Chemerinsky: Arbitration agreements ruling is a significant loss for workers
The U.S. Supreme Court’s decision May 21 in Epic Systems v. Lewis is the latest 5-4 ruling in favor of the enforcement of arbitration clauses. In an opinion by Justice Neil M. Gorsuch, the court ruled that an employer may lawfully require its employees to agree, as a condition of employment, to take all employment-related disputes to arbitration on an individual basis and to waive their right to participate in a class action suit or class arbitration.
The case involved an effort by workers to file a class action suit against an employer for violating the federal minimum wage law. The employer sought to dismiss the case because it had insisted as a condition of employment that the employees waive their ability to go to court or be part of a class action; any dispute had to be resolved out of court in an arbitration.
The National Labor Relations Act, a federal law adopted in 1935, protects a right for employees to engage in “concerted activities for the purpose of … mutual aid or protection.” But Justice Gorsuch, joined by the conservative justices—John G. Roberts Jr., Anthony Kennedy, Clarence Thomas, and Samuel A. Alito Jr.—ruled that the arbitration clause in the employment contract had to be enforced, and the workers could not go to court or even have a class action in arbitration. The Supreme Court based its decision on the Federal Arbitration Act, a law adopted in 1925, which provides that arbitration clauses in contracts shall be enforced.
EARLIER DECISIONS ENFORCING ARBITRATION CLAUSES
Epic Systems v. Lewis follows several other Supreme Court decisions, all split along ideological lines, that required the enforcement of arbitration clauses based on the Federal Arbitration Act. In Circuit City v. Adams (2001), the court ruled 5-4 that an employee could not sue in state court for discrimination because on the back of the job application was a clause saying that any employment-related disputes had to go to arbitration.
There is an exception to the Federal Arbitration Act that says arbitration is not required for claims by “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” However, the Supreme Court interpreted the statute to say that employees in interstate commerce refers only to transportation workers. Under the court’s interpretation, contractual clauses requiring arbitration are not enforceable only for those working in the transportation industry. But all other employees are compelled to have their employment disputes, including discrimination claims, resolved through arbitration when there is such a clause in the employment contract.
AT&T Mobility LLC v. Concepcion (2011) is another example of the Supreme Court enforcing arbitration agreements. Vincent and Liza Concepcion purchased cellular telephones from AT&T Mobility. The form contract they signed provided for arbitration of all disputes between the parties. They believed that AT&T had engaged in fraud by charging them sales tax after promising free phones. The Concepcions’ suit was consolidated with other similar claims in a class action suit filed in federal court.
AT&T moved to compel arbitration under the terms of its contract with the Concepcions. The Federal Arbitration Act specifically provides that arbitration clauses are not enforceable where state law provides for the revocation of the contractual provision. The federal district court and the San Francisco-based 9th U.S. Circuit Court of Appeals said that the arbitration clause was not to be given effect because California law was clear that such a contractual provision is not enforceable. The California Supreme Court had ruled that arbitration clauses in form agreements are contracts of “adhesion” and not to be enforced. But the Supreme Court, 5-4, held that the Federal Arbitration Act requires the arbitration of claims on an individual basis and that California law was therefore pre-empted.
In American Express v. Italian Colors Restaurant (2013), the court said that an arbitration clause in a contract must be enforced even if it means that an antitrust suit realistically has no chance of going forward, and when the effect will surely be to immunize a defendant’s wrongful conduct from any remedy. Italian Colors Restaurant, a small business, accepted American Express cards. Italian Colors wanted to bring a class action against American Express for antitrust violations. American Express sought to prevent this litigation by invoking a clause in its agreement that requires all disputes between the parties to be resolved by arbitration.
Italian Colors said that the antitrust suit could not realistically go forward except as a class action. Successfully suing for an antitrust violation can cost hundreds of thousands, if not millions of dollars. Recovery for a claim under the antitrust law, though, is limited to $39,000, including treble damages. No one is going to spend hundreds of thousands or millions of dollars to bring a lawsuit to collect $39,000.
In a 5-4 opinion by Justice Antonin Scalia, the high court said that the Federal Arbitration Act required that the arbitration clause be strictly enforced, even if it meant that the antitrust claims otherwise would not be brought. There is a long-standing principle under the Federal Arbitration Act that arbitration clauses are not to be enforced if they prevent “effective vindication” of a claim. But the court refused to allow the exception to apply in situations like this where the costs of litigation mean that no claim would ever be brought.
THE DIFFERENCES BETWEEN THE MAJORITIES AND THE DISSENTS
There are striking and consistent differences between the conservative majorities and the liberal dissents in these cases. First, they disagree as to whether the parties to the contracts really had a meaningful agreement to arbitration. In Epic Systems, Justice Gorsuch began his opinion by asking: “Should employers and employees be allowed to agree that any disputes between them will be resolved through one-on-one arbitration?” The dissent did not see the arbitration as an agreement between the parties; it was dictated by the employer as a condition for employment, just as the dissents did not find a meaningful agreement in Circuit City in the back of an employment agreement or in AT&T Mobility in a form contract.
Second, there is disagreement over the importance of a class remedy. In both Epic Systems and AT&T Mobility, the majority minimized the importance of class actions and in fact said that they often force settlements of nonmeritorious claims. But for the dissents, class remedies are essential, especially in situations where a large number of people each lose a small amount of money. In AT & T Mobility, Justice Stephen G. Breyer in dissent lamented: “What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim?” He quoted Judge Richard Posner: “The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.”
Justice Ruth Bader Ginsburg made a similar point in her dissent in Epic Systems: “Violations of minimum-wage and overtime laws are widespread. … One study estimated that in Chicago, Los Angeles, and New York City alone, low-wage workers lose nearly $3 billion in legally owed wages each year.” Individual employees are unlikely to bring individual claims to arbitration. Without the ability to bring class action suits, employees have little likelihood of recourse. Employers know it too, and will be ever more emboldened to rip off their employees.
Finally, and not surprisingly, the conservative and liberal justices interpret the Federal Arbitration Act to reflect their views about arbitration and class actions. For the conservative justices, the Act is a strong mandate that arbitration clauses shall be enforced by the federal courts. The liberal dissenting justices, though, believe the court is ignoring the limits in the statute: it does not apply to employment contracts or when a contract would not be enforceable under state law or where it would prevent effective vindication of a claim.
Underlying these differences is the reality that the conservative justices are much more pro-business, and business strongly favors enforcement of arbitration agreements. By contrast, the liberal justices are much more concerned with protecting employees and consumers.
No one, liberal or conservative, has doubt that Epic System v. Lewis would have come out the other way if Hillary Clinton rather than Donald Trump had replaced Antonin Scalia. It is a significant loss for workers. More generally, it shows a court that is going to continue to enforce arbitration clauses and preclude class remedies.
Erwin Chemerinsky is dean of the University of California at Berkeley School of Law. He is an expert in constitutional law, federal practice, civil rights and civil liberties, and appellate litigation. He’s the author of seven books, including The Case Against the Supreme Court (Viking, 2014).