The Epic Failure Of Arbitration

It was going to save us, alternative dispute resolution. Couched in glowing terms, replete with warm and fuzzy adjectives, reasonable people would resolve their disputes through mediation, where the sides would try in good faith to accommodate their differences, see each other’s perspective and, because people are truly good at heart, end in a hug. And if they didn’t, there was always arbitration.

The legal system was brutal, expensive and time-consuming. It took forever and, by the time anything was resolved, the damage was long since done. Arbitration was derived from the notion that a prompt, informal system would far better serve people’s needs than the formalized legal system. Sure, not for everything, but for some. And so the Federal Arbitration Act was enacted in 1925, reflecting the government’s favor of informal resolution.

The problem wasn’t the concept of arbitration, per se, but that it became captive of its users. If you’re an arbitrator working for an arbitration company, you would have a one-off user on one side and a corporate user on the other, who might have hundreds, perhaps thousands, of employees, and need your services over and over.

It’s not that arbitrators necessarily were corrupted by the need for business, but it’s impossible not to become co-opted by the side that appears regularly and not to realize that a ruling in the wrong direction might spell the last time that regular user wanted you anywhere near its arbitration. If you wanted another arb gig, you didn’t piss off the person feeding you business. You might not always rule for your patron, but you never went too far off the reservation or that would be your last time arbitrating.

Corporations realized the benefits of arbitration in general, quicker and less expensive procedures than real court, and certainly a greater likelihood of a friendly face, and arbitration clauses magically appeared in employment contracts. For the employee, the choice was clear: say yes or work elsewhere. There was no negotiation involved. It was Bulwarism at its worst, a take-it-or-leave-it contract of adhesion. You were there for a job. You needed a job. They had a job and were willing to give it to you, along with a paycheck. Plus this minor side detail, arbitration.

In Epic Systems v. Lewis, the employees tried to make an end run around the arbitration clause and the FAA by seizing upon their Section 7 rights under the National Labor Relations Act, enacted a decade later. It provided that employees had the right to band together for their mutual benefit. That meant they could, as a group, overcome what they could not do individually, form a class to sue an employer in court and nullify the arbitration clause in their employment contract. And the National Labor Relations Board agreed. But in a 5-4 decision, the Supreme did not.

Although the Federal Arbitration Act generally requires courts to enforce arbitration  agreements as written, the employees argued that its “saving clause” removes this obligation if an arbitration agreement violates some other federal law and that, by requiring individualized proceedings, the agreements here violated the National Labor Relations Act.

The employers countered that the Arbitration Act protects agreements requiring arbitration from judicial interference and that neither the saving clause nor the NLRA demands a different conclusion. Until recently, courts as well as the National Labor Relations Board’s general counsel agreed that such arbitration agreements are enforceable. In 2012, however, the Board ruled that the NLRA effectively nullifies the Arbitration Act in cases like these, and since then other courts have either agreed with or deferred to the Board’s position.

There’s a little kicker in the syllabus that bears noting, that the NLRB switched sides in 2012, holding that the right to collective action trumps the Arbitration Act. That was about the time that federal administrative agencies changed a great many long-held positions, discovering that the laws they were created to administer meant something different than what they had always meant before. Congress didn’t say so, but they did, and weren’t they the “experts”?

The opinion, by Justice Gorsuch, is premised on the FAA being clear in its mandate, and the NLRA saying nothing to expressly overcome the FAA. For the employees, this meant that its end-run failed, and they would be denied the ability to band together to challenge violations to the Fair Labor Standards Act, not to mention other laws like Title VII, because the standard arbitration clause in employment contracts would be enforceable nonetheless.

As a practical matter, individual employees are unable to mount a successful challenge to dubious corporate practices, lacking the funding necessary to do so and given the cost-benefit analysis. If a practice screwed you out of $179, did it make sense to invest a few million into the fight? On the flip side, put together a thousand employees in a class action and the cost-benefit analysis shifts, making the challenge viable.

On the other side, there were foundational concepts at stake, primarily the right to contract. If two parties enter into a contract of their own volition, the government should not have the power to nullify it. It’s a “sacred” right. And, indeed, the right to contract is one upon which we all rely, constantly, or society would be incapable of functioning. Imagine if you bought a stick of gum, and on the way out the door, the shopkeeper ran up to you, grabbed the gum from your fingers and took it back, demanding another dollar if you wanted it. Hey, too late, the sale was done, the deal was struck, right?

But the right to contract, sacred as it may be, relies upon some basic premises that aren’t enjoying a great deal of favor. First, that there is actual, good faith negotiation. Second, that the parties have equivalent bargaining power.

The argument that a potential hire can always refuse a job if the arbitration clause doesn’t work for him is sort of true but mostly specious. There are core concerns, salary and perhaps vacation days, and then there are a bundle of collateral terms of employment that are distant seconds to making decent money, like the choice of law clause, or the venue clause. Or the arbitration clause. A potential hire may take a hike if the money sucks, but nobody walks because of this boilerplate term. And why would they, as nobody enters into employment anticipating they will soon need to go to war with their employer?

In other words, the right to contract really isn’t the issue here, as these aren’t negotiated terms between parties of equivalent bargaining power. These are throwaways, take ’em or leave ’em, but employers know that no one will ever walk away from a decent salary over them.

And there’s yet another aspect to consider here, that a reform measure from 1925 that was meant to be a panacea to facilitate dispute resolution comes back to bite employees in the butt in 2018. Arbitration seemed like such a great idea at the time when it was presented as a huge benefit for those who wanted swift and inexpensive resolution of disputes. It’s not that the notion was necessarily false, but that there are always unintended consequences to consider before singing a rousing chorus of Kumbaya.

Postscript: Elie Mystal, unsurprisingly, finds the dissent by Justice Ruth Bader Ginsburg more persuasive.

Class status didn’t exist in 1935, so the NLRA couldn’t possibly protect it. In related news, chlorophyll didn’t exist 4 billion years ago, so the Sun is still pissed off that plants steal energy in life giving ways.

Gorsuch’s opinion does everything he can to take us back to 1935, when white male employers were unassailable in courts by their employees.

You might wonder, what does “white male employers” have to do with this? While the NLRA was enacted in 1935, it hasn’t been amended since then to reflect the change in perspective that the dissenting judges believe it should.

But even if each of the provisions the Court cites had been included in the original Act, they still would provide little support for the Court’s conclusion. For going on 80 years now, the Board and federal courts—including this one—have understood §7 to protect numerous activities for which the Act provides no “specific” regulatory guidance.

And this is correct, that Section 7 has been read to include all manner of unspecified collective activity. But the NLRA is about labor relations, not the antidote to racism or sexism. There is much to question in the majority’s rationale, but to dismiss it as “white male employer” law isn’t going to win any converts among the rational and unwoke.

20 thoughts on “The Epic Failure Of Arbitration

  1. PseudonymousKid

    Dear Papa,

    And now another potential avenue for an end-run is closed off. Other would-be heroes lay dead around the disgusting monster that is the FAA. It has conquered everything but contract defenses to the arbitration clause specifically. Lacking facts supporting those, the arbitrator gets to decide even if he ultimately decides the claims wouldn’t have been arbitral. Damn. I was really hoping labor law had magic enough to wound the beast, but I guess not.

    Be careful complaining too much. Congress might try to fix it.


  2. Richard Kopf


    While arbitration may be outdated for the woke, although the legal (and economic) realists like me think not, the evolution of class actions into a legal mechanism for extortion strikes me as even worse. Coupons worth, say $10.00, provided to each class member and comprising the entirety of a settlement and that results in concomitant attorney fees for the “prevailing” class lawyers in the millions is rent seeking on steroids.

    All the best.


    1. SHG Post author

      Mel Weiss lives down the road from me. I hate the $10 coupon outcome (if that, since most of the time it’s buy another one of our shitty thousand dollar products and get $10 off). But damn, Mel lives in a sweet house on the water.

      I share your general lack of enthusiasm for class actions, although I appreciate that a company ripping off 10 million people for a dollar is wrong and there’s no other way to deal with it. Part of my ambivalence here is that most good ideas end up being bastardized by someone to serve a nefarious purpose, even if they can also serve their intended salutary purpose. It could almost make one cynical.

      1. Richard Kopf


        In a civil rights cases, as you know, the prevailing plaintiffs’ lawyer who wins in whole or in part gets a fee based upon the “lodestar method” set out in Hensley v. Eckerhart, 461 U.S. 424 (1983) (number of hours reasonably expended on successful claim multiplied by the prevailing hourly rate in the relevant market). Part of that hourly based analysis requires a judge to determine whether the win was in whole or in part, and, if in part, to reduce the fee accordingly If that method was rigidly applied in non-civil rights class action settlements your buddy down the road might have to downsize. The schadenfreude I would feel in such an eventuality would bring tears of joy to my aging eyes. But, then again, I am a mean old bastard who hates lawyers making more money than me.

        All the best.


        1. SHG Post author

          I wouldn’t shed too many tears if class action fees were subject to the same lodestar method. Though in fairness, I have seen a few judges whose notion of hours reasonably expended falls a bit shy of what I think is required to produce zealous representation. Still.

      2. grberry

        I’ve wondered if a simpler solution might just be to make sure the lawyer’s fee and class representative’s reward are no more liquid than the class’s reward. So if the class gets coupons (one per purchase, no transfer, no cash value) then the lawyers should only get coupons (one per purchase, no transfer, no cash value). The lawyer can only get cash if the class gets cash. If part of the classes award gets remaindered to cy pres, the same share of the lawyers fees goes to cy pres recipients. It would give the class action lawyers and class representatives more reason to get good results for the class they supposedly are working for.

        1. SHG Post author

          There have been many proposed variations on a theme to improve the calculus for class action lawyers, with their various good and bad points. But this isn’t a post about how best to compensate the consumer class action bar.

        2. tabstop

          No link because rules, but that sort of ruling got a judge censured (according to where you can still find the story). (Admittedly judge was already retired so censure isn’t even a slap on the wrist.)

          1. SHG Post author

            If it wasn’t for the fact that Kevin is an old friend, I would probably say something snarky about taking this one step too far. Plus, you respected the no link rule, although I would have let you link to Kevin because reasons.

  3. Erik H.

    As an employment lawyer, all of my practice area boards are lighting up with appalled people screaming about how bad this decision is. I agree that it’s a relative shift of power from employers to employees but I am having trouble finding the requisite levels of appallment.

    The FAA is a horrible beast but it’s been available for change for many decades. If Congress wants to change it they should do so. The Supremes, OTOH, should keep doing their job.

    That said the results of the fallout should be…. interesting. There will be a legislative push to try to fix this and I suspect it is going to blow up like the BLM protests.

    For example, one group I know of is trying to carve out an exception for sexual harassment filings. But there are plenty of people on the boards who expect legislative changes to address things like $15 minimum wage; passing DACA; and proper arms control (no, I am not making that last one up.)

    Everyone who is lobbying knows that this will be a hard fix and it is very unlikely to get fixed twice, so there’s going to be a huge battle on the margins. Which causes will get fixed and which will be left by the wayside? Why carve out for harassment and not for disability, wages, discrimination, etc?

    Making matters worse, there is plenty of bad information (or call it “fake news” if you prefer.) For example, the NYT article says
    “Even an utterly routine case can cost a lot of money to litigate. Plaintiffs’ lawyers we spoke with estimated that to represent just one worker who is denied minimum wage or overtime would take more than 40 hours of attorney time. In a case like that, a typical settlement for back wages for one underpaid low-wage worker might amount to $3,000 to $5,000, perhaps less. Few private lawyers would take that case. But if a lawyer can represent a group of workers harmed in the same way by the same employer, the economics of a case starts to make sense.”

    But this is not true, in court. Yes, of course, I prefer to litigate wage cases with a ton of money. But I take $3000-5000 cases pretty often as a public service. The federal Wage Act has a fee-shifting provision and strict liability for wage violations, so those are fine cases and my associates enjoy them. The Massachusetts Wage Act is even better, what with mandatory triple damages and mandatory fees for all successful cases.

    Compared to individual cases which can be promptly settled, class actions mostly enrich counsel, not employees.

    Places like the NYT are talking to major plaintiff firms which focus on class actions and who won’t take those $5000 cases. But there are plenty of other avenues to address them outside a class.

    1. David

      Glad to read someone highlighting that this was purely statutory (not Constitutional). Would have been nicer if any news story from a major publication I’d read had made the same point.

  4. Scott Jacobs

    Gorsuch’s opinion does everything he can to take us back to 1935, when white male employers were unassailable in courts by their employees.

    If nothing else, I admire Elie’s ability turn a single trick into a steady paycheck.

    1. SHG Post author

      It makes it increasingly difficult to address racism when it’s waved as a red flag no matter how little it has to do with the issue.

      1. Scott Jacobs

        Why would he want to solve it? It would ruin his gig.

        He might have to actually become a lawyer then.

  5. B. McLeod

    This was just another case decided by the justices along political lines. This is our “law” now (and for the foreseeable future).

  6. Lucas Beauchamp

    Epic Systems wasn’t the bad decision. The bad decision was AT&T Mobility v. Concepcion, which held that an arbitration agreement could eliminate class actions. Epic Systems just rejected a weak argument trying to create an exception to AT&T Mobility based on the NLRA.

    The Federal Arbitration Act was meant to legalize arbitration; before that the courts refused to enforce arbitration agreements that ousted them of jurisdiction. The Supreme Court has taken a statute saying that an arbitration agreement is enforceable to mean that arbitration trumps everything.

    A class-action waiver in a contract is ordinarily unenforceable. But combine the waiver with an arbitration agreement, and it’s untouchable.

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