Broadening Split on Viability of Class Waivers in Employment Arbitration Agreements Invites SCOTUS

Contracts Pen iStock_000005206508Small[1]In the years following the U.S. Supreme Court’s AT&T Mobility v. Concepcion decision, more and more courts enforced class waivers in arbitration agreements based on the commands of the Federal Arbitration Act (FAA). The National Labor Relations Board (NLRB) parted with the post-Concepcion trend to enforce class waivers in D. R. Horton, Inc. and Michael Cuda, Case 12–CA–25764, 357 NLRB No. 184 (Jan. 3, 2012), however, and held that such waivers in individual employment agreements violate the National Labor Relations Act (NLRA) by prohibiting employees from acting in concert. When the Fifth Circuit Court of Appeals struck down the NLRB’s D.R. Horton decision in 2013, it stated that it was “loath to create a circuit split” with the other Circuit Courts that had considered the impact of D.R. Horton. Employers should be aware that there are now two federal Circuit Courts of Appeals that have aligned themselves with the NLRB’s view, inviting U.S. Supreme Court intervention to resolve this conflict. Earlier this year, the Seventh Circuit’s Lewis v. Epic-Systems Corp decision created a split with the Fifth, Second, and Eighth Circuits, and that split recently was widened by the Ninth Circuit in Morris v. Ernst & Young. We highlight the Ninth Circuit’s reasoning in joining the Seventh Circuit below and what employers can take away from the decision.

That Was Then…

Three years ago, the Fifth Circuit cited the Ninth Circuit (Richards v. Ernst & Young, LLP, – F.3d — , No. 11-17530 (9th Cir. 2013)) as one of three courts that had suggested or stated that it would not defer to the NLRB’s rationale in D.R. Horton. The Ninth Circuit in Richards did in fact lend credence to the idea of rejecting the NLRB’s D.R. Horton decision, stating: 

We also note that the only court of appeals, and the overwhelming majority of the district courts, to have considered the issue have determined that they should not defer to the NLRB’s decision in D.R. Horton because it conflicts with the explicit pronouncements of the Supreme Court concerning the policies undergirding the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1–16.

The Richards court further stressed that “’Congress…did not expressly provide that it was overriding any provision in the FAA when it enacted the NLRA or the Norris-LaGuardia Act.’” But, the Ninth Circuit did not rule on the issue at the time because it was not properly raised and briefed before the District Court. When actually presented with the opportunity in Morris, the Ninth Circuit did not reject D.R. Horton but rather it lent “considerable deference” to the NLRB’s interpretation of the NLRA.

This is Now…

In Morris, the Ninth Circuit joined the Seventh Circuit, negating the other Circuit Courts’ treatment of this issue: “We recognize that our sister Circuits are divided on this question. We agree with the Seventh Circuit, the only one that ‘has engaged substantively with the relevant arguments.’” The Ninth Circuit held that “an employer violates the National Labor Relations Act by requiring employees to sign an agreement precluding them from bringing, in any forum, a concerted legal claim regarding wages, hours, and terms and conditions of employment.” The court’s reasoning turned on its declaration that “[c]oncerted activity—the right of employees to act together—is the essential, substantive right established by the NLRA.”

The Ninth Circuit found there was no question that the Congressional intent in the NLRA was consistent with the NLRB’s D.R. Horton decision invalidating employment-related class waivers. In the court’s view, the waiver in the employment contract at issue “is the very antithesis of § 7’s substantive right to pursue concerted work-related legal claims.” Requiring employees to agree to waive their § 7 rights is interference with those rights and therefore a violation of § 8 of the NLRA. The NLRA is “unambiguous” on this point, according to the Ninth Circuit. The court relied upon Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) and other Supreme Court precedent as support for the proposition that substantive rights cannot be waived through an arbitration agreement.

The Morris court expressly rejected the argument that the NLRA cannot be meant to protect concerted legal actions by employees since the federal class action rule (Rule 23) did not exist when the NLRA was passed – “Rule 23 is not the source of employee rights; the NLRA is.” The Ninth Circuit vacated the district court’s order compelling individual arbitration and remanded the case for a determination of whether the illegal waiver clause could be severed from the contract.

“At its heart, this is a labor law case, not an arbitration case”

How did the Ninth Circuit maneuver around Concepcion and the FAA? Essentially, by finding that the substantive rights conveyed by the NLRA eliminate any conflict with the FAA in this context. The FAA provides that while an arbitration agreement cannot be invalidated on grounds that “that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue,” it can be invalidated “upon such grounds as exist at law or in equity for the revocation of any contract.” This savings clause was key to the Ninth Circuit’s holding. According to the Ninth Circuit, the concerted action prohibition is an illegal contract term because it violates the NLRA by depriving employees of a substantive federal right and it would be illegal regardless of whether the contract required separate proceedings in arbitration, court, or “casting lots, coin toss, duel, trial by ordeal,” or “rolls of the dice or tarot cards.” Accordingly, the court found no conflict with the FAA: “we join the Seventh Circuit 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 saving clause of the FAA prevents the enforcement of that waiver.”

What Can Employers Do? Required Waiver vs. Opt-Out Provision

The Ninth Circuit apparently does not intend for employers to abandon arbitration altogether: “Do not be misled. Arbitration is consistent with, and encouraged by, the NLRA following today’s opinion.” Arbitration is not the problem in the court’s view – the required waiver of collective proceedings is the problem: “Indeed, § 7 rights would amount to very little if employers could simply require their waiver.” But, the court did note in a footnote citing its 2014 Johnmohammadi v. Bloomingdale’s, Inc. decision that an employer has not violated the NLRA if an employee is given the choice to opt-out of the agreement that requires individual dispute resolution. Should employers consider revising their arbitration agreements so that an employee will agree to individual arbitration, waiving a right to proceed collectively in any forum, unless they opt out of the alternative dispute resolution agreement within a certain period of time, as in Johnmohammadi? How can employers ensure that they don’t open themselves up to unwanted class arbitration proceedings? Should employers forgo arbitration agreements with their employees altogether? Until the Supreme Court has an opportunity to weigh-in on the matter, employers in the Ninth Circuit (CA, NV, AZ, AK, ID, OR, WA, MT) and Seventh Circuit (IL, IN, WI) should consult with counsel to determine the impact of the Morris and Epic-Systems decisions on their dispute resolution strategies and agreements.

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