Ninth Circuit Finds Arbitration Agreement That Required Employees to Bring Claims in “Separate Proceedings” Illegal Under the NLRA

On August 22, 2016, in Morris et al. v. Ernst & Young, LLP,1 a panel of the U.S. Court of Appeals for the Ninth Circuit followed the lead of the National Labor Relations Board (“NLRB”) and the U.S Court of Appeals for the Seventh Circuit in finding that an arbitration agreement that required employees to bring claims in “separate proceedings”, thereby prohibiting class and collective actions, violated the employees’ right to engage in concerted activity under the National Labor Relations Act (NLRA).  Previously, the only appellate court to adopt the NLRB's position first announced in D.R. Horton2 was the Seventh Circuit in Lewis v. Epic-Systems Corp., while several other Circuits had decisively rejected it.3 

The current Circuit split makes it all the more likely the Supreme Court will soon address the issue of whether employees may waive their ability to participate in aggregate litigation in an arbitration agreement.  But what is especially noteworthy for the current state of the law, is that the Ninth Circuit did not extend its holding to waivers in agreements which are not required to be signed as a condition of employment.  Thus, an agreement that gives employees the right to opt-out of the agreement is likely still enforceable in the Ninth Circuit.  This is worth noting because the NLRB has found that even “opt-out” agreements with class action waivers violate the NLRA.4  Although the Seventh Circuit did not extend its holding to agreements with opt-out provisions in Lewis, it questioned the enforceability of these agreements in dicta. 

The Ninth Circuit’s decision largely followed the Seventh Circuit’s lead in Lewis in finding that there was no conflict between the NLRA and the Federal Arbitration Act (“FAA”), which governs the enforcement of arbitration agreements, because the FAA’s “savings clause” provides that arbitration agreements are “enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”   Since the agreement required employees to bring claims separately, it was illegal under the NLRA, and therefore enforcement is not required under the FAA's saving clause.  The court left open for the district court on remand the question of whether the “separate proceedings” provision was severable from the agreement. 

A second key finding from the court is that the right to engage in “concerted activity” by pursuing “legal claims together”5 is a substantive right as opposed to a procedural right.  This is a crucial distinction because, as the court notes, substantive rights cannot be waived in an arbitration agreement, while a procedural right can be waived.  Since the agreement illegally purported to waive substantive rights, the FAA did not mandate the agreement’s enforcement.

The bottom line is that some class and collective action waivers may no longer be enforceable in federal courts in the Ninth Circuit, but the decision has no controlling precedential value for California state courts, and the California Supreme Court has previously rejected the NLRB’s position in DR Horton.6  Moreover, most Circuits have declined to adopt the NLRB’s position in DR Horton.  Notably, in the weeks ahead, petitions for certiorari are due in both Murphy Oil v. NLRB and Lewis.  It remains to be seen whether these cases will proceed to the Supreme Court.  Additionally, although the NLRB will continue to find that class or collective action waivers violate the NLRA, employers can challenge these findings in favorable Circuits as long as the employer conducts business in the circuit or if the alleged unfair labor practice occurred in the circuit.  Employers can also appeal to the D.C. Circuit under the NLRA’s appellate venue provision.  One thing that is clear is that the fight over the enforceability of class and collective action waivers is far from over.

See Footnotes

1 Morris et al. v. Ernst & Young, LLP, No. 13-16599 (9th Cir. Aug. 22, 2016).

2 D.R. Horton Inc., 357 NLRB 184 (2012).

3 See Murphy Oil U.S.A., Inc. v. NLRB, 808 F.3d 1013 (5th Cir. 2015); D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013); Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297 n.8 (2d Cir. 2013); Owen v. Bristol Care, Inc., 702 F.3d 1050, 1052 (8th Cir. 2013); Cellular Sales of Missouri, LLC v. Nat'l Labor Relations Bd., 15-1620, 2016 WL 3093363, at *1 (8th Cir. June 2, 2016).

4 See, e.g.On Assignment Staffing Services, Inc., 362 NLRB No. 189 (2015) rev’d On Assignment Staffing Services, Inc. v. NLRB, No. 15-60642 (5th Cir. Jun. 6, 2016).

5 Morris, Slip Op. 19.

6 Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014) (California Supreme Court rejecting D.R. Horton and enforcing mandatory arbitral class action waiver).

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.