Arbitration agreement that required employees to bring claims in “separate proceedings”

Morris v. Ernst & Young, LLP, 834 F.3d 975 (9th Cir., Aug. 22, 2016), cert. granted, 137 S.Ct. 809 (2017) – Arbitration agreement that required employees to bring claims in “separate proceedings,” thereby prohibiting class and collective actions, is illegal under the NLRA and thus unenforceable.

This is a significant case because it further deepens the split among the Circuits concerning the intersection of the FAA and the long line of cases promoting the enforcement of arbitration agreements by their terms, including class action waivers, on the one hand, and a developing trend of cases flowing from administrative decisions of the National Labor Relations Board (NLRB) that deny enforcement of arbitration clauses that include class action waivers when included in employment contracts because they impair the collective action rights of employees under the National Labor Relations Act (NLRA) to prosecute collective action complaints against employers for violations of the Fair Labor Standards Act (FSLA), on the other. The holding in this case concerning the unenforceability of class action waivers is context specific – mandatory class action waivers included in employment contracts where the employee seeks to assert a collective action for alleged workplace violations under the FSLA. With the Ninth Circuit joining the Seventh Circuit in favor of non-enforcement (versus the Second, Fifth, Eighth and Eleventh Circuits favoring enforcement), there is now a clear split among the circuits. The Supreme Court accepted review of this case in January 2017. 137 S.Ct. 809. It also accepted review of the Seventh Circuit’s decision in Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016), and the Fifth Circuit’s decision in NLRB v. Murphy Oil USA, Inc., 808 F.3d 1013 (5th Cir. 2015).

Prior to 2016, four Circuit Courts of Appeal had denied enforcement of NLRB rulings declining to enforce arbitration agreements that contained class action waivers, thereby rejecting the argument that an employee’s right to prosecute a collective action under the FSLA is a non-waivable substantive right. See, e.g., Murphy Oil U.S.A., Inc. v. NLRB, 808 F.3d 1013 (5th Cir. 2015); Walthour v. Chipio Windshield Repair, 745 F.3d 1326 (11th Cir.), cert denied, 134 S.Ct. 2886 (2014); D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013); Sutherland v. Ernst & Young LLP, 726 F.3d 290 (2d Cir. 2013); Owen v. Bristol Care, Inc., 702 F.3d 1050 (8th Cir. 2013); Cellular Sales of Missouri, LLC v. NLRB, No. 15-1620, 2016 WL 3093363 (8th Cir. June 2, 2016).

In 2016, the Seventh Circuit became the first Court of Appeal to adopt the NLRB’s position and strike down class waivers in employment contracts. See, Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016). The court in Epic Systems opined that there is nothing quite so “concerted” as a piece of class action litigation, where employees band together to collectively assert a legal challenge to a workplace practice. A few months later, the Ninth Circuit followed suit and echoed the Seventh Circuit’s reasoning in Morris v. Ernst & Young LLP.

In this case, the plaintiff worked for the accounting firm, Ernst & Young, and like all new hires, he was required to sign an arbitration agreement at the outset of his employment as a condition to employment. The arbitration agreement contained a class action waiver and expressly required “covered disputes” to be heard in “separate proceedings.” Despite the existence of this provision, plaintiff brought a class and collective action against his employer in federal court, alleging that he and others had been misclassified as exempt from overtime under the FLSA. Ernst & Young moved to compel individual arbitration. Plaintiff opposed, challenging the “concerted action waiver” and arguing that it violated the NLRA by interfering with the right of employees to pursue work-related legal claims together. The trial court granted Ernst & Young’s motion and ordered the plaintiff and all others who felt aggrieved to pursue individual arbitration claims, and dismissed the case. Plaintiffs appealed.

Dismissing contrary holdings by the Second, Fifth and Eighth Circuits, as well as the California Supreme Court, the Ninth Circuit joined the Seventh Circuit and held that the “concerted action waiver” violated the NLRA. The Ninth Circuit reversed the decision and struck down the class waiver provisions. Just as the Seventh Circuit ruled in Epic Systems, the Ninth Circuit held that employers interfere with the right of all employees – not just those unionized – to engage in concerted activity under the NLRA by requiring them to pursue claims in separate proceedings. The Court noted that Section 7 of the NLRA provides a statutory right to employees to engage in concerted activities for their mutual aid or protection, and determined that this included class action litigation.

Although the employer defended its position by pointing out that the Federal Arbitration Act (FAA) mandates a liberal policy in favor of upholding arbitration agreements, the Ninth Circuit was not persuaded. “The problem with the contract at issue is not that it requires arbitration, it is that the contract term defeats a substantive federal right to pursue concerted work-related legal claims.” By concluding that the rights established under the NLRA are substantive in nature and not just procedural, the Court ruled that these rights could never be waived via a standard, mandatory arbitration agreement, thus adopting the view of the currently constituted NLRB.

With the Ninth Circuit joining the Seventh Circuit in favor of non-enforcement of class action waivers as applied to collective actions under the FLSA – versus the opposite view being taken by the Second, Fifth, Eighth and Eleventh Circuits – there is a clear split among the Circuits. On January 13, 2017, the United States Supreme Court granted Ernst & Young’s petition for certiorari, along with the petitions filed by Epic Systems (Seventh Circuit) and by the NLRB (Fifth Circuit). This will be a case to watch, and will be among the first batch of cases to be decided by the newly constituted Supreme Court.

This case was argued to the newly constituted Supreme Court in October 2017, and will most likely be decided in 2018. Stay tuned!