United States: Reining In Individual Arbitration – Ninth Circuit Rules Class Waivers Unenforceable

In a 2-1 ruling, the Ninth Circuit became the second federal court of appeals to agree with the National Labor Relations Board's (NLRB) position that the National Labor Relations Act (NLRA) prohibits class action waivers in employees' arbitration agreements.

Writing for the majority in Morris v. Ernst & Young, Chief Judge Sidney Thomas held that Ernst & Young's arbitration agreement violated Sections 7 and 8 of the NLRA by requiring its employees to arbitrate work-related claims in "separate proceedings."

Plaintiffs Stephen Morris and Kelly McDaniel formerly worked at Ernst & Young. As a condition of employment, they signed arbitration agreements that included a "concerted action waiver." The waiver required employees to pursue claims exclusively through arbitration and only as individuals in "separate proceedings." Despite signing the agreement, Morris and McDaniel subsequently brought a class and collective action in federal court, alleging that the company misclassified its employees in violation of the Fair Labor Standards Act. Pursuant to the arbitration agreement, Ernst & Young moved to compel individual arbitration. The federal district court agreed and dismissed the case. The plaintiffs appealed to the Ninth Circuit.

Citing the NLRB's position regarding the unenforceability of class action waivers and the Seventh Circuit's recent decision in Lewis v. Epic Systems Corp. striking down a class waiver (discussed previously here), the Ninth Circuit concluded that Ernst & Young's concerted action waiver violated the NLRA and could not be enforced.

The majority engaged in a two-part analysis to reach its conclusion. First, the court analyzed Sections 7 and 8 of the NLRA and determined that the language of these sections demonstrates that the intent of Congress is clear and is consistent with the NLRB's interpretation that the NLRA grants employees the right to pursue work-related claims collectively. Looking to the language of Section 7, the court noted that the literal wording establishes such a right – "Employees shall have the right . . . to engage in other concerted activities for the purpose of collective bargaining or other mutual aid and protection."

The majority found Congress's intent to be equally clear in Section 8's enforcement provisions, which make it an unfair labor practice for an employer to "interfere with, restrain, or coerce employees in the exercise of the rights guaranteed [in section 7]." Ernst & Young's "separate proceedings" clause, according to the majority, prevents the exercise of a Section 7 right to initiate a concerted work-related legal claim and therefore constitutes the very "interference" prohibited by Section 8. This position is consistent with the Seventh Circuit's reasoning in Lewis v. Epic that "[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)." 823 F.3d 1147, 1155 (7th Cir. 2016). Accordingly, the Ninth Circuit majority concluded that Sections 7 and 8 of the NLRA are unambiguous and consistent with the NLRB's interpretation, and the "separate proceeding" clause interferes with these unambiguous rights and cannot be enforced.

In a second portion of the opinion, the majority examined the relationship between the NLRA and the Federal Arbitration Act (FAA). It concluded that the FAA's savings clause, which enforces arbitration agreements save for instances in which grounds exist for their revocation, is applicable because Ernst & Young's agreement attempts to make employees waive a substantive federal right to pursue legal claims collectively. The problem with the agreement was not that it requires arbitration. "The illegality of the 'separate proceedings' term here has nothing to do with arbitration as a forum . . . . The same infirmity would exist if the contract required disputes to be resolved through casting lots, coin toss, duel, trial by ordeal, or any other dispute resolution mechanism . . . . the problem . . . is that the contract term defeats a substantive federal right to pursue work-related legal claims."

Acknowledging the distinction between substantive and procedural federal rights and its critical impact on the outcome of the case, the court concluded that "[t]he rights established in § 7 of the NLRA—including the right of employees to pursue legal claims together—are substantive. They are the central, fundamental protections of the Act, so the FAA does not mandate the enforcement of a contract that alleges their waiver." (emphasis added). And because the arbitration agreement at issue "professes to waive a substantive federal right, the savings clause of the FAA prevents the enforcement of that waiver."

In a 17-page dissent labeling the majority's ruling as "breathtaking in its scope and in its error," Judge Sandra S. Ikuta stated that the majority's focus on whether the NLRA confers substantive rights was misplaced. Instead, U.S. Supreme Court precedent is clear that when a party claims that a federal statute precludes the enforcement of an arbitration agreement, courts must examine whether the statute contains a "contrary congressional command" that trumps the FAA. See, e.g., Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304, 2309 (2013); CompuCredit Corp. v. Greenwood, 132 S. Ct. 665, 669 (2012); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 29 (1991). The dissent emphasized that in every Supreme Court case to date, the Court has harmonized the challenged statutory language with the FAA and found the arbitration agreement at issue to be enforceable according to its terms.

In Italian Colors, CompuCredit and Gilmer, the Supreme Court consistently focused on whether the text of the federal statute at issue expressly precluded the use of an arbitration agreement. In those cases, the Supreme Court uniformly rejected claims that such a "contrary congressional command" existed. The language of Sections 7 and 8 of the NLRA, according to the dissent, does not come "remotely close to the examples of contrary congressional commands" previously identified by the Supreme Court. Moreover, nothing in the NLRA's legislative history demonstrates congressional intent to preclude individual resolution of work-related disputes. Finally and importantly, according to the dissent, no inherent conflict exists between arbitration and the underlying purposes of the NLRA, and the majority's attempt to "equate a substantive right to concerted action with a legal procedural mechanism for resolving disputes has no basis in history or in Supreme Court precedent."

Countering Judge Ikuta's arguments, the majority noted that the dissent "puts the cart before the horse" by rushing to an analysis of "contrary congressional command" and whether the FAA trumps the NLRA or vice versa. "Instead, we join the Seventh Circuit (Lewis v. Epic) in treating the interaction between the NLRA and the FAA in a very ordinary way: when an arbitration contract professes to waive a substantive federal right, the savings clause of the FAA prevents enforcement of the waiver."

The decision in Morris v. Ernst & Young sets the stage for ultimate Supreme Court review and adds to the split among federal circuit courts as to the enforceability of class waivers in arbitration agreements. The Second, Fifth and Eighth Circuits have concluded that the NLRA does not invalidate class or collective action waivers in arbitration agreements. The Seventh and Ninth Circuits now have concluded otherwise. Supreme Court review seems inevitable – but when and how is yet to be determined. The NLRB has been granted an extension of time to file a petition for writ of certiorari until Sept. 9, 2016, in NLRB v. Murphy Oil. And the employer in Lewis v. Epic Systems has been granted an extension of time to file a petition for writ of certiorari until Sept. 23, 2016, based on the Seventh Circuit's decision.

Bottom line: The Ninth Circuit's opinion in Morris v. Ernst & Young widened the divide among circuit courts regarding the validity of class waivers in employment arbitration agreements. Now, in the Ninth Circuit, employers violate employees' substantive Section 7 rights to engage in concerted activity by requiring them to execute class waivers in arbitration agreements. National employers will have to grapple with the differing positions of the circuits on this issue. Supreme Court review is needed.

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