Arbitration Agreements Don’t Get Rubber Stamp, Even After ‘Epic Systems’

On Behalf of | Jun 22, 2018 | News

“There is a bit of a push, pull that you will continue to see,” says Michael Phillips of McGuireWoods. “The Supreme Court is knocking down obstacles and other judges are not as enthusiastic from a policy point of view. That dynamic won’t end anytime soon.”

By Erin Mulvaney

The U.S. Supreme Court ruling last month that restricted the power of workers to form class actions was widely touted as a win for employers. Yet, weeks later, appeals courts are not rubber-stamping arbitration agreements, revealing continued tension over employment contracts.Federal appeals courts based in New Orleans and Virginia in recent weeks rejected two arbitration agreements as invalid. The rulings, by the Fifth and Fourth circuits, signaled that employment-related cases will still carry nuance and that arbitration agreements themselves are not above challenge.

Still, the Supreme Court’s decision in Epic Systems v. Lewis is broadly expected to influence companies to embrace class-action waivers in employment agreements. A divided court found in May that these waivers do not violate the National Labor Relations Act. In some instances, arbitration agreements are subject to state law and not the federal Arbitration Act, which carried the day in Epic Systems.McGuireWoods LLP employment litigation partner Michael Phillips said there is stark contrast between the Epic Systems decision and the two recent federal appeals court rulings. “There is a bit of a push, pull that you will continue to see,” said Phillips, who recently spotlighted the two appeals court rulings in a blog post. “The Supreme Court is knocking down obstacles and other judges are not as enthusiastic from a policy point of view. That dynamic won’t end anytime soon.”

Andrew Melzer, partner and co-chair of Sanford Heisler Sharp's wage-and-hour practice, said the practical impact of the Supreme Court’s decision in Epic Systems may be limited. Employers are already rolling back some of their mandatory arbitration agreements, including law firms, Melzer said.

“There has been a substantial public outcry against confidentiality agreements and arbitration clauses, particularly in the MeToo era,” he said. “In light of the backlash, some employers have been reluctant to impose such provisions on their employees.”

Some state and local governments are attempting to mitigate the impact of the Supreme Court’s ruling. Washington state Gov. Jay Inslee on June 12 signed an executive order that instructs state agencies to do business with companies that can show their employees are not required to sign mandatory arbitration clauses or class action waivers. Employment attorneys said this type of response is likely to continue, particularly amid the force of the cultural movement against sexual harassment.

In the Fifth Circuit case, the panel reversed an order from a lower court that compelled arbitration. The appeals court found state law voided the agreement. The next day, the Fourth Circuit issued an opinion invalidating an agreement, which involved a class action waiver, on state law grounds.

“[The cases] illustrate that, notwithstanding the Supreme Court’s pronouncements, arbitration agreements remain creatures of state law and must strictly comply with state law principles. They also illustrate that courts will place the burden on employers to establish that arbitration agreements are valid and enforceable,” McGuireWoods lawyers wrote in their recent blog post.

In April, a New York appellate court vacated an arbitration award that concerned sexual harassment. “The arbitrator’s decision belies the realities of workplace sexual harassment,” the panel said in its decision, which concluded the arbitration agreement violated public policy.

Donald Davis, a Mintz, Levin, Cohn, Ferris, Glovsky and Popeo associate in Washington, said the New York court seemed “enthusiastic” about using its authority to support the anti-harassment policies of Title VII and those of New York state and city to overturn an arbitration award.

“Arbitration awards are not beyond challenge, but in the domain of the Federal Arbitration Act, the grounds for judicial review and vacatur of such awards are few and narrowly interpreted,” Davis wrote in a recent blog post. “On the other hand, arbitrations that are subject to state law, and not the FAA, may be subject to broader judicial scrutiny. And when state law permits a challenge based on a public policy doctrine, the scope of judicial review may be a bit unpredictable. A savvy practitioner will take nothing for granted in that regard.”

Davis said that although state laws may provide grounds for invalidating arbitration agreements or setting aside arbitration awards, courts generally uphold parties’ agreements to arbitrate and are loath to disrupt an arbitrator’s award.