Supreme Court to Regulators: You Can’t Trump the Federal Arbitration ActIn a 5-4 decision along ideological lines, the Supreme Court has upheld a controversial tool used by employers to stop class action lawsuits before they start: contractual provisions requiring employees to bring individual arbitration proceedings rather than class actions in court.

In Epic Systems Corp. v. Lewis and its sister cases, the majority of the Supreme Court rejected the argument that the National Labor Relations Act (NLRA) requires employees to be able to bring class actions. Instead, Justice Gorsuch wrote for the majority, “[i]n the Federal Arbitration Act (FAA), Congress has instructed federal courts to enforce arbitration agreements according to their terms—including terms providing for individualized proceedings.” In the view of the majority, neither the FAA nor the NLRA create any exception for employment contracts.

The issue of class action waivers in employment contracts has taken on new prominence in recent years as the use of arbitration agreements has increased. Though both statutes at issue here are approaching their centennial anniversaries, there was relatively little litigation on their interplay until recent years. In 2012, the Obama-era National Labor Relations Board (NLRB) held that the NLRA invalidates any employer-imposed contracts that bar group litigation, including arbitration agreements that limit employees to individual actions. Subsequently, the Sixth, Seventh, and Ninth Circuits deferred to the NLRB’s interpretation, while the Second, Fifth, and Eighth Circuits rejected it.

Last year, the Supreme Court granted certiorari to resolve the circuit split. In each of the three cases that were consolidated, employees brought Fair Labor Standards Act (FLSA) class or collective action claims in federal court. The employees argued that the NLRA renders class action waivers illegal and that their individual arbitration agreements were therefore unenforceable. The NLRB supported the employees’ positions. But in a move that caused the court to describe the executive branch as “of two minds,” the Solicitor General argued against the NLRB’s position and in favor of the employers’ interpretation of the FAA.

In the end, Justice Gorsuch’s opinion took a decidedly textual approach, as is his habit.  The majority found that the FAA explicitly requires courts to enforce arbitration agreements according to their terms. The employees sought refuge in a savings clause that allows courts to refuse to enforce arbitration agreements where grounds “exist at law or in equity for the revocation of any contract.” The employees argued that the arbitration agreements were illegal under the NLRA, a proper ground for revocation of a contract. But the Court returned to its 2011 decision in AT&T Mobility v. Concepcion, where it found that the FAA savings clause does not apply to defenses that can apply only to arbitration. Because the employees sought to attack only the individualized nature of arbitration and that characteristic is one of arbitration’s fundamental attributes, the savings clause did not apply.

The majority also rejected an argument that the NLRA overrides the FAA’s presumption in favor of arbitration. The employees argued that Section 7 of the NLRA guarantees workers the right to take collective action. But the majority found that “Section 7 focuses on the right to organize unions and bargain collectively.” Because the statute was silent on arbitration and class actions, the Court found that the NLRA could not overcome the FAA’s strong preference for enforcing arbitration provisions. Instead, Justice Gorsuch wrote, the FAA and NLRA should be construed in harmony, with the NLRA protecting collective bargaining and the FAA protecting arbitration agreements.

The Court further noted that it would be inappropriate to apply Chevron deference to the NLRB’s interpretation of the NLRA as invalidating arbitration clauses. After applying the interpretative canons, the Court was not left with any ambiguity in the statutory language itself. The Court also noted that the NLRB’s interpretation advanced its own statutory mission at the expense of another statute in which it has no expertise. As such, courts were not required to defer to the NLRB.

Writing for the four-person dissent, Justice Ginsburg described the decision as “egregiously wrong,” lamenting that the majority “subordinates employee-protective legislation to the Arbitration Act.” Justice Ginsburg’s dissent claimed that class actions are the only way that employees can afford to litigate claims for small underpayments. Though the majority found that the NLRB’s protection for “concerted activities . . . for the purpose of mutual aid or protection” was limited by the specific bargaining-related examples that preceded it, the dissent argued that group litigation is consistent with legislative intent. In particular, Justice Ginsburg urged, the NLRB has long held that the NLRA protects employees from employer interference when they bring class actions.

The Court’s decision in this case has been closely watched and is likely to greatly affect the landscape of employment relationships. Of clearest importance, the Court’s decision allows employers to include arbitration agreements waiving class actions in employment contracts without fear of invalidation. In the wake of this decision, we expect employers’ use of such agreements to increase. The Court’s disregard of the NLRB’s purported expertise in this matter may also suggest that litigants could have success in challenging NLRB rulings on procedural, legislative and regulatory issues that are not employment-specific in the future.

But the decision also offers insight into the Court’s broader attitudes towards arbitration and class actions. In the absence of a clear congressional directive, the Court declined to make a policy decision to give employees the unfettered ability to sue their employers in a class setting. In the eyes of the Court, given the simple, clear breadth of the FAA, if any such policy choice is to be made, it must be made explicitly by Congress rather than being implied by Congress or a regulator. This philosophy suggests that had Congress not nullified the CFPB’s proposed anti-class waiver rule for arbitration clauses, the Supreme Court likely would have.

The same philosophy also suggests the answer to a question that the Court has recently decided to hear next year: whether the FAA forecloses a state-law imposition of class procedures into an arbitration agreement that does not clearly, explicitly, and unambiguously provide for any. The Court’s opinion in Epic Systems reinforces our conclusion that the Court is unlikely allow defendants to be forced into class arbitration without clear express consent.

Arbitration Provision TKOs Class Action Lawsuit by Online Viewer of Mayweather/McGregor FightBoxing fan Victor Mallh, attempting to take a class action swing at Showtime Networks for failures in its livestream broadcast of the Mayweather/McGregor fight in August of this year, will have to pursue his claim in arbitration, the U.S. District Court for the Southern District of New York ruled last week (Mallh v. Showtime Networks, Inc., 2017 WL 5157247 (S.D.N.Y. Nov. 7, 2017)). While Mallh’s fight – unlike McGregor’s against Mayweather – hasn’t been stopped, it will apparently now be confined to a single-plaintiff arbitration against the entertainment company.

Mallh signed up to view the boxing match via livestream on Showtime’s website, paying $99.95 on the day of the fight. The website’s purchase page required purchasers to agree to Showtime’s Terms of Use (TOU), Privacy Policy and Video Services Policy, each of which were hyperlinked to the page. The TOU in turn contained an express arbitration provision and class action waiver, whereby purchasers agreed in the event of a dispute to either an individual action in small claims court or an individual arbitration proceeding administered by the AAA.  Purchasers also agreed to waive the right to trial by jury and the right to participate in a class action.

Mallh claimed that Showtime rabbit-punched him during the livestream, logging him out for a substantial portion of the fight, and then hit him below the belt by delaying or making incomplete various parts of the coverage. When his request for a refund was refused, he complained to the referee, but not the referee actually in charge of the fight. Ignoring the arbitration provision, Mallh filed a putative class action against Showtime in federal court, asserting contract, unfair practices and unjust enrichment claims. Showtime counterpunched by moving to compel arbitration pursuant to the TOU, or in the alternative to dismiss or strike the complaint’s class allegations.

The court granted Showtime’s motion to compel, sounding the final bell on Mallh’s quest for a class action jury trial. Acknowledging Second Circuit and other precedent, the court first recognized that an electronic click can sufficiently manifest assent to a contract, in the context of both “clickwrap” and “browsewrap” electronic agreements. (The former requires users to affirmatively click an “I agree” box after being presented with terms of use; the latter – as Showtime’s was – generally posts detailed terms of use via hyperlink and does not require the user to click an “I agree” box.) The court found that the Showtime website required Mallh to acknowledge that he had read and agreed to the TOU; the only remaining question was whether Mallh received adequate notice via the website and links that he was agreeing to individual arbitration.

The judge scored all rounds decisively for Showtime. Contrary to Mallh’s arguments, the court held that the website was not “cluttered” and the arbitration provision and class waiver were not “buried,” but instead were reasonably conspicuous. On this point the court held that there was nothing inherently wrong with the TOU being made available only via hyperlink.  Relying on Second Circuit authority, the court found it unobjectionable that the consumer is “prompted to examine the terms of sale . . . located somewhere else.” Given that Mallh did not deny that he clicked on a box agreeing to the TOU, thus manifesting his assent, the court granted the motion to compel arbitration, and left Mallh’s class action aspirations lying on the canvas.

CFPB’s Effort to Axe Class Waivers Gets Axed by the SenateBy the hair of its chinny chin chin, the Senate voted on Tuesday to nullify the CFPB’s previously announced final rule that would have prohibited banks, credit card companies, and other financial service entities from utilizing arbitration agreements to block or limit class action suits by consumers.

The vote took place pursuant to the Congressional Review Act, 5 U.S.C. § 801 et seq., which allows Congress to invalidate regulations promulgated by executive agencies within 60 legislative days of publication by a simple majority vote in both the House and Senate. After a long, heart-felt debate on the Senate floor, all Democrats and two Republicans (Sens. Lindsey Graham of South Carolina and John Kennedy of Louisiana) voted against nullification, but the resulting 50-50 tie was broken by Vice President Mike Pence.

The House had already voted overwhelmingly in favor of nullifying the rule in July. The only remaining piece of the puzzle for complete nullification is the blessing of President Trump. Given the Trump administration’s views on regulation and the president’s continued praise for those opposing this rule, the likelihood of the president disapproving this nullification appears extremely small.

Under the Congressional Review Act, the nullification not only kills this version of the rule, but also prohibits the issuance of “a new rule that is substantially the same … unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.” As such, there is little chance that any type of rule limiting arbitration clauses will be issued in the foreseeable future.

Arbitration clauses with class waivers have been an effective tool for avoiding class litigation thanks to cases such as AT&T v. Concepcion, which held that the Federal Arbitration Act generally preempted state rules that classified arbitration clauses with class waivers in consumer contracts as unconscionable (563 U.S. 333, 340 (2011)). Thanks to the Senate’s vote on Tuesday, companies can continue relying on these types of holdings, utilizing arbitration clauses, and limiting a consumer’s ability to join or initiate a class action lawsuit.

The Senate’s vote also avoids potential constitutional challenges to the CFPB’s rule. As such arbitration agreements are made generally enforceable under the Federal Arbitration Act, the CFPB’s rule prohibiting a certain class of such agreements could be challenged as a revision to the FAA that only Congress could accomplish through the normal legislative process — and therefore could not delegate to the CFPB to decide. In addition, the CFPB’s structure has been challenged as unconstitutional in a case pending before the D.C. Circuit en banc, and the U.S. Chamber of Commerce had just filed suit to enjoin the rule as being inconsistent with the limitations imposed by the Dodd-Frank Act.

While the full extent of political backlash to Congress’ action remains to be seen, several groups and individuals immediately spoke out on each side of this Congressional decision. CFPB Director Richard Cordray stated minutes after the vote, “Wall Street won and ordinary people lost.” Similarly, Sen. Elizabeth Warren (D-Mass.) turned her attention directly toward President Trump, asking him to follow through on his promises of standing up to Wall Street. Conversely, Keith A. Noreika, Acting Comptroller of the Currency, released a statement praising the Senate for the vote, stating that the rule would have increased the cost of credit for hardworking Americans and had a detrimental impact on small community banks. In the coming days, there will undoubtedly be vigorous rhetoric on both sides of this decision, but the fact remains that the rule has likely been stopped in its tracks.