Main content

Analysis: Epic Systems Corp. v. Lewis

Richard D. Freer |
Richard D. Freer, Charles Howard Candler Professor of Law
Richard D. Freer
Charles Howard Candler Professor of Law

In Epic Systems Corp. v. Lewis, decided on May 21, the Supreme Court continued its steady march of enforcing adhesion clauses that require individual (and forbid aggregate) arbitration. Again, the court split 5-to-4, and there is a vigorous dissent. The majority aptly refers to the "mountain of precedent" under the Federal Arbitration Act (FAA) that thwarts the dissent. Epic Systems must be seen in the context of that "mountain."

Into the early 20th century, American courts refused to enforce arbitration provisions. They reasoned that clauses requiring private resolution of disputes improperly "ousted" courts of jurisdiction and usurped their role in vindicating rights. In 1925, Congress enacted the FAA to overcome this hostility. The act requires courts to enforce private arbitration clauses. It was intended, in the words of one supporter, to "give the merchants the right or the privilege of sitting down and agreeing with each other as to what their damages are, if they want to do it."

Consistent with this vision, for over half a century, courts applied the FAA only to force arbitration of contract claims in the business-to-business context. They did not venture beyond this narrow domain for at least four reasons. First, employment cases were not arbitrated because § 1 of the FAA exempts certain contracts of employment. Second, the FAA did not apply to federal statutory claims; such rights were considered important enough to require vindication in the courts. Third, the FAA did not compel arbitration of cases filed in state court. Fourth, the act did not apply to contracts of adhesion; in such agreements, there was no explicit agreement to arbitrate.

Over the past generation, however, the court has erased each limitation. First, it held that the FAA exemption applies only to contracts involving transportation workers, not employees generally. Second, the court compelled arbitration of a variety of federal statutory claims, including RICO, employment, and antitrust claims. In so doing, it concluded that there is nothing special about litigation; federal claims can be fully vindicated in arbitration. Third, it held that the act applies to cases filed in state court. Finally, the court applied the FAA to contracts of adhesion—to agreements that do not feature bargaining, but which are offered on a take-it-or-leave-it basis. Not surprisingly, retailers and employers now routinely insert arbitration clauses into their contracts. 

But that is not the full story. Two decades ago, retailers and employers began adding provisions that forbid claimants from arbitrating with other claimants. In other words, the consumer or employee must arbitrate alone. The problem with these “class waivers” is that many cases involve “negative value” claims, which are not economically viable if pursued alone. Recognizing this, some states concluded that class waivers violate public policy. Thus, they permitted claimants to arbitrate in the aggregate. But in the Concepcion case in 2011, the court held that such state laws are preempted by the FAA. That case concerned one million claims of $30 apiece. In the absence of group arbitration, it is not clear that many of the claims would be pursued, even if the claim were well-grounded legally.

In Concepcion, the court left open the possibility that class waivers would not be enforced if they would thwart the “effective vindication” of plaintiffs’ rights. Plaintiffs thought they had such a case when restaurants sued a credit card company for alleged violations of antitrust law. The claims were not viable individually because of the need for expensive expert testimony. Nonetheless, in 2013, in Italian Colors, the court enforced the class waiver. According to the majority, the fact that it was not economically feasible to pursue a claim “does not constitute the elimination of the right to pursue that remedy.” In short, the antitrust laws “do not guarantee an affordable procedural path to the vindication of every claim.”

This is the “mountain” against which Epic Systems was decided. The opinion decided three companion cases. In each, employees agreed to adhesion contracts that required individual arbitration of all employment disputes; agreeing to the contract was a condition of remaining employed. Each employee filed a class action in court, asserting wage and hour claims under the Fair Labor Standards Act and related state claims. They asserted that compelling them to forgo the right to aggregate litigation or arbitration violated the National Labor Relations Act (NLRA) because it interferes with their right to engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The National Labor Relations Board had agreed with this assertion, as had the Seventh Circuit.

The court rejected the argument on statutory grounds. The NLRA was passed 10 years after the FAA. Neither the terms nor the structure of the NLRA repeals the operation of the FAA. The “concerted activities” language relates not to litigation, but to collective action in unionization and collective bargaining. The majority was not interested in whether the result reflected a wise policy choice. In the end, the majority asserted, policy is for Congress to make and Congress has opted for the primacy of contract. The dissent, by Justice Ginsburg, leans heavily on policy and bemoans the path the precedent has taken.

Given other decisions on the “mountain,” the result in Epic Systems is not surprising. In my opinion, the court erred years ago when it applied the FAA to contracts of adhesion. But the mountain stands. The way around the mountain—if there is to be one—does not lie in the courts. It lies in Congress. The courts have indeed been ousted of jurisdiction.

Richard D. Freer, Charles Howard Candler Professor of Law