires invalidation of all employer-imposed contractual provisions prospectively waiving employees’ §7 rights.” [Emphasis in the opinion.]

The dissent concluded with a plea on behalf of U.S. workers, who Ginsburg writes will be subject to under-enforcement of federal and state statutes. “In stark contrast to today’s decision,” she writes, “the Court has repeatedly recognized the centrality of group action to the effective enforcement of antidiscrimination statutes.” The dissent passage cites a 2015 Consumer Financial Protection Bureau study that pre-dispute agreements cut off consumers’ claims; the study was used to outlaw mandatory consumer arbitration in financial services contracts, but was overturned by the Senate under the Congressional Review Act when Vice President Mike Pence cast the deciding vote to kill the regulation last October.

* * *

Justice Gorsuch countered the dissent arguments as vehemently as Ginsburg’s dissent took on the majority decision.

“In its view,” writes Gorsuch at the beginning of a section addressing the minority dissent, “today’s decision ushers us back to the Lochner era when this Court regularly overrode legislative policy judgments. The dissent even suggests we have resurrected the long-dead “yellow dog” contract. [Such contracts prohibited unionization; citation to Ginsburg’s opinion omitted.] But like most apocalyptic warnings, this one proves a false alarm.”

First, Gorsuch says that the decision doesn’t override Congressional policy. Workers’ rights to unionize and bargain collectively “stand every bit as strong today as they did yesterday,” the majority opinion states.

“[T]oday’s decision merely declines to read into the NLRA a novel right to class action procedures that the [NLRB’s] own general counsel disclaimed as recently as 2010,” the opinion says.

The minority’s problem, according to Gorsuch, is that it doesn’t like the Court’s FAA jurisprudence:

Shortly after invoking the specter of Lochner, it turns around and criticizes the Court for trying too hard to abide the Arbitration Act’s “‘liberal federal policy favoring arbitration agreements,’” Howsam v. Dean Witter Reynolds Inc., 537 U. S. 79, 83 (2002), saying we “‘ski’” too far down the “‘slippery slope’” of this Court’s arbitration precedent.  . . . [Internal citation omitted.] But the dissent’s real complaint lies with the mountain of precedent itself. The dissent spends page after page relitigating our [FAA] precedents, rehashing arguments this Court has heard and rejected many times in many cases that no party has asked us to revisit.

Similarly, Gorsuch and the majority also hammer the Ginsburg-minority NLRA view. “The dissent imposes a vast construction on Section 7’s language,” the opinion notes, “But a statute’s meaning does not always ‘turn solely’ on the broadest imaginable “definitions of its component words.” Yates v. United States, 574 U. S. ___, ___ (2015) (plurality opinion) (slip op., at 7). Linguistic and statutory context also matter. We have offered an extensive explanation why those clues support our reading today. By contrast, the dissent rests its interpretation on legislative history.  . . . But legislative history is not the law.” [Internal citations omitted.]

Gorsuch writes that the Court’s decision wasn’t between the laws the justices preferred but on the precise issue:

[T]he question before us is whether courts must enforce particular arbitration agreements according to their terms. And it’s the [FAA] that speaks directly to the enforceability of arbitration agreements, while the NLRA doesn’t mention arbitration at all. So if forced to choose between the two, we might well say the Arbitration Act offers the more on-point instruction. Of course, there is no need to make that call because, as our precedents demand, we have sought and found a persuasive interpretation that gives effect to all of Congress’s work.  . . .

Finally, the majority rejects the dissent policy arguments, noting that that the “respective merits of class actions and private arbitration as means of enforcing the law are questions constitutionally entrusted not to the courts to decide but to the policymakers in the political branches where those questions remain hotly contested.”

Gorsuch then, immediately, notes that the Senate’s repeal of the CFPB’s move to ban mandatory arbitration.

 

Russ Bleemer is the editor of CPR’s award-winning publication, Alternatives

Future Challenges Nixed? Thomas Writes That Public Policy is Not FAA Illegality

By Russ Bleemer

There were two opinions in addition to the five-justice majority opinion this morning in Epic Systems Corp. v. Lewis, No. 16-285, covering three consolidated cases that declared that employers may require their employees to use mandatory individual arbitration to resolve workplace disputes, and waive their rights to class processes in either traditional litigation class actions, or in class arbitration processes.

[Our first blog post on the majority opinion here: https://bit.ly/2KEuXFN  Opinion here: https://www.supremecourt.gov/opinions/17pdf/16-285_q8l1.pdf.%5D

Justice Clarence Thomas, who joined the majority, wrote separately to explain why he believes that the Federal Arbitration Act Sec. 2 savings clause relied upon by the employees didn’t apply.

Thomas’s concurrence explains that the Sec. 2 ground for revocation of an arbitration agreement—“valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract” (9 U. S. C. §2)—concern the contract’s formation.

But the employees, Thomas writes, said the National Labor Relations Act makes the class waivers illegal, which is a public policy defense.

Because “‘[r]efusal to enforce a contract for public-policy reasons does not concern whether the contract was properly made,’ the saving clause does not apply here,” according to Thomas, quoting his concurrence in AT&T Mobility LLC v. Concepcion, 563 U. S. 333, 353, 357 (2011).

The position is a significant distinction and expands the majority opinion’s view that there was no Sec. 2 violation because the National Labor Relations Board interfered with a fundamental attribute of arbitration, also from AT&T Mobility.  Thomas’s position could be used by the Court to reject future challenges to arbitration contracts.

AT&T Mobility was the case in which the Court permitted mandatory individual arbitration with class waivers in consumer contracts.  Today’s Epic Systems decision mirrors AT&T Mobility in the workplace.

More on the Justice Ruth Bader Ginsburg-authored dissent soon.

 

Russ Bleemer is editor of CPR’s award-winning publication, Alternatives.

Supreme Court Backs Federal Arbitration Act’s Power to Require Mandatory Individual Arbitration

By Russ Bleemer

The U.S. Supreme Court this morning has affirmed the ability of companies to use mandatory arbitration clauses in employment agreements that are accompanied by waivers of class processes in litigation and arbitration.

In 5-4 decision by Associate Justice Neil Gorsuch, the Court held that the Federal Arbitration Act requires enforcement of employees’ agreements to mandatory individual arbitration. Gorsuch, joined by Chief Justice John G. Roberts Jr., and Associate Justices Anthony Kennedy, Clarence Thomas and Samuel Alito, held that the employees’ arguments that the FAA’s Sec. 2 Savings Clause, which would exempt arbitration agreement provisions from enforcement when they run afoul of “generally applicable contract defenses,” and the National Labor Relations Act, do not counter the FAA’s mandate.

The case is available at https://www.supremecourt.gov/opinions/17pdf/16-285_q8l1.pdf

The long-running controversy involves arbitration provisions that kick in due to class waivers which prohibit employees from joining class processes—litigation or arbitration—in favor of mandatory, predispute, individualized arbitration to resolve disputes with their employers.

The cases—NLRB v. Murphy Oil (No. 16-307), from the Fifth U.S. Circuit Court of Appeals; Ernst & Young v. Morris (No. 16-300), from the Ninth Circuit, and the Seventh Circuit’s Epic Systems Corp. v. Lewis (No. 16-285)—had been consolidated into the Court’s 2017-2018 term’s kickoff argument on Oct. 2, with Epic Systems as the lead case, and four attorneys arguing the case on behalf of the parties in all three cases.

The class waivers in question require workers, from collectively bargained rank-and file to executive suites, to address disputes with their employers in individual arbitration. While unions can agree to mandatory predispute arbitration on behalf of their members, the cases involve white-collar employees and nonunion workers with little bargaining power.

The Court previously definitively permitted mandatory arbitration contract clauses accompanied by class waivers for products and services contracts where consumers have little or no bargaining power. The Federal Arbitration Act-focused decision today now settles how arbitration is used in workplace matters.

Gorsuch’s opinion rejects a 2012 National Labor Relations Board administrative that held that FAA Sec. 2 removed mandatory individual arbitration from FAA application for employee agreements.  The Court’s opinion notes that the reasoning interfered with a fundamental attribute of arbitration.

After rejecting the Sec. 2 argument, Gorsuch dismantled the employees’ other arguments.  He develops the Supreme Court precedent concerning two clashing federal statutes, finding that the National Labor Relations Act, passed in 1935, didn’t override 1925’s FAA to require class or collective actions.

“Section 7 focuses on the right to organize unions and bargain collectively,” Gorsuch writes. “It may permit unions to bargain to prohibit arbitration. Cf. 14 Penn Plaza LLC v. Pyett, 556 U. S. 247, 256–260 (2009). But it does not express approval or disapproval of arbitration. It does not mention class or collective action procedures. It does not even hint at a wish to displace the Arbitration Act—let alone accomplish that much clearly and manifestly, as our precedents demand.”

Moreover, Gorsuch notes that NLRA Sec. 7’s definition of protected employees’ “concerted activities” didn’t include, nor was it amended to include, class-action litigation. “[W]e’ve stressed that the absence of any specific statutory discussion of arbitration or class actions is an important and telling clue that Congress has not displaced the Arbitration Act,” the majority opinion states.

Similar arguments regarding claims under the Fair Labor Standards Act and the Norris-LaGuardia Act also were rejected.

Finally, Gorsuch, a longtime critic of Chevron U. S. A. Inc. v. Natural Resources Defense Council Inc., 467 U. S. 837, which provides Court deference to agency determinations made in the areas of the agency’s expertise, writes that the NLRB’s decision that launched the case, In re Horton, 357 NLRB No. 184, 2012 WL 36274 (Jan. 3, 2012)(PDF download link at http://1.usa.gov/1IMkHn8), didn’t meet the Chevron deference standards.

The NLRB, the opinion notes “has sought to interpret this statute in a way that limits the work of a second statute, the Arbitration Act. And on no account might we agree that Congress implicitly delegated to an agency authority to address the meaning of a second statute it does not administer. One of Chevron’s essential premises is simply missing here.”

Gorsuch, after countering the lengthy dissent—we will return to the dissent and majority’s counterpoints in a subsequent CPR Speaks post later today–concludes:

The policy may be debatable but the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written. While Congress is of course always free to amend this judgment, we see nothing suggesting it did so in the NLRA—much less that it manifested a clear intention to displace the Arbitration Act. Because we can easily read Congress’s statutes to work in harmony, that is where our duty lies.

 

Russ Bleemer is editor of CPR’s award-winning publication, Alternatives

Uber Eliminates Mandatory Arbitration of, and NDAs for, Sexual Assault and Harassment Claims

AnnaBy Anna M. Hershenberg, Esq.

Uber Technologies Inc. announced that it will no longer require its customers, drivers or employees to arbitrate sexual assault or harassment claims, and that it would allow victims to decide whether to enter into non-disclosure agreements or confidentiality provisions as a part of any settlement with the company.

Uber is the second tech company to announce it has changed its dispute resolution policies in response to the #MeToo movement, following Microsoft’s December move.  Brad Smith, “Microsoft endorses Senate bill to address sexual harassment,” Microsoft blog (Dec. 19, 2017)(available at http://bit.ly/2mR65jR).

In a blog post yesterday, “Turning the lights on,” Uber’s Chief Legal Officer Tony West announced the details of three major changes to Uber’s policies. Tony West, “Turning the lights on,” Uber blog (May 15, 2018) (available at https://ubr.to/2KrVhD1).

First, Uber states it “will no longer require mandatory arbitration for individual claims of sexual assault or sexual harassment claims by Uber riders, drivers or employees.” The company instead will allow victims to choose whether to mediate, arbitrate or litigate their individual claims.

In an interview with the New York Times, West confirmed that the “waiving of arbitration only applied to those claims and not for other legal claims, like discrimination.” Daisuke Wakabayashi, “Uber Eliminates Forced Arbitration for Sexual Misconduct Claims,” New York Times (May 15, 2018)(available at https://nyti.ms/2GjbBTW).

West also noted that the new policy applies “to people currently in arbitration with Uber over sexual assault or harassment claims.” Id. 

The Uber blog post specifically states that the company waives application of mandatory arbitration to “individual” claims, still barring class actions. Notably, as of the writing of this blog post, Uber’s driver agreement still contains a mandatory arbitration clause.  Uber US Terms of Use (Dec. 13, 2017)(available at https://ubr.to/2jrKPBW).

Second, Uber will no longer require people who settle sexual harassment or abuse claims with the company to sign confidentiality provisions or NDAs that forbid them from speaking about their experience in order to “help end the culture of silence that surrounds sexual violence.” Tony West, “Turning the lights on,” Uber blog (May 15, 2018)(available at https://ubr.to/2KrVhD1).

This does not appear to prohibit victims from agreeing to keep the terms of the settlement confidential. “Whether to find closure, seek treatment, or become advocates for change themselves, survivors will be in control of whether to share their stories,” the blog post states.

Third, Uber has committed to publishing “a safety transparency report that will include data on sexual assaults and other incidents that occur on the Uber platform.” Id.

Soon after Uber announced these changes, competitor Lyft announced the same changes, and said on Twitter it would join Uber in producing a safety report.  Johana Bhuiyan, “Following Uber’s lead, Lyft is also allowing alleged victims of sexual assault to pursue cases in open court.” Recode (May 15, 2018)(available at https://bit.ly/2ILLXfO).

Some news sources have linked Uber’s policy change to its hopes for an initial public offering in 2019, and mounting public pressure following a CNN investigation, which found that 103 U.S. Uber drivers had been accused of sexual assault or abuse in the past four years.  Daisuke Wakabayashi, “Uber Eliminates Forced Arbitration for Sexual Misconduct Claims,” New York Times (May 15, 2018)(available at https://nyti.ms/2GjbBTW); Stephanie Forshee, “Uber CLO Explains Decision to Scrap Mandatory Arbitration Clauses and NDAs Around Sexual Harassment, Assault,” Corporate Counsel (May 15, 2018)(available at https://cnnmon.ie/2I35QyI); see also Sara Ashley O’Brien, Nelli Black, Curt Devine and Drew Griffin, “CNN investigation: 103 Uber drivers accused of sexual assault or abuse,” CNN Money (April 30, 2018) (available at https://cnnmon.ie/2I35QyI).

Uber’s Tony West, however, insists that the new policies are aimed at winning back the “public’s trust,” “respect of customers [Uber] lost through [its] past actions and behavior,” and, in the words of the company’s new “cultural norm,” to “do the right thing, period.”  Tony West, “Turning the lights on”, Uber blog (May 15, 2018) (available at https://ubr.to/2KrVhD1); see also Dara Khosrowshahi, Uber’s new cultural norms, Linked In (Nov. 7, 2017)(available at https://bit.ly/2jaoiL7)(the author is the company’s chief executive officer).

The legal profession’s use of mandatory employment arbitration also has recalibrated, at least at some firms, in the wake of the #MeToo movement. In March, major law firms, including New York-based Skadden, Arps, Slate, Meagher & Flom, San Francisco’s Orrick, Herrington & Sutcliffe and Los Angeles’ Munger, Tolles & Olson announced they would no longer require employees to sign onto mandatory employment arbitration agreements. The moves followed a Twitter attack invoking #MeToo directed primarily at Munger.

And on Monday, Yale Law School sent a letter on behalf of top law schools asking law firms that recruit on their campuses to “disclose whether they require summer associates to sign mandatory arbitration agreements and nondisclosure agreements related to workplace misconduct, including but not limited to sexual harassment.” Staci Zaretsky, “Elite Law Schools Demand That Biglaw Firms Disclose Whether Students Will Be Forced to Sign Arbitration Agreements,” Above the Law (May 14, 2018)(available at https://bit.ly/2ILJMZU).

 

Ms. Hershenberg is Vice President of Programs and Public Policy at CPR. She can be reached at ahershenberg@cpradr.org.