“Yellow dog contracts.”
That is what Justice Ginsburg called mandatory arbitration agreements with class action waivers between an employer and an employee. The phrase “yellow dog contract” refers to an agreement between and employer and its employee in which the employee agrees, as a condition of employment, not to be a member of a labor union. Prior to the enactment of the Norris-LaGuardia Act (NGA), these contracts were commonly used by employers to prevent the formation of unions. However, with the passage of the NLA in 1932, yellow dog contracts became unlawful.
On Monday, October 2, 2017, the United States Supreme Court heard oral arguments on the question of whether an employer’s mandatory arbitration agreement that requires an employee to waive his or her right to proceed in a class or collective action violates the NGA or the National Labor Relations Act (NLRA). It is estimated that 55 percent of non-union private employees have contracts that are covered by mandatory arbitration agreements, and that covers about 60 million people. Moreover, 23 percent of those employees have non-joint, non-class, non-collective, the research which represents about 25 million employees. The employers rely on the Federal Arbitration Act to argue that an arbitration agreement between an employee and the employer is a valid and enforceable contract. The question is whether that contract conflicts with federal law.
The National Labor Relations Act
Section 7 of the NLRA states “employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” And Section 8 of the NLRA makes it unlawful for an employer “to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in Section 7.”
Strong Arguments Against Class Action Waivers in Arbitration Agreements
However, the employers argued to the Court that the protections of Section 7 and 8 of the NLRA only protects concerted activity in the workplace and does not protect concerted activity in a judicial forum or an arbitration forum. Further, they argue the class waiver is agreement is akin to a plaintiff needing to establish the requirements of Rule 23 class action (numerousity, commonality, typicality, etc.) and that if Federal Rule of Civil Procedure 23 doesn’t violate the NGA or NLRA, then the arbitration agreement should not either. In other words, the employers argued that the NGA and NLRA protect them up to the court room doors, but not once they enter the court room.
The National Labor Relations Board and private counsel for the employees made several distinctions between a procedural rule and an agreement that is forced upon an employee. Justice Sotomayor pointed out that “[w]here you are stopping the concerted activity is in the very act of saying this can only be an individual arbitration, and individual court action.” Sotomayor’s statement illustrates that the conduct that is arguably violating the federal laws occurs before an employee gets into the court hour or arbitration forum, it occurs in the workplace when the employee commences his or her employment.
Justice Kagan made the point that the NGA specifically contemplates not enforcing such agreements in Court. “Forget about a waiver because an undertaking in conflict with Section 7 shall not be enforceable [in Court],” justice Kagan commented. The NGA provides “any waiver of Section 7 rights shall not be enforceable in any court.”
The employers continued to emphasize that the FAA permits the parties to enter into such agreements, but the National Labor Relations Board and private counsel for the employees pointed a provision in the FAA that declines to enforce agreements that run afoul of federal law. Justice Ginsberg provided further criticism of the employer’s position by noting that “[t]he FAA, in its inception, was meant to deal with bargains between merchants, bargains between merchants who said the arbitration forum is much less expensive, so we want to go there, rather than the court … it was commercial contracts that triggered the FAA.”
Justice Breyer weighed in favor of the employees and even went so far to say “I haven’t seen a way that you can, in fact, win the case, which you certainly want to do, without undermining and changing radically what has gone back to the New Deal, that is, the interpretation of the Norris-LaGuardia and the National Labor Relations Act.”
A Close Decision is Expected
On the other hand, Chief Justice Roberts, Justice Alito, and, perhaps most critically, Justice Kennedy seemed to lean in favor of upholding the agreements. Justice Kennedy’s questions suggested that he believed one could still engage in concerted activity, without being able to pursue a class action. Justice Kennedy’s vote, as is often the case, could prove to be the decisive vote. Justice Thomas and Gorsuch remained completely silent during the hearing, however, legal scholars suspect they will side with the employer and in favor of the arbitration agreements.
Colossal Ramifications at Stake
In many circumstances, employees are victims of unlawful employer conduct; however, their individual damage claims are relatively small – often less than the costs of litigating the claims. On the other side of the equation, the unlawful conduct can result in a windfall for an employer over thousands of similarly situated employees.
For example, consider a company that employs hundreds of thousands of employees. The employer in this hypothetical is robbing the employee of just a few dollars of wages every day. Over the course of a year, the employee may only have several hundred dollars in damages. However, in the same amount of time (one year) an employer has saved millions of dollars in labor expenses by robbing its employees of wages. If the workers are prohibited from engaging in a collective action, then they are left to litigate individual claims for just a few hundred dollars. Those claims are essentially meaningless to the individual because they will spend more in pursuit of the unpaid wages than they are likely to recover. In this situation, the employer is rewarded for engaging in unlawful conduct at the expense of its employee.
Additionally, many caution that if employers can prevent class actions in the employment setting, it will open the door to companies eliminating a consumer’s right to proceed in a class action as well.
The consequences of the Supreme Court’s decision in this matter should not be under estimated. The consolidated case caption is Epic Systems Corporation v Jacob Lewis, in the United States Supreme Court, Case Number 16-285.