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The Supreme Court’s Arbitration Ruling Undercuts The Court System

On Monday, in a decision called Epic Systems, the United States Supreme Court authorized employers to close the courthouse door to tens of millions of employees. The harm that the ruling has caused another system — the justice system — is epic.

The opening lines of the five-person majority decision by Justice Neil Gorsuch seem to ask a genuine question. “Should employees and employers be allowed to agree that any disputes between them will be resolved through one-on-one arbitration?”

I would happily answer yes, had the question not been a red herring. But agreement has nothing to do with the actual facts of the three cases before the court.

Jacob Lewis was working at Epic Systems when, on April 2, 2014, he received an email informing all employees of new rules: If they had any legal complaints, they had to bring them individually. Epic mandated that all employees waive their “right to participate in … any class, collective, or representative proceeding.” Epic said employees were “deemed” to have accepted and were to acknowledge doing so through computer clicks.

Stephen Morris and Kelly McDaniel were working for Ernst & Young when they learned that they were told to sign agreements not to seek collective redress. Sheila Hobson, employed by a gas station in Alabama owned by Murphy Oil, had to sign on to binding arbitration to keep her job.

Three major companies thus laid down new conditions of continuing employment. And while treating their employees en masse, these companies instructed their employees that they could never be part of a group bringing complaints against their employers.

“Contract” is an important word in the law, one that for centuries has been key to a stable economy. What turns a piece of paper into a contract? Bargaining. One side makes an offer, and the other can counteroffer, and if they can find a way to come to a meeting of the minds and agree on terms, their exchange can become an enforceable contract.

But Jacob Lewis, Morris, McDaniel and Hobson never had any choices. Because the terms imposed by their employers were neither bargained for nor bargainable, they do not deserve to be called contracts.

Because the terms imposed by their employers were neither bargained for nor bargainable, they do not deserve to be called contracts.

Rather, as Justice Ruth Bader Ginsburg said when she took the unusual step of explaining from the bench why she dissented, along with Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan, these were “arm twisted, take-it-or-leave-it contracts,” not real contracts.

What were the employees twisted out of? Rights under federal law to overtime pay and to obtain collective redress, enshrined since the 1930s to protect employees against retaliation and to help them marshal the resources to pursue claims.

The Epic Systems decision is not just one that gets contract law wrong and undermines federal statutory rights. It is also a tragic reflection of the low value that employers and the U.S. Supreme Court’s majority place on American courts. Instead of running away from one of the great court systems in the world, employers should be committed to an independent judiciary, central to vibrant economies in democratic orders.

To be sure, powerful economic actors want control, and they want immunity from complaints that they are violating the law in a systemic fashion. Employers want to use courts on their own terms. A study of business-to-business contracts showed that when really bargaining with each other, major companies rarely require the use of arbitration; they leave open the option of using courts or arbitration. Yet many of those companies kick their employees and customers out of public courts.

Whatever the incentives of businesses, there is no excuse for those in the business of justice — judges, on courts — to put up barriers to courts. Justices should be committed to public accountability and to fair treatment, for which collective actions are sometimes required.

There is no excuse for those in the business of justice – judges, on courts – to put up barriers to courts.

In Epic Systems, the majority tries to hide behind Congress’ skirts by saying that the Federal Arbitration Act (FAA) of 1925 required its decision. But from the 1920s until the 1980s, the Supreme Court never read the FAA to apply when there was no real bargaining. The court rejected efforts to keep weaker parties out of court.

A 1953 decision, Wilko v. Swan, is exemplary. A securities broker argued that the form he had given to a customer required that the customer use only arbitration. But as the court explained, no real bargaining was possible, given the power disparity between the parties. Furthermore, what was at stake was the enforcement of federal securities regulations, and judges were needed to apply the law and make a record, subject to appellate review.

The FAA has not changed since then. But the people sitting on the Supreme Court have.

In the 1990s the court held that employers could mandate arbitration, even when employees argued that employers were violating state anti-discrimination laws.

In 2011 the court took the FAA even further afield from its text, in a case, also decided by a five-person majority, involving a claim by consumers — the Concepcions — that AT&T overcharged them $30 by falsely advertising a phone as free. California law protected consumers from such deception, and the state also made bans on collective action unenforceable.

But in AT&T v. Concepcion, the Supreme Court pushed aside California’s consumer protection laws and held that AT&T could require waiver of rights to class actions. The majority said the FAA contemplated “bilateral” arbitration.

Most people never use single-file arbitration because it is hard and expensive to go it alone.

The word “bilateral” appears nowhere in the FAA. Rather, as Justice Sandra Day O’Connor put it decades earlier, the expansion of the FAA to cut off claims in state as well as federal court is an “edifice” of the court’s own making.

Return then to where I started: the red herring of agreement between employees and employers. Take a good look at what cellphone providers like AT&T tell you about your consumer “agreement.” It says the company can “change any terms and conditions at any time.” This is illustrative of the unilateral power that the Supreme Court majority has unleashed.

Two takeaways are in order. First, the employers and the companies keep saying that in addition to being a contract, arbitration is great because it is so easy to do. But scratch the surface and look at the data.

AT&T had 85 million to 147 million customers from 2009 to 2017. Fewer than 56 a year used single-file arbitration.  Most people never use single-file arbitration because it is hard and expensive to go it alone. We need to stop calling this forced arbitration and instead call it forced out of courts.

The second thing to know is that Congress and employers can and should fix this. The Me Too movement is producing pressure for new statutes. Fifty attorneys general signed a letter a few months ago to ask Congress to exempt claims of sexual harassment from mandates to use confidential arbitration. Congress should do that and more: prohibit bans on collective redress and not only for sexual misconduct.

But we don’t need to wait for Congress. Let employers put their actions where their rhetoric is. Of course people should be able to use options other than courts, but only if genuine agreement exists. Instead of the question that opened Gorsuch’s opinion, the court should have asked, “If single-file arbitration is so good, why are employers and companies afraid to let us vote with our feet and opt into it when we really agree to do so?”

Judith Resnik is the Arthur Liman professor of law and the founding director of the Arthur Liman Center for Public Interest Law at Yale Law School.

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