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Supreme Court Limits Individual Arbitration Agreement Enforcement

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When an employee signs an individual arbitration agreement, they agree to go through arbitration as opposed to filing a lawsuit if a legal issue arises in the workplace. As one can imagine, these agreements are regularly the subject of debate when employees do not want to bring their claims to arbitration. For example, leading up to the Supreme Court decision in Epic Systems Corp. v. Lewis, several employees who signed arbitration agreements waiving the right to participate in class actions challenged the validity of these agreements. The basis for these challenges was that the National Labor Relations Act (“NLRA”) protects an employee’s right to partake in class action lawsuits. The employers maintained that the Federal Arbitration Act (“FAA”) requires that courts enforce arbitration agreements. In 2012, the National Labor Relations Board (“NLRB”) sided with the employees and concluded that clauses waving class actions do violate the NLRA. The Supreme Court overturned the NLRB decision in the 2018 Epic case.

The Epic decision appeared to settle the debate about enforcing arbitration agreements, solidifying that courts will favor and enforce these agreements (absence the presence of fraud or similar conditions that generally invalidate contracts) because employees give up their rights to bring lawsuits when signing them. This is true even when there is a class action waiver clause present in the agreement. However, the recent Supreme Court case of New Prime, Inc. v. Olivera illustrated that the law on enforcing arbitration agreements is not that clear cut.

The New Prime case dealt with an independent contractor who drove for a trucking company that required him to sign an arbitration agreement waiving his right to bring a lawsuit in the event an issue arose. He filed a class action lawsuit about wage fairness for independent contractors, and the company asserted the arbitration agreement as a defense. While the FAA clearly requires enforcement of these agreements, there is an exception under 9. U.S.C. § 1 for “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The Supreme Court unanimously concluded that the exception applied in this situation, thus expanding the reach to both employees and independent contractors that provide transportation services in interstate commerce.

The New Prime decision is significant because it illustrates that the arbitration agreement exception covers a larger group of individuals than previously thought. However, employers and employment lawyers should recognize that this decision does not foreclose the general favor towards enforcing arbitration agreements under the FAA. It also does not discount the progress that the Epic decision made. Courts will still continue to enforce these agreements, even with class action waiver clauses, in most situations unless the exception applies. What might happen are more challenges on what qualifies as “foreign or interstate commerce” and “contracts of employment.” Only time will tell.

Going forward, any employers providing transportation services (or any services in the realm of foreign or interstate commerce) should take the following actions:

  • Review contracts with all employees and independent contractors to determine if there is an arbitration clause. Understand that the FAA exception will apply to these contracts and foreclose enforcement of arbitration agreements.
  • Know the state law that applies to enforcement of individual arbitration agreements. Depending on a particular state’s stance on this issue, an employer may be able to enforce an arbitration agreement even if the FAA exception applies.
  • If state law does not protect individual arbitration agreements, formulate a litigation plan in the event a workplace issue arises because any court action will proceed unless there is another ground for dismissal. An employer’s general counsel should be aware of these and any other relevant court decisions and can work with employers to formulate a plan.
  • Periodically review workplace policies and procedures to ensure compliance with all relevant laws. This should decrease the amount of merited litigation in the future and save an organization time and money. Again, general counsel can assist with this task.

The contents of this article are intended to convey general information only and not to provide legal advice or opinions.

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