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The Supreme Court Is Set to Decide the Future of Mandatory Arbitration

These binding clauses lock millions of workers and consumers out of the courtroom, and now their legality is being determined by the highest court in the land.
The United States Supreme Court building in Washington, D.C.

When Gretchen Carlson, the former host of Fox & Friends, accused Fox News Chief Executive Officer Roger Ailes of sexual harassment, she wasn't legally able to sue Fox News. A mandatory arbitration clause that she signed in her contract with the company prohibited her from taking her employer to court. The agreement required her to negotiate her complaint in confidential proceedings. So instead she sued Ailes personally—for $20 million.

Of all the hidden legal craft tucked into the fine print today, forced arbitration agreements may do the greatest harm to the largest number of Americans. These binding clauses, buried deep in the arcana of terms-of-service documents and employment contracts, lock millions of workers and consumers out of the courtroom.

From Wells Fargo and Amazon to Olive Garden and Applebee's, corporations with vast resources especially favor arbitration clauses that force a signatory to surrender their right to join a class action. A forthcoming decision by the United States Supreme Court may decide how far companies can run with these class-action waivers.

But if the court declines to put limits on runaway arbitration clauses, a legal theory being tested by legislators in Connecticut, Illinois, New York, and Oregon may provide some relief to workers and consumers going forward. More than 60 million employees in the U.S. have signed mandatory arbitration agreements. According to a study by the Economic Policy Institute, one-third of these affected workers have also signed class action waivers—meaning that not only can they not bring a suit against their employers on their own behalf, they also may not join a class action as part of an aggrieved group. More common in low-wage workplaces, mandatory arbitration clauses and class action waivers have a disproportionately adverse impact on women and minority employees.

As these clauses continue to withstand court scrutiny, their use is spreading. Forced arbitration got its start with credit card issuers, banks, and telecoms; today, many start-ups and smaller companies have adopted the practice. Even local bodegas in New York have begun dropping forced arbitration agreements into employee contracts, as CityLab reported last year.

"We are beginning to see these [forced arbitration clauses] in medical agreements, waiving the right to bring a malpractice claim," says Myriam Gilles, vice dean and law professor at the Benjamin N. Cardozo School of Law. "We're going to start to see these on ordinary consumer goods. And possibly someday, when you open your prescription drug, in the insert that nobody reads, there will be an arbitration clause barring you from bringing a case against Merck or Pfizer."

But wait—can they really do that? Class action suits, after all, lie behind some of the biggest consumer- and worker-rights decisions in recent history. Last year, for example, Wells Fargo agreed to pay $142 million to settle class action lawsuits over the 3.5 million fake bank accounts and credit cards the lender opened in consumers' names. Wells Fargo tried its damnedest to block any suits through forced arbitration; only sheer public outrage succeeded in forcing the bank to settle. From overtime wage protections to consumer safety protocols, class action suits are responsible for a wide range of benefits enjoyed by all workers and consumers. Corporate waivers change that, helping powerful companies such as Wells Fargo keep such scandals from ever seeing the light of day.

Within the next few weeks, the Supreme Court will decide whether class action waivers are enforceable as they apply specifically to job contracts. The Supreme Court's ruling in National Labor Relations Board v. Murphy Oil USA, Inc. (and two other consolidated cases), expected any day now, will pit two federal laws against one another.

On the one side is the Federal Arbitration Act, which establishes federal enforcement of employers' arbitration agreements. On the other is the National Labor Relations Act, which protects workers' right to bring class actions. Lawyers for the Obama administration filed a brief on behalf of the National Labor Relations Board, but the Trump administration took the opposite tack. Justice Stephen G. Breyer said a decision for employers could cut out "the entire heart of the New Deal."

There's a lot at stake in the next decision, in other words, and the precedent doesn't look great for labor. In the context of consumer agreements, the court has decided that states may not interfere with the Federal Arbitration Act, neither by judgment nor law. When a West Virginia state court ruled in 2012 that nursing homes could not enforce mandatory arbitration clauses in cases of negligence that led to wrongful death, the Supreme Court struck down the decision with an exquisitely brief and unanimous per curiam ruling.

A narrow reading by the Court that favors employers might simply clarify federal labor law. But a broad reading on their behalf could limit the reach of a future administration to regulate forced arbitration through agency rule-making. (The Consumer Financial Protection Bureau issued a rule banning class action waivers in July of 2017; Congress rolled back that action four months later.)

If the Court sides broadly with employers in NLRB v. Murphy Oil, the Economic Policy Institute's Alexander J.S. Colvin warns, "this will signal to businesses that the last potential barrier to their ability to opt out of class actions has been removed."

The issue has earned new visibility in light of forced arbitration agreements restricting would-be plaintiffs in high-profile sexual harassment cases. Susan Fowler, the engineer who detailed the sexual harassment she says she suffered working for Uber, became a whistleblower after she realized she had signed away her right to take her former employer to court. Fowler is now backing a state bill that would bar forced arbitration in cases involving discrimination in California. In an op-ed for the New York Times, she noted the intersection of #MeToo and corporate law reform. "Forcing legal disputes about discrimination, harassment and retaliation to go through secret arbitration proceedings hides the behavior and allows it to become culturally entrenched," Fowler writes.

There's another bill pending in Congress, the Ending Forced Arbitration of Sexual Harassment Act of 2017, sponsored by New York Senator Kirsten Gillibrand and Representative Cheri Bustos of Illinois, to do pretty much what the bill's title says—but with the full weight of federal law. If this legislation fails, or if the Supreme Court knocks down the pending challenges to forced arbitration, then aggrieved workers or consumers may need to fall back on a legal alternative established by California.

The Private Attorneys General Act, a California state law passed in 2004, mapped out a different route for challenges against corporate defendants. The bill enables injured employees or consumers to bring forward an action on behalf of the state. Shored up with new guidances in 2016, the law deputizes claimants to "stand in the shoes of the attorney general," Gilles says, which means they are seeking statutory fines, not personal damages.

"That's what makes it a public enforcement claim brought essentially by a private entity acting as a public enforcer," Gilles says. "The reason that completely avoids any preemption argument: The [Federal Arbitration Act] doesn't even come into play. The public enforcer is not a party to the contract and therefore is not subject to the forced arbitration clause."

Back in 2002, the Supreme Court heard a case that tested the role of the public enforcer in arbitration disputes. In Equal Employment Opportunity Commission v. Waffle House, the commission brought an enforcement claim on behalf of an injured employee. Waffle House argued that, since the employee was subject to an arbitration clause, the EEOC would have to arbitrate the claim. In a unanimous 2002 decision, the Supreme Court said there was no other way to dice it: The EEOC was not subject to that contract.

Supporters of laws such as California's PAGA bill say that EEOC v. Waffle House is settled law that establishes the public enforcer as an alternative to forced arbitration. In California, states collect most of the fines in cases brought this way, which is one drawback for claimants. But the greater benefit is still preserved, especially in class actions that affect the public at large—the kind of cases that public enforcers are more likely to take up.

"Basically, this is taking the private individual—consumer or employee—out of that contract, and putting them as a deputy in the AG's office or the labor commissioner's office, whoever the public enforcer may be," Gilles says.

That's why several states are looking to pass their own private attorneys general bills. New York's proposed Empowering People in Rights Enforcement Worker Protection Act enables employees to pursue wage theft and other labor claims on behalf of the state. Legislators in Vermont, Connecticut, and Illinois have proposed similar rules, in bills that are all pending before state assemblies. Advocates in Oregon are drafting a bill that they hope to see introduced in the fall.

But advocates for corporate interests are not about to take what they consider to be a flimsy legal workaround sitting down. The U.S. Chamber of Commerce, a vocal critic of the Consumer Financial Protection Bureau and its recent effort to curb forced arbitration, has backed a challenge against California's PAGA bill. "Review is essential to prevent an end-run around this Court's longstanding precedents upholding the strong federal policy in favor of arbitration," the group's amicus filing reads.

California passed its original PAGA legislation in 2004, several years before the Supreme Court affirmed that federal law trumps state law when it comes to forced arbitration disputes (in AT&T v. Concepcion, for those keeping score). At that time, Gilles says, California's labor commissioner was overwhelmed by the volume of workplace complaints pouring in and needed the help of deputies.

Even if other states follow course with acts like California's, it may not be enough to dam the flood of claims today. In an environment in which corporations no longer face the legal threat of class action suits, companies may push their interests further than ever.

"I think what we're seeing is that public enforcers are very worried that they simply can't bring all these claims. There are just too many," Gilles says. "The truth is, because forced arbitration suppresses claims, it makes defendants much bolder in the things they try to do."

This story originally appeared on CityLab, an editorial partner site. Subscribe to CityLab's newsletters and follow CityLab on Facebook and Twitter.