Awaiting the end of June with great anticipation is an annual affair for Court watchers around the country. Many of the most consequential and ground-breaking decisions each year are released in June, as the Supreme Court closes the term and enters its summer break. This year is no different. Last month’s Update previewed several (potentially) consequential and ground-breaking cases, and the Court handed down one of those decisions last week—Masterpiece Cakeshop, Ltd. v. Colorado Civil Rights Commission, No. 16-111. A recap of this case appears at the end of this post. As the Update has stressed these last few months, however, the Supreme Court’s impact extends far beyond the “June cases”—the First Amendment cases, the “Obamacare” cases, the marriage cases. The Court is an important player across the economic landscape in this country, and the various interests of the financial services industry frequently are involved in cases before the justices. Below, I discuss two cases—Epic Systems Corp. v. Lewis, No. 16-285 (a case involving the enforceability of arbitration agreements with employees), and Murphy v. National Collegiate Athletic Association, No. 16-476 (a case involving a state’s authority to permit sports gambling)—that touch on the financial sector.
The enforceability of arbitration agreements is a frequently litigated issue in federal courts, and almost always the issue involves a business on one side and an individual on the other. Arbitration, in this context, is the process of resolving a dispute in a private forum rather than in court. For a business, proceeding to arbitration to resolve a dispute with a customer or employee is in the typical case less burdensome and less costly, both in terms of legal fees and with respect to exposure to large money judgments. But, of course, neither party has a right to proceed to arbitration unless both parties have agreed ex ante to that private forum. Such agreements are commonplace (check your credit card agreement), and so is litigation about whether the agreements are enforceable. Individuals, once a dispute has arisen, overwhelmingly prefer the protections of the judicial forum.
At the center of this sort of litigation is the Federal Arbitration Act (FAA), which as a general matter says that, because arbitration agreements are private contracts, courts must strictly enforce their terms. In other words, if a party agrees to arbitrate his disputes, then his disputes must be arbitrated. More than a few challenges to that basic construction of the FAA have reached the Supreme Court in recent decades. The Supreme Court has held that the FAA mandates full enforcement of an agreement between an individual and a company where the individual not only has agreed to arbitrate any individual disputes but also has agreed to forego any right to pursue a class action. That is, no individual cases in court, no class actions in court. The appeal, on the company side, of limiting class actions is obvious. The company’s exposure is greatly reduced, and it can manage risk more efficiently.
That brings us to Epic Systems Corp. v. Lewis, where the plaintiffs in a group of consolidated employment cases involving defendants Murphy Oil USA, Inc., and Ernst & Young LLP, argued that the protections granted by the National Labor Relations Act (NLRA) overrode the FAA and therefore permitted the plaintiffs to proceed with their class action claims in court rather in arbitration. Specifically, the plaintiffs contended that the NLRA’s protection of “concerted activities”—e.g., the right to organize unions and to bargain collectively—encompassed the right to proceed with class action lawsuits. The Supreme Court, in a decision authored by Justice Gorsuch, rejected the plaintiffs’ argument, reasoning fundamentally that “Congress has instructed federal courts to enforce arbitration agreements according to their terms—including terms providing for individualized proceedings.” Justice Gorsuch explained that there is no conflict between the NLRA’s protection of “concerted activities” and the FAA’s arbitration mandate because the NLRA simply does not guarantee the right to proceed with class action lawsuits. The parties’ contract must control.
Readers who track point spreads, money lines, and over/unders will be particularly interested in Murphy v. National Collegiate Athletic Association—the sports gambling case. A federal statute, known as the Professional and Amateur Sports Protection Act (PASPA) prohibits the states from authorizing sports gambling. In 2014, New Jersey repealed its ban on sports gambling, effectively authorizing betting in Atlantic City. The major professional sports leagues and the NCAA (which somewhat ironically rake in absurd amounts of cash under plenty of morally suspect circumstances) adamantly oppose sports gambling and sued to prevent New Jersey from implementing a legal gambling system, relying on PASPA’s prohibition. Fortunately for us Americans, the federal government doesn’t always get to tell the states what to do. The Tenth Amendment provides that the “powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” The upshot, as Justice Alito wrote for the majority, is that Congress may not simply commandeer state legislatures by directly compelling states to enact and enforce a federal regulatory program. This is known as the anti-commandeering doctrine. Applied here, this doctrine means that Congress may not prohibit New Jersey from authorizing legal gambling. While the federal government may take action to directly prohibit gambling, it must enforce such laws on its own; Congress may not enlist the states to enact its regime. Football season kicks off in approximately three months, and if I had to bet, I’d say the sportsbooks in Atlantic City are looking forward to it.
Readers should continue to monitor developments on the sports gambling scene. If sports gambling—potentially a highly profitable industry—becomes more prevalent as a result of state law changes, banks and other financial institutions need to be aware of the potential risks associated with investing in and financing certain ventures involved with sports gambling. Navigating the interplay of state and federal laws to ensure that transactions do not run afoul of federal law will be important.
Masterpiece Cakeshop is a case at the intersection of the rights protected by the First Amendment and the rights and dignity of gay persons in this country. Readers will recall that the owner of Masterpiece Cakeshop had refused to create a cake for a same-sex wedding, and the Colorado Civil Rights Commission then ordered him to “cease and desist” from discriminating against same-sex couples “by refusing to sell them wedding cakes.” The Commission also ordered him to conduct comprehensive staff training and to prepare quarterly compliance reports for a period of two years. Justice Kennedy, who also authored the Supreme Court’s decision in Obergefell v. Hodges, which recognized the constitutional right to enter into a same-sex marriage, authored the Court’s opinion here. This opinion echoes the core of Obergefell: “Our society has come to the recognition that gay persons and gay couples cannot be treated as social outcasts or as inferior in dignity and worth. For that reason the laws and the Constitution can, and in some instances must, protect them in the exercise of their civil rights.” Justice Kennedy also recognizes the importance of religious freedom: “The First Amendment ensures that religious organizations and persons are given proper protection as they seek to teach the principles that are so fulfilling and so central to their lives and faiths.” Surely, one of these principles must cede to the other here?
Not necessarily. Justice Kennedy concludes that the Commission failed to follow an appropriate process and “violated the State’s duty under the First Amendment not to base laws or regulations on hostility to a religion or religious viewpoint.” Thus, it was not the ultimate conclusion of the Commission—i.e., that the state’s anti-discrimination law prohibited a cake maker from declining service on the basis of sexual orientation. Instead, it was the process by which that conclusion came to be. To wit, the Commission referred to the cake maker’s faith as “despicable” and characterized the cake maker’s stance as mere “rhetoric.” One of the Commissioners went so far as to compare the cake maker’s “invocation of his sincerely held religious beliefs to defenses of slavery and the Holocaust.” Justice Kennedy concludes by acknowledging that litigation of this sort will continue but that judges (and all of us) must strive to recognize and respect the competing interests at stake: “The outcome of cases like this in other circumstances must await further elaboration in the courts, all in the context of recognizing that these disputes must be resolved with tolerance, without undue disrespect to sincere religious beliefs, and without subjecting gay persons to indignities when they seek goods and services in an open market.”
Charles W. Prueter is a trial and appellate lawyer at Waller Lansden Dortch & Davis, LLP, in Birmingham. He can be reached by email at charles.prueter@wallerlaw.com. Comments and questions are welcome.
