By Michael Canfield  |  Buffalo Law Journal, Buffalo Business First  |  Jun 11, 2018, 6:00am

BLJ: Supreme Court ruling on arbitration may affect employee contracts

A Supreme Court ruling in May allows companies to use arbitration clauses in employment contracts to keep workers from joining to bring legal action over workplace issues. 

The ruling could prevent workers from taking action against employers, said Krista Gottlieb of the ADR Center & Law Office in Buffalo. 

“It’s always been controversial because it can make it so that the cases are so small that people won’t bring them, which can be argued by some that it allows bad actors to get away with bad acts,” she said. “They’re all so small that no one can afford to or is willing to spend the time and money to correct them. When you allow people to band together, it prevents bad actors from getting away with it.

“The flip side of that is that it’s not fair because it is all individual and therefore should be brought independently,” she said.

The court ruled 5-4, which could have an impact on nearly 25 million employment contracts nationwide.

Writing for the majority, Justice Neil Gorsuch pointed to federal law and the court’s precedents in favoring arbitration. 

“In the Court’s judgment, the virtues Congress originally saw in arbitration, its speed and simplicity and inexpensiveness, would be shorn away and arbitration would wind up looking like the litigation it was meant to displace,” he wrote in response to workers being able to band together to file claims. 

The elimination of class actions has forced large arbitration organizations such as the American Arbitration Association to deal with many individual filings, said former Magistrate Judge Carol Heckman, a partner at Lippes Mathias Wexler Friedman LLP in Buffalo. She specializes in arbitration.

Under the court’s ruling, she said, there will be more individual cases or multiple group filings.

“For example, I had a case where there were 45 different claimants,” Heckman said. “They all had the same lawyer and they were all suing the same employer in arbitration involving claims under the Fair Labor Standards Act.”

The federal law outlines the rules for overtime pay. Heckman said a lot of independent contractors will sue employers, claiming that they’re entitled to overtime and insisting that they’re an employee, not an independent contractor. 

“Those cases all get separate arbitrators,” she said. “The AAA is trying to figure out ‘How do we handle this deluge of cases in an efficient way without driving the cost of arbitration up high?’ That’s always the goal – to make it efficient and cost-favorable.”

The AAA is starting to use “special masters” in order to deal with the number of cases, she added. 

“It’s a title for people like myself who can be appointed by the (association) and come in and take all these cases and rule on a number of common issues, like how long is it going to take to go through the discovery process?” she said. “How long is it going to be before the first hearing? Which case should be first as far as the hearings? What to do about common discovery issues? There’s no point in having different arbitrators have different conclusions and working against each other.”

Because the process is confidential, arbitrators don’t know what the other arbitrators are doing. Special masters should clear up any disparities, Heckman said. 

“It’s a new technique to try and deal with the consequences of the Supreme Court decision and related decisions,” she said. “The clear trend in the courts is to enforce every arbitration agreement that employers throw out there.”

Employers like multiple group filings because they drive up the cost for filing claims, thus discouraging them, she said. And plaintiff lawyers like them because it puts employers “through their paces” and costs them time and money, she said. 

“Very often, the employer pays 100 percent of the cost,” Heckman said. “That’s in the arbitration agreement very often. That’s one of the ways they’ve been able to force it down employees’ throats is by paying the cost. There’s no penalty attached to the employee for arbitration.”
Arbitration is meant to be cost-effective. However, with multiple individual cases, the cost can rise quickly, and such cases can take a long time to resolve.

The Supreme Court case of Epic Systems Corp. v. Lewis was held over to the second term, according to Heckman, in order to ensure Gorsuch was on the bench to contribute to the ruling. 

“He wrote the opinion,” she said. “It was interesting from the point of view of how he goes about legal issues and how his opinions lead. He voted the way people predicted he would.”

Locally, the ruling shouldn’t change much, because the U.S. Second Circuit, which covers New York, had already ruled against employees banding together to bring legal actions against employers. 

“What Epic Systems does for us, is it gives us here in the Second Circuit greater certainty, to the extent that an employer adopts an arbitration program – at least in respect to the class waiver, it’s going to be enforced,” said Kevin Mulvehill, labor and employment team leader at Phillips Lytle LLP.

The ruling is good for employers and employees, Mulvehill said. 

“Probably the group that will have the most unfavorable reaction to the ruling is the plaintiff’s class action bar,” he said. “This could have an effect on their practice.”

Arbitration clauses aren’t always the best thing for employers, Mulvehill said. It’s important for an employer to weigh the benefits to determine if its right. Employers may also implement an internal dispute process.

“For example, the employee may provide notice of the claim to the employer, and the employer will have ample opportunity to investigate if the claim is valid or not,” he said. “Often times, we’ll see resolution of the claim at that stage, as opposed to actually going to arbitration.”

Mulvehill said there will be an increase in employers adopting internal dispute mechanism procedures, and an increase in mediation in labor disputes. The court’s ruling could lead to more arbitrations, as well. 

Epic Systems Corp. v. Lewis

“It’s premature,” he said. “The decision is only two weeks old, and this isn’t a major change in respect to the Second Circuit here in New York. It’s possible it could result in more individual arbitrations, but we don’t know.”

The case was decided by the Supreme Court on how two federal laws, the National Labor Relations Act and the Federal Arbitration Act, correlate to employment contracts and whether employers can legally block employees from collective arbitration.

In making the ruling, the court merged three cases: Epic Systems Corp. v Lewis, Ernst & Young LLP v. Morris and National Labor Relations Board v. Murphy Oil USA Inc.

Epic Systems Corp. v. Lewis involved a case in which employees of Epic Systems in Wisconsin were asked to agree to a company policy that required the use of individual arbitration in any disputes in 2014. An employee, technical writer Jacob Lewis, agreed to the terms. However, he filed suit against the company in 2015 as part of a collective action by other technical writers in U.S. District Court for the Western District of Wisconsin. They cited the FLSA and Wisconsin law in regard to overtime pay.

Epic attempted to dismiss the Lewis case, based on the arbitration agreement. The District Court argued that his actions were protected under Section 7 of the NLRA. The federal Court of Appeals for the Seventh Circuit agreed on appeal.

Justice Neil Gorsuch delivered the majority opinion in a 5-4 decision issued May 21. The court ruled that arbitration agreements requiring individual arbitration are enforceable under the FAA, regardless of allowances set forth under NLSA.