Class action waiver split may go up

Last month, in a 2-1 decision, the 9th U.S. Circuit Court of Appeals ruled Ernst & Young cannot force employees to pursue work-related claims individually through so-called "concerted action waivers." Morris v. Ernst & Young LLP, 2016 DJDAR 8732 (Aug. 22, 2016). As a condition of employment, employees were required to sign agreements that contained a "concerted action waiver" (a term coined by the court) requiring the employees to pursue legal claims against Ernst & Young exclusively through arbitration, and arbitrate only as individuals and in "separate proceedings." The court struck down this provision, ruling that mandatory class action waivers violate the right to engage in concerted action under the federal National Labor Relations Act (NLRA).

The court said the "separate proceedings" restriction is the "very antithesis" of NLRA Section 7's substantive right to pursue concerted work-related legal claims. According to the court, a "concerted action waiver" prevents employees from initiating a work-related legal claim together: Employees may only resolve disputes in a single forum - here, arbitration - and they may never do so in concert. The court reasoned this result interferes with a protected Section 7 right, making the "separate proceedings" terms unenforceable.

The majority also concluded that the so-called "saving clause" of the Federal Arbitration Act (FAA), which validates arbitration agreements save for instances in which grounds exist for their revocation, prevented the enforcement of the waiver of substantive federal rights. Although the "separate proceedings" provision appeared in an agreement that directed employment-related disputes to arbitration, the "illegality" of the provision had nothing to do with arbitration as a dispute resolution forum. The problem with the contract was not that it required arbitration; it was that the contract term defeated a substantive federal right to pursue concerted work-related legal claims. The 9th Circuit found "[t]he right to protected concerted activity cannot be waived in an arbitration agreement."

In so holding, the 9th Circuit followed decisions by the National Labor Relations Board (NLRB) and 7th U.S. Circuit Court of Appeals. See Lewis v. Epic Sys. Corp., 823 F.3d 1147, 1155 (7th Cir. 2016) ("A contract that limits Section 7 rights that is agreed to as a condition of continued employment qualifies as 'interfer[ing] with' or 'restrain[ing] ... employees in the exercise' of those rights in violation of Section 8(a)(1)."). Judge Sandra S. Ikuta dissented, calling the majority's reasoning "specious" and "breathtaking in its scope and in its error." She found the majority's decision based on the "erroneous assumption" that the waiver of the right to use a collective mechanism in arbitration or litigation is "illegal." But in this instance Ikuta concluded there was no "contrary congressional command" in the NLRA precluding such a waiver.

The 9th Circuit's decision creates a split in the circuits and creates uncertainty for employers. Contrary to the 9th Circuit, the 2nd, 5th and 8th Circuits have concluded that the NLRA does not invalidate collective action waivers in arbitration agreements. See Cellular Sales of Missouri, LLC v. NLRB, 15-1620, 15-1860, (8th Cir. 2016); Murphy Oil U.S.A., Inc. v. NLRB, 808 F.3d 1013 (5th Cir. 2015); D.R. Horton v. NLRB, 737 F.3d 344, 361 (5th Cir. 2013); Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297 n.8 (2d Cir. 2013). Ernst & Young has asked the Supreme Court to resolve the question, arguing that this case "presents a recognized and indisputably important circuit conflict" concerning the "interplay" between the FAA and NLRA. Epic Systems also has filed a petition for writ of certiorari, contending that the 7th Circuit's analysis was flawed. The NLRB also requested Supreme Court review of the 5th Circuit's decision in Murphy Oil. In light of this circuit split, it seems likely that the U.S. Supreme Court will review the issue.

Meanwhile, the California Supreme Court in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014), previously followed the 5th Circuit in rejecting the argument that the NLRA prevents class action waivers: "In light of Concepcion, the Board's rule is not covered by the FAA's savings clause." Given the FAA's "liberal federal policy favoring arbitration," the court concluded that the NLRA did not represent "a contrary congressional command" that overrides the FAA's pro-arbitration mandate.

California state courts are bound by the California Supreme Court's Iskanian decision upholding class action waivers in arbitration agreements, rather than the 9th Circuit's contrary decision in Morris. This means that for California employers, state courts remain the best forum to enforce class action waivers.

Employers may choose to rely on the more favorable Iskanian decision and wait for the United States Supreme Court to weigh in on the split in the circuits, particularly those employers with arbitration agreements already in place. Nevertheless, this strategy is not without risk. First, California employers continue to face potential exposure to unfair labor practice charges by the NLRB for requiring mandatory class action waiver agreements. The board maintains the position that Section 7 precludes the enforcement of class action waivers. Second, the board could conclude that including such a waiver in an agreement violates Sections 7 and 8, constituting an unfair labor practice. Second, Morris erects a bar to the enforcement of employment arbitration agreements containing class action waivers in the federal courts in this circuit.

However, even under Morris, California employers can strengthen their position by giving employees an opportunity to opt out of the class action waiver agreement, as the 9th Circuit suggested. In footnote four of Morris, the 9th Circuit panel left open the possibility that class action waivers may be permissible when employees are not required to sign such waivers as a condition of employment, citing Johnmohammadi v. Bloomingdale's, Inc., 755 F.3d 1072, 1076 (9th Cir. 2014) (holding there was no Section 8 violation because the employee could have opted out of the individual dispute resolution agreement and chose not to). Moreover, logically the Morris decision should not apply to employees not covered by the NLRA.

In sum, Morris will create uncertainty over the enforcement of class action waivers in employment arbitration agreements and will engender more litigation until the U.S. Supreme Court decides the issue.