United States: Ninth Circuit, California Appellate Court Take Aim At Arbitration Agreements

Executive Summary. The Ninth Circuit and the California Court of Appeal have each issued decisions that may fundamentally affect how employers deal with arbitration agreements in the future. In Morris v. Ernst & Young, the Ninth Circuit held that it is unlawful to require an employee to sign an arbitration agreement that includes a class action waiver. In Esparza v. Sand & Sea, Inc., the California Court of Appeal refused to enforce an arbitration provision that was contained only in an employee handbook.

Class Action Waivers Unlawful in Ninth Circuit. In Morris, two Ernst & Young employees filed a wage and hour class and collective action lawsuit against the company. Ernst & Young moved to compel arbitration, citing the fact that the employees had signed arbitration agreements. The arbitration agreements required employees to (1) pursue all legal claims arising from the employment relationship exclusively through arbitration; and (2) arbitrate only as individuals and in "separate proceedings." The latter of these provisions is commonly referred to as a "class action waiver" because it precludes employees from pursuing class or collective actions against the company.

The Ninth Circuit held that the class action waiver interfered with employees' right to pursue employment claims together and thus violated employees' right to engage in protected concerted activity under Section 7 of the National Labor Relations Act (NLRA).  Adopting the rationale set forth in D.R. Horton, 357 NLRB No. 184 (2012), the court stated that employees have a substantive right under the NLRA to pursue work-related legal claims together and that this right extends to pursuing class or collective actions. As such, class action waivers violate the NLRA and are not enforceable, per the Ninth Circuit.

The Ninth Circuit also explicitly stated that its holding was consistent with the Federal Arbitration Act. According to the court, the problem with the arbitration agreement in question was not that it required arbitration; rather, the problem (in the court's view) was that it prohibited employees from exercising their right to pursue work-related legal claims together.  According to the court, arbitration agreements are enforceable, but only if they allow employees to pursue class or collective actions in the arbitration forum.

Significantly, the Ninth Circuit noted that an arbitration agreement that includes a class action waiver may still be enforceable if employees have the choice to opt out of the agreement and choose not to do so.

It must be noted that this decision is at odds with two Fifth Circuit decisions holding that class action waivers do not violate the NLRA. This split in the circuits may result in a review by the U.S. Supreme Court.

Arbitration Agreement in Employee Handbook Not Enforceable. In Esparza v. Sand & Sea, Inc., an individual employee filed a lawsuit under California's anti-discrimination and anti-harassment statute. The employer moved to compel arbitration pursuant to the arbitration provision set forth in the company's employee handbook.

The Court of Appeal refused to compel the plaintiff to pursue her claims via arbitration based on the handbook provision. The court reasoned that the employee handbook explicitly stated that it did not give rise to an employment contract of any kind. In addition, the handbook required employees to sign a form acknowledging that they received the handbook, but the form did not explicitly state that by signing the form, the employee agreed to abide by the arbitration provision in the handbook. Rather, the acknowledgment form stated that the policies in the handbook were only informational and asked the employees to read the handbook within one week of receipt, which suggested the employees did not have to read the handbook before signing the acknowledgment. Accordingly, the court concluded that the plaintiff employee had not agreed to be contractually bound by the arbitration provision and, thus, could not be compelled to arbitrate her claims.  

Bottom Line. The decision in Morris v. Ernst & Young exacerbates an existing circuit split and further emphasizes the need for the Supreme Court to weigh in. In the meantime, companies with arbitration agreements that contain class action waivers should speak to an attorney to determine what revisions may be appropriate.

In response to the decision in Esparza v. Sand & Sea, Inc., employers who have implemented arbitration provisions in their employee handbook may wish to consult with an attorney to develop stand-alone arbitration agreements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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