Ninth Circuit Holds that Mandatory Arbitration Agreements with Class Action Waivers Violate NLRA, Advances Circuit Split | Practical Law

Ninth Circuit Holds that Mandatory Arbitration Agreements with Class Action Waivers Violate NLRA, Advances Circuit Split | Practical Law

In Morris v. Ernst & Young, the US Court of Appeals for the Ninth Circuit held that mandatory arbitration agreements with class action waivers violate the National Labor Relations Act (NLRA). The decision advanced a circuit split on the enforceability of employment arbitration agreements that waive class, collective, or representative remedies.

Ninth Circuit Holds that Mandatory Arbitration Agreements with Class Action Waivers Violate NLRA, Advances Circuit Split

by Practical Law Labor & Employment
Law stated as of 30 May 2017 • USA (National/Federal)
In Morris v. Ernst & Young, the US Court of Appeals for the Ninth Circuit held that mandatory arbitration agreements with class action waivers violate the National Labor Relations Act (NLRA). The decision advanced a circuit split on the enforceability of employment arbitration agreements that waive class, collective, or representative remedies.
On August 22, 2016, in Morris v. Ernst & Young, the Ninth Circuit held that mandatory arbitration agreements with "concerted action waivers" violate Sections 7 and 8 of the NLRA. The Ninth Circuit concluded that the Federal Arbitration Act (FAA) does not require a different result. The Ninth Circuit joined the Seventh Circuit in refusing to enforce class action waivers in mandatory arbitration agreements. The Fifth and Eighth Circuits have enforced employment arbitration agreements that waive class, collective, or representative remedies. ( (9th Cir. Aug. 22, 2016).)

Background

The accounting firm Ernst & Young required employees to sign an arbitration agreement with a class action waiver as a condition of employment. An employee, Stephen Morris, brought a class action against the company in federal court under the FLSA and California state law, alleging that Ernst & Young misclassified him and similarly situated employees and relied on that misclassification to deny overtime wages. Another employee, Kelly McDaniel, joined the suit.
Ernst & Young moved to compel arbitration based on the arbitration agreement that Morris and McDaniel had signed. The agreement to arbitrate contained a "separate proceedings" clause that provided:
"Separate Proceedings. If there is more than one Covered Dispute between the Firm and an Employee, all such Covered Disputes may be heard in a single proceeding. Covered Disputes pertaining to different Employees will be heard in separate proceedings."
The district court ordered individual arbitration and dismissed the case. Morris and McDaniel appealed to the Ninth Circuit and argued that the arbitration agreement was unenforceable because the class action waiver violated the NLRA.

Outcome

The Ninth Circuit:
  • Vacated the district court's order compelling individual arbitration.
  • Held that:
    • Ernst & Young's arbitration agreement violated Sections 7 and 8 of the NLRA by requiring employees to waive their substantive right to bring concerted work-related legal claims; and
    • the FAA does not require enforcement of arbitration agreements that purport to waive substantive federal rights.

Substantive Right to Bring Concerted Work-Related Legal Claims

The Ninth Circuit noted that:
  • The panel (Board) heading the judicial functions of the NLRB is tasked with defining the scope of rights under the NLRA. Courts give considerable deference to the Board's interpretation.
  • In D.R. Horton, the Board held that:
    • Section 7 of the NLRA protects the right of employees to bring concerted work-related legal claims; and
    • Section 8 of the NLRA prohibits employers from requiring employees to waive their right to bring concerted work-related legal claims as a condition of employment.
    (357 N.L.R.B. No. 184 (2012).)
  • When a court reviews the Board's interpretations of the NLRA, the first question is whether the intent of Congress is clear from the statute. If Congress' intent is clear, that ends the analysis. (Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).)
The Ninth Circuit held that the intent of Congress is clear and comports with the Board's position that:
In dissent, Judge Ikuta challenged the majority's conclusion that Section 7 creates a substantive right to bring class-wide employment claims.

FAA Does not Require Enforcement of Arbitration Agreements that Waive Substantive Federal Rights.

The Ninth Circuit noted that:
The Ninth Circuit held that:
  • The right to bring concerted work-related claims is substantive rather than procedural.
  • The FAA does not require courts to enforce arbitration agreements that waive the right to bring concerted work-related claims.
In dissent, Judge Ikuta argued that:
  • The FAA's savings clause applies only to state law that would render an arbitration agreement unenforceable.
  • The Supreme Court requires an express "contrary congressional command" if a party claims that federal law prevents the enforcement of an arbitration agreement.
  • The NLRA does not contain a contrary congressional command that would prevent enforcement of mandatory arbitration agreements with class action waivers.

Practical Implications

In Morris v. Ernst & Young, the Ninth Circuit held that an arbitration agreement was unenforceable because it required employees to arbitrate legal claims against the employer on an individual basis only. The court's analysis largely tracked that of the NLRB that employees have a statutory right under Sections 7 and 8 of the NLRA to bring concerted work-related claims as a means of engaging in protected concerted activity.
This decision advances a circuit split and could accelerate Supreme Court review. The Seventh and Ninth Circuits have adopted the NLRB's position that mandatory arbitration agreements are unenforceable if they contain class action waivers. The Fifth and Eighth Circuits have enforced mandatory arbitration agreements with class action waivers citing the FAA. (D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013); Murphy Oil, Inc. v. NLRB, 808 F.3d 1013 (5th Cir. 2015); Cellular Sales of Missouri, LLC v. NLRB, 824 F.3d 772 (8th Cir. 2016); Lewis v. Epic Sys. Corp., 823 F.3d. 1147 (7th Cir. 2016).)

UPDATE

The Sixth Circuit joins the Seventh and Ninth Circuits in adopting the NLRB's position that mandatory arbitration agreements are unenforceable if they contain class action waivers (NLRB v. Alternative Entm't, Inc., (6th Cir. May 26, 2017)). For more information see Legal Update: Sixth Circuit Holds that Arbitration Provisions Prohibiting Concerted Employee Activity Violate NLRA, Splitting with Fifth Circuit. This decision advances the circuit court split as Ernst & Young's appeal of the Ninth Circuit's decision progresses in the Supreme Court.

UPDATE

In Epic Systems Corp. v. Lewis, the US Supreme Court held that arbitration agreements with class and collective action waivers are not prohibited under Section 7 of the NLRA and must be enforced as written under the Federal Arbitration Act (FAA). The decision reversed the judgment in this case. (( (U.S. May 21, 2018); see Legal Update, SCOTUS: Arbitration Agreements with Class Action Waivers Must Be Enforced as Written, and NLRA Does Not Command Otherwise and Article, Expert Q&A on Class Action Waivers in the Employment Context.)