Collective bargaining squares off against arbitration

Employers seeking to prevent employees from bringing class action lawsuits against them faced a setback when the 9th U.S. Circuit Court of Appeals held in its August 2016 decision of Morris v. Ernst & Young that arbitration agreements requiring employees bringing claims against their employer do so in “separate proceedings” violated the National Labor Relations Act. In its October term, the U.S. Supreme Court will revisit the issues in Morris and decide whether the collective bargaining provisions of NLRA prohibit enforcement under the Federal Arbitration Act of an agreement requiring employees to arbitrate claims against employers on individual, as opposed to a collective, basis.

Employment contracts with arbitration clauses have become increasingly common in the workplace. In recent past years, when the conservative Justice Antonin Scalia was on the bench, the Supreme Court generally ruled in favor of the enforcement of arbitration agreements. In the 2011 landmark decision AT&T Mobility LLC v. Concepcion, the Court held that the FAA preempts state laws that forbid contracts that preclude class actions in arbitration. Concepcion thus overruled the California Supreme Court’s prior ruling on this issue in the decision of Discover Bank v. Superior Court which held that Discover’s cardholder arbitration agreement’s class action waiver was unenforceable because it appeared in a consumer adhesion contract and enabled Discover, the party with more bargaining power, to cheat its customers out of small sums of money. The pro-business Concepcion decision paved the way for businesses to lawfully include and enforce arbitration agreements prohibiting consumers from bringing class actions.

Morris arose when two employees of Ernst & Young brought a class action against the company for misclassifying employees as a means of denying them overtime wages. As a condition of employment, they had to sign agreements requiring that employees (1) pursue legal claims against Ernst & Young exclusively through arbitration and (2) arbitrate only as individuals and in “separate proceedings.” The trial court ordered the plaintiffs to pursue their claims individually through arbitration and dismissed the case. The 9th Circuit reversed the trial court’s decision and held that the “separate proceedings” requirement violated the employees’ rights to engage in concerted activity for their benefit and protection pursuant to Section 7 of the NLRA (which was put into place by the National Labor Relations Board, an independent U.S. government agency which investigates and remedies unfair labor practices).

Ernst & Young argued that the FAA greatly favors the enforcement of arbitration agreements, but the 9th Circuit noted that the problem with Ernst & Young’s employment agreement was not the arbitration requirement itself, but the requirement that aggrieved employees pursue separate, individual actions. Furthermore, the 9th Circuit held that the rights laid out by Section 7 of the NLRA were substantive, not merely procedural, thus these rights could not be waived in an arbitration agreement.

The Morris decision surprised California jurists as it seemingly clashed with state law precedent pursuant to the 2014 decision, Iskanian v. CLS Transportation. In Iskanian, the California Supreme Court had examined an arbitration clause in an employment contract that barred “class and representative actions,” but unlike Morris, did not specifically require “separate proceedings.” In Iskanian, the court held that this clause still permitted a broad range of collective action pursuant to the NLRA, such as multiple employees bringing an action together in arbitration. The California Supreme Court agreed with the 5th Circuit’s holding in D.R. Horton, Inc. v. NLRA that the NLRA does not preclude enforcement of a class action waiver in an arbitration agreement. However, the court’s decision in Iskanian implied that a clause that went further in barring collective action might well violate the NLRA. The Iskanian court also noted that California’s Private Attorneys General Act was an exception to its holding and as such, an employee’s right to bring a PAGA claim in any forum could not be waived.

In Morris, the 9th Circuit joined the 7th Circuit, which was the first appeals court to invalidate employment class action waivers in arbitration agreements earlier in 2016 in Lewis v. Epic Systems. In contrast to the 9th and 7th Circuits, the 2nd, 5th and 8th Circuits have held that the NLRA does not invalidate class or collective action waivers in arbitration agreements. The Supreme Court will address this circuit split by consolidating Morris, Lewis and NLRB v. Murphy Oil USA, Inc. (the 2nd Circuit’s decision) in its October term.

During the time that Scalia’s vacancy was unfilled, there was some uncertainty about how the high court would rule on this issue. However, after President Donald Trump’s nominee to the bench, Neil Gorsuch, was confirmed in April of this year — in the narrowest approval of a Supreme Court justice since Justice Clarence Thomas — there is considerably less speculation as to how the newest justice will rule. Justice Gorsuch is conservative and is expected to take an originalist and textualist approach in his decisions, akin to Scalia. Originalism is a rigid theory that the Constitution should be interpreted pursuant to the intent of the original drafters and people living at the time of the Constitution’s ratification. Gorsuch was previously a 10th Circuit Court of Appeals judge, nominated to the bench by President George W. Bush in 2006.

Democrats challenged Gorsuch’s confirmation on several grounds, including that the court would become too heavily skewed in favor of big business. Democrats pointed to Gorsuch’s dissent in a 2016 case (Transam Trucking, Inc. v. Administrative Review Board, United States Department of Labor) where a truck driver whose rig broke down in 14 below weather drove away to seek shelter when he started to become numb; Gorsuch argued that the driver had been rightfully fired by his employer for his actions.

With Justice Gorsuch taking the place left by Justice Scalia, the Supreme Court may well resolve this circuit split in a pro-business, pro-employer manner, confirming the decisions of the 2nd, 5th and 8th Circuits that class action waivers in employment arbitration agreements are lawful. However, anything is possible and we wont know more until the oral argument next month.