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An Epic Decision

eye on the news

An Epic Decision

A Supreme Court ruling affirms the freedom of contract over the abuses of the plaintiffs’ bar. May 22, 2018
Politics and law

Yesterday, a divided Supreme Court announced its decision in Epic Systems Corp. v. Lewis, affirming the principle of private contract over the interests of the class-action legal industry. The ruling implicates not only trial lawyers but also the other great Democratic Party patron, organized labor. Thus, the wailing, tearing out of hair, and rending of garments in the halls of the plaintiffs’ bar and other progressive political havens.

Epic Systems involves three consolidated cases. (The other two are National Labor Relations Board v. Murphy Oil USA and Ernst & Young LLP v. Morris.) The cases concern the scope of the Federal Arbitration Act (FAA), which requires courts to enforce arbitration clauses as written in contracts. Arbitration is a form of “alternative dispute resolution”—essentially, an agreement to resolve differences by going to a private arbiter rather than to a civil court, though courts can and do review arbitration clauses for fairness. Studies show that arbitration awards are generally comparable with those received in litigation, but that they save on time and expense—the principal expense being lawyers’ fees, which explains the trial bar’s hostility to the process.

Congress enacted the FAA in 1925, in reaction to widespread judicial hostility to arbitration agreements. The law’s language unequivocally states that written contractual provisions “to settle by arbitration a controversy” arising out of contracts or transactions “involving commerce . . . shall be valid, irrevocable, and enforceable.” The FAA makes no exception for employment contracts or for class-action lawsuits filed under Rule 23 of the Federal Rules of Civil Procedure. (The Court clarified the latter in AT&T Mobility v. Concepcion (2011).)

On January 3, 2012, however, the National Labor Relations Board (NLRB) issued a ruling that class-action waivers in labor-contract arbitration clauses violate employees’ collective-bargaining rights under another federal law, the National Labor Relations Act of 1935 (NLRA). As Justice Neil Gorsuch’s opinion in Epic details, the NLRB ruling was novel. Writing for the Court, Gorsuch emphasizes, “This Court has never read a right to class actions into the NLRA—and for three quarters of a century neither did the National Labor Relations Board.” Indeed, as recently as 2010, the general counsel of the NLRB observed that there were good policy reasons for employers and employees to be able to enjoy “the relative simplicity and informality of resolving claims before arbitrators” and “opined that the validity of such agreements ‘does not involve consideration of the policies of the National Labor Relations Act.’”

The NLRB rested its decision on Section 7 of the 1935 law, which protects “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.” In the NLRB’s novel reading, the final clause was operative: because class-action lawsuits are “concerted activities for . . . mutual aid or protection,” the 1935 NLRA supersedes the 1925 FAA in the employment context. (Note that Congress couldn’t have had class-action lawsuits in mind when it drafted the NLRA in 1935; the change in the Federal Rules of Civil Procedure that created the modern “opt-out” class-action lawsuit didn’t occur until 1966.)

The first federal appeals court to hear a challenge to the NLRB ruling, the Fifth Circuit in Murphy Oil, reversed the administrative body’s decision. But the NLRB continued to assert its position in other federal circuits. Eventually, a few of them deferred to the agency’s interpretation under the “Chevron doctrine,” the name given the rule promulgated in a Supreme Court decision permitting agencies great leeway to interpret their own enabling statutes. The Trump administration voiced its disagreement with the NLRB. To clear up the confusion, the Supreme Court took the consolidated cases.

The Court’s reasoning is consistent with the way it typically reads statutes that may be deemed to conflict. As Gorsuch’s opinion notes, arguing that two congressional statutes conflict ordinarily requires “a stout uphill climb.” The Supreme Court hesitates to infer that one statute overrides another, absent “a clearly expressed congressional intention.” This hesitance is based in the Court’s respect for Congress as a coordinate branch of government—a branch that knows how to say so when it wants one statute to trump another. As Gorsuch explains:

Allowing judges to pick and choose between statutes risks transforming them from expounders of what the law is into policymakers choosing what the law should be. Our rules aiming for harmony over conflict in statutory interpretation grow from an appreciation that it’s the job of Congress by legislation, not this Court by supposition, both to write the laws and to repeal them.

The NLRA certainly does not contain any clear indication that Congress meant it to supersede the already-existing FAA. “Concerted activities” for “mutual aid” could be read to apply to class-action lawsuits, but that language is most clearly interpreted to refer to the “collective bargaining” activities that the statute contemplates, including in the immediately preceding clauses. In short: if Congress wanted the NLRA to supersede the FAA, it should have said so.

Justice Gorsuch’s opinion in Epic takes pains to emphasize that it is an interpretation of the law as Congress has enacted it, regardless of whether Congress’s policy judgment is wise: “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.” Justice Ruth Bader Ginsburg’s dissent is less temperate. Ginsburg invokes the specters of “yellow dog contracts” (which forbade workers from joining unions, before such practice was outlawed in the NLRA) and the “Lochner era” (the now-reversed line of Supreme Court cases that held early Progressive wage and hour regulations unconstitutional on freedom-of-contract grounds). In an extraordinary departure from usual Court protocol, Ginsburg expressly calls on Congress to pass new legislation to reach the policy outcome that she deems best.

Ginsburg was joined in dissent by her three Democrat-appointed colleagues. This four-justice bloc has consistently voted against the Court’s FAA jurisprudence, maintaining the position that the 1925 congressional law requiring courts to enforce contractual arbitration clauses contains an exception for the class-action litigation rule adopted 41 years later in the Federal Rules of Civil Procedure.

The media outcry has focused more on the purported policy implications of the Epic decision—such as how many employees and what causes of action might be affected—than on its legal rationale. The Washington Post leads with the observation that the Supreme Court was “ideologically divided” (which never seems to bother critics when the Court is creating new progressive-favored constitutional rights). NPR invokes the #MeToo movement and concludes that “the court’s decision means that tens of millions of private nonunion employees will be barred from suing collectively over the terms of their employment.” Writing in the New York Times, Terri Gerstein and Sharon Block of Harvard Law School’s Labor and Worklife Program sidestep the legal dispute altogether and, echoing Ginsburg, simply ask Congress to amend the statutes and reverse the Court.

Class-action employment lawsuits tend to benefit lawyers and hurt the average worker by acting as an implicit tax on employment. (For more on the economics of arbitration clauses and class actions, see this Manhattan Institute study.) Still, Congress does have the power to act, should it choose, to modify the degree to which private parties can contract around such lawsuits. But that power rightly belongs to the legislative branch, not the executive. And since each of the Obama administration’s major efforts to enable class-action lawsuits by quashing arbitration have now been undone, maybe progressives will start coming around to that viewpoint as well.

Photo by Drew Angerer/Getty Images

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