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On May 26, 2017, the U.S. Court of Appeals for the Sixth Circuit, in NLRB v. Alternative Entertainment, Inc., held that it was unlawful for an employer to require its employees to sign arbitration agreements that blocked them from pursuing job-related class or collective lawsuits and arbitrations.

Prior to reaching the Sixth Circuit, the National Labor Relations Board (the NLRB) had found that Alternative Entertainment Inc. (AEI) violated the National Labor Relations Act (the NLRA) when it barred its satellite TV technician employees from pursuing class-action litigation or collective arbitration of work-related claims. The agreement between AEI and its employees required that “Disputes between you and AEI . . . relating to your employment with the Company” must be resolved “exclusively through binding arbitration.” Furthermore, the document specified that “By signing this policy, you and AEI also agree that a claim may not be arbitrated as a class action, also called ‘representative’ or ‘collective’ actions, and that a claim may not otherwise be consolidated or joined with the claims of others.”

Statutory Background: The Federal Arbitration Act and the National Labor Relations Act

The NLRB concluded that AEI’s agreement violated the NLRA because it prevented employees from taking any concerted legal action. As the Sixth Circuit noted, any provision in an arbitration agreement that prevents employees from taking concerted legal action implicates two federal statutes: the Federal Arbitration Act (the FAA) and the NLRA. The FAA, 9 U.S.C. §§ 1 et seq., reflects a liberal federal policy favoring arbitration agreements, and states that arbitration agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2.

Section 7 of the NLRA, 29 U.S.C. §§ 151 et seq., states that “Employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” 29 U.S.C. § 157. Section 8 specifies that, “It shall be an unfair labor practice for an employer . . . to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in section 157 of this title.” 29 U.S.C. § 158. Many legal minds have interpreted these two statutes to be incompatible.

The Sixth Circuit’s Reasoning: the FAA and NLRA “Do Not Conflict”

The Sixth Circuit’s reasoning relies on a portion of the FAA that has become known as the “saving clause,” which refers to the part of that the law makes arbitration agreements enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The Sixth Circuit explained that this saving clause actually allows the two statutes, which appear to be inconsistent, to be read compatibly. Any contract that undermines the NLRA right of employees to engage in concerted activity, the Sixth Circuit opined, is therefore unenforceable under the FAA. “Because of the FAA’s saving clause, the statutes work in harmony.”

The Sixth Circuit Joins an Existing Circuit Split and the U.S. Supreme Court Has Agreed to Review

The first circuits to review the NLRB’s position were the Fifth and Eight Circuits, which held in 2013 that the NLRB’s interpretation of the NLRA was in conflict with the FAA, and that the FAA allows for such mandatory class action waivers. Both circuits have maintained this holding in their 2015 Murphy Oil USA v. NLRB and 2016 Cellular Sales of Missouri, LLC v. NLRB rulings, respectively.

Other circuits first confronting the issue more recently, however, have disagreed. Both the Ninth Circuit, in Morris v. Ernst & Young, LLP, and the Seventh Circuit, in Lewis v. Epic Sys. Corp., first faced this legal question in 2016, and both backed the NLRB’s view. These circuits held that arbitration provisions mandating individual arbitration of employment-related claims violate the NLRA.

Now, the Sixth Circuit joins the Ninth and Seventh Circuits in supporting the NLRB’s position. Given the growing circuit split, the U.S. Supreme Court has agreed to review the issue and is expected to hear arguments in the fall of 2017.

Employers which have promulgated arbitration agreements in Kentucky, Michigan, Ohio, and Tennessee should recognize the Sixth Circuit’s ruling here as to provisions purporting to ban class-wide arbitrations. However, the final word as to the enforceability of such provisions has yet to be spoken. The Supreme Court’s decisions typically are issued within three months of oral argument.


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