Class Action Waivers in Employment Contracts: The Clash Between the National Labor Relations Act and the Federal Arbitration Act
Class Action Waivers in Employment Contracts: The Clash Between the National Labor Relations Act and the Federal Arbitration Act
In Ernst & Young LLP v. Morris, the Court will decide if the provisions of the National Labor Relations Act (NLRA) invalidate class action waivers included in arbitration clauses in employment contracts. The Court will decide whether the NLRA invalidates such provisions, requiring that employees arbitrate their claims individually, rather than on a collective basis.
Docket No. 16-300, 16-285, 16-307
Argument Date: October 2, 2017
From: The Ninth Circuit
by Linda S. Mullenix University of Texas, Austin, TX
Do provisions of the National Labor Relations Act effectively invalidate class action waivers in employment arbitration clauses, requiring that employees arbitrate their grievances on an individual, rather than a collective basis?
The facts underlying Ernst & Young LLP v. Morris are relatively straightforward. Stephen Morris and Kelly McDaniel were employees of Ernst & Young, the accounting and financial services company. Nationally, Ernst & Young LLP and Ernst & Young U.S. LLP employ approximately 40,000 employees. (This case includes three cases in total consolidated together for oral argument. All three deal with the same question. The two other cases are Epic Systems Corp. v Lewis (Docket No. 16-285) and NLRB v. Murphy Oil USA (Docket No. 16-307).)
Between 2005 and 2011, Morris and McDaniel worked in the auditing divisions of two California Ernst & Young offices. In 2012, Morris and McDaniel filed an action in federal court in the Southern District of New York alleging that they had been misclassified as employees for the purposes of overtime pay under the Fair Labor Standards Act (FLSA) and California law. 29 U.S.C. §§ 201– 219. The plaintiffs sought back pay. Their action was pursued as a collective action under the FLSA, with a separate federal class action of California employees. The FLSA provides for opt-in collective actions that are similar to class actions under Federal Rule of Civil Procedure 23.
Ernst & Young employees are required to sign an employment contract as a condition of employment, which includes an alternative dispute resolution provision. This provision specifies that “[a]ll claims, controversies, or other disputes between
[petitioners] and an [e]mployee that could otherwise be resolved by a court” will instead be resolved by the company’s Common Ground Dispute Resolution Program. Thus, the arbitration agreement bars court proceedings, as well as arbitration proceedings conducted on a classwide or collective basis.
If an employee asserts a grievance against the company, the Common Ground Program proceeds in two phases. The first phase involves mediation. If mediation does not resolve the dispute, the Common Ground Program proceeds to binding arbitration. In this second phase, the contract specifies that “[c]overed [d]isputes pertaining to different [e]mployees will be heard in separate proceedings”; class action or other collective proceedings are prohibited. The Common Ground Program provides for discovery, including depositions of fact and expert witnesses, and a full evidentiary hearing.
The respondents (Morris and McDaniel) contend that Ernst & Young’s Common Ground Program is so complex and expensive that the cost entailed in seeking relief generally outstrips the small amounts that might be recovered in a typical overtime pay dispute. In a similar action brought against the company, evidence indicated that the potential cost of going through the Common Ground Program was approximately $200,000, with a possible recovery of $1,800.
After Morris and McDaniel initiated their New York litigation, the court transferred the case to the Northern District of California. Ernst & Young then moved to dismiss and to compel arbitration pursuant to the employment contract, contending that the plaintiffs had consented to the arbitration provision by signing their employment contracts. In response, the plaintiffs countered that the arbitration clause was unenforceable because collective-bargaining provisions of the National Labor Relations Act (NLRA) conferred a non-waivable right to collective litigation. 29 U.S.C. §§ 151–169.
The court granted Ernst & Young’s motion to dismiss. The court concluded that it was required to enforce the employment contract according to its terms, because Congress in enacting the NLRA did not expressly provide that it was overriding any provisions in the Federal Arbitration Act. 9 U.S.C. § 2. The Arbitration Act embodied a strong policy choice in favor of enforcing arbitration agreements.
A divided panel of the Ninth Circuit reversed the district court’s decision and remanded for further proceedings. Section 7 of the NLRA provides: “Employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection….”
The majority indicated that Section 7 established a substantive right for employees “to pursue work-related legal claims, and to do so together.” Ernst & Young’s employment contract prevented collective activity by its employees in arbitration proceedings and interfered with a protected Section 7 right. Consequently, the collective waiver provision in Ernst & Young’s employment contract was unenforceable.
The court further held that the Arbitration Act did not dictate a contrary result. The Arbitration Act’s savings clause provides that arbitration clauses are enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The court held that Ernst & Young’s arbitration provision was prohibited by the NLRA and was therefore unenforceable.
Finally, the Ninth Circuit held that the Arbitration Act recognizes the contract defense of illegality. “Nothing in the Supreme Court’s recent arbitration case law suggests that a party may simply incant the acronym ‘FAA’ and receive protection for illegal contract terms anytime the party suggests it will enjoy arbitration less without those illegal terms… AT&T Mobility LLC v. Concepcion [563 U.S. 33 (2011)] support no such argument.”
Holding that the NLRA was dispositive, the court did not address the plaintiffs’ alternative arguments based on the Norris-LaGuardia Act. 28 U.S.C. § 101 et seq.
Judge Sandra Segal Ikuta dissented, indicating that the Ninth Circuit’s decision was directly contrary to the Supreme Court’s arbitration jurisprudence and to Congress’s goals in enacting the Arbitration Act. She stated that the proper test required the court to consider whether the statute in question (in this case the NLRA) contains an express contrary command overriding the Arbitration Act. If not, then the statute could not displace the Arbitration Act. Judge Ikuta concluded that nothing in the NLRA was remotely close to a contrary Congressional command to override the Arbitration Act. She further concluded that the majority’s reliance on the Act’s savings clause was misplaced, because it did not apply to federal statutes.
The Court’s consideration of the Ernst & Young appeal continues its recent attention to arbitration clauses and class action waivers included in these provisions. See generally American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013); CompuCredit Corp. v. Greenwood, 565 U.S. 95 (2012); AT&T Mobility LLC v. Concepcion; Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010); and Green Tree Financial Corp. v. Randolph, 531 U.S. 79 (2000).
In revisiting the problems relating to arbitration clauses, the Court will address the specific issue of whether a federal statute by its terms overrides the Arbitration Act, thereby rendering a class action waiver unenforceable. In particular, the Court will for the first time take up the controversial question of class action waivers included in employment contracts that contain arbitration clauses.
Historically, arbitration clauses provided for alternative dispute resolution on an individual basis. In the late 1990s, plaintiffs subject to arbitration clauses began pursuing relief on a classwide basis in arbitration. In response, the Court developed an arbitration jurisprudence that required contracting parties to specifically indicate whether an arbitration clause permitted or prohibited classwide arbitration. If a contract forbade classwide arbitration, such provisions were deemed “class action waivers.” Generally, the Supreme Court has upheld class action waivers as a matter of private contract law.
Congress enacted the Federal Arbitration Act in 1925. The primary underlying purpose of the Act was to reverse longstanding judicial hostility to arbitration. Section 2 of the Arbitration Act provides, in relevant part, that “a written provision in any…contract evidencing a transaction…to settle by arbitration a controversy thereafter arising out of such contract or transaction…shall be valid, irrevocable, and enforceable, save upon such grounds as exist in law or in equity for the revocation of any contract.”
Courts consistently have indicated that the Arbitration Act reflects a liberal policy favoring arbitration and that arbitration is a matter of contract law. As recently as 2013, the Court in Italian Colors further stated that “courts must rigorously enforce arbitration agreements according to their terms.” Although the Court’s jurisprudence reflects a policy of enforcing arbitration agreements, the Ernst & Young appeal focuses on the issue of whether the Arbitration Act’s mandate has been overridden by provisions of another federal statute—in this instance the NLRA.
Hence, the Ernst & Young appeal embodies a clash between the Arbitration Act and the NLRA. The controversy centers primarily on a question of statutory construction of the NLRA in relation to the Arbitration Act. Two provisions in the NLRA are relevant to the Court’s assessment. Section 7 provides that “[e]mployees shall have the right to self-organization, to form, join, or assist labor organizations; to bargain collectively through representatives of their own choosing; and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” 29 U.S.C. § 157. Section 8(1) makes it an unfair labor practice for an employer to “interfere with, restrain, or coerce employees in the exercise of rights guaranteed” by Section 7. 29 U.S.C. § 158(a).
The Court previously has considered questions relating to the primacy of the Arbitration Act when it comes into conflict with a federal statute. General jurisprudence counsels that when two federal statutes are allegedly in conflict, courts must attempt to harmonize the statutes unless there is a clearly expressed Congressional intent to the contrary. Most recently in 2012, the CompuCredit Court held that the Arbitration Act applies to enforce arbitration agreements, unless the Act has been overridden by an express, contrary Congressional command.
In CompuCredit, the plaintiffs filed a class action against their credit card issuer under the Credit Repair Organizations Act (CROA), 15 U.S.C. §§ 1679–1679j. The defendant moved to compel arbitration according to the credit card contract. In response, the plaintiffs contended that CROA provisions prohibited class action waivers in arbitration agreements and instead guaranteed a right to sue collectively in court. Construing CROA’s statutory language, the Court found that the statute did not contain an express Congressional command prohibiting individual arbitration of CROA claims. Consequently, the arbitration clause was enforceable on its terms.
The Court indicated that if Congress intended to prohibit arbitration of CROA claims, “it would have done so in a manner less obtuse than what [the plaintiffs] suggested[ed].” The Court indicated that when Congress restricted the use of arbitration, it did so with “clarity that far exceeds the claimed indications in CROA.”
Ernst & Young argues that the plaintiffs carry a heavy burden of proving that a federal statute displaces the Arbitration Act and that the plaintiffs in this case fail to satisfy that burden. Thus, the plaintiffs cannot carry their burden of showing that Congress, in enacting the NLRA, intended to override the Arbitration Act by precluding arbitration agreements requiring arbitration on an individual basis. Nothing in the NLRA statute demonstrates the requisite Congressional command contrary to agreements to arbitrate. Because the NLRA evinces no clear Congressional intent to supersede the Arbitration Act, Ernst & Young claims the Ninth Circuit’s decision was erroneous and the arbitration provision should be enforced.
Ernst & Young contends that the text, legislative history, and purposes of the NLRA fail to manifest Congressional intent to override the Arbitration Act. Thus, no textual provision of the NLRA guarantees employees a judicial forum or a right to collective procedures in court. Nothing in the NLRA disavows arbitration for resolving employee disputes. In addition, the legislative history of the NLRA does not indicate Congressional intent to preclude arbitration agreements, or arbitration agreements that require individual arbitration. The NLRA, Ernst & Young notes, was adopted well before the enactment of the federal class action Rule 23 or the collective action procedure of the FLSA. Moreover, Ernst & Young contends that the purposes of the NLRA do not conflict with individual arbitration. The company points out that labor policy has long-favored and promoted arbitration in the collective bargaining process.
Ernst & Young further disputes that the savings clause of the Arbitration Act permits courts to decline enforcing arbitration agreements. That provision indicates that courts may withhold enforcement “upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Ernst & Young argues that the savings clause applies generally to contract principles that are supplied by state law, not federal law. Thus, the savings clause does not apply where another federal statute allegedly discriminates against arbitration, as the plaintiffs contend. Moreover, Ernst & Young notes that if a state adopted a public policy prohibiting arbitration agreements requiring individual arbitration, such state law would be preempted by the Arbitration Act.
Finally, Ernst & Young stresses that there is no substantive right to collective procedures for the complaining employees, as the Ninth Circuit held. The only substantive rights at issue were the plaintiffs’ claims for overtime pay under the FLSA and California state law. Ernst & Young points out that the right to class action or other collective procedures is a procedural right, not a substantive right. The NLRA’s language supporting “concerted activities” does not embrace employees’ rights to an opt-out class action. The litigation does not concern mutual rights, but only Morris and McDaniel’s individual rights under the FLSA and California law. Lastly, even if the NLRA confers a right to collective procedures, it would be a waivable right.
In response, the plaintiff-respondents urge the Court to uphold the Ninth Circuit’s decision. Their argument relies chiefly on an extended exposition of multiple canons of statutory construction. In addition to discussing the Arbitration Act and the NLRA, the respondents—unlike Ernst & Young—also repeatedly invoke the Norris-LaGuardia Act, which the Ninth Circuit did not address in its opinion.
The nub of the respondents’ argument is that the plain meaning of the Norris-LaGuardia and NLRA’s broad general term “other concerted activities” embraces any lawful concerted activities by which employees act together to improve their working conditions. This includes collective litigation in court, as well as classwide arbitration. Citing dictionary definitions, the respondents suggest that collective or class action proceedings fit comfortably within the ordinary understanding of “concerted activities.”
The respondents contend that every federal circuit court that has addressed the “concerted activities” and “mutual aid or protection” language of NLRA Section 7 has concluded that this language protects collective or class action proceedings. They argue that the Court historically has given broad interpretations to the statute. The respondents assert that in enacting the Norris-LaGuardia Act, the NLRA, and the Arbitration Act, Congress manifested a legislative intent to preclude enforcement of agreements prohibiting concerted litigation. Congress rendered such agreements unenforceable under the Norris-LaGuardia Act and illegal under the NLRA.
The respondents contend that the Court consistently has rejected an interpretation of Section 7 that would limit the “concerted activities” language only to union-related activities. Thus, Congress did protect some forms of concerted activities, but not others. Section 7, then, protects all lawful means of collective action to resolve grievances relating to the terms and conditions of employment.
The respondents further claim that there is no ambiguity in the statutory text that would require a contrary interpretation, as the petitioners argue. In contrast to Ernst & Young’s version of legislative history, the respondents suggest that the history of 20th-century labor legislation demonstrates an unmistakable Congressional intent to protect workers’ rights to act collectively to resolve labor disputes.
The respondents also challenge Ernst & Young’s argument that class action procedures only became established decades after enactment of the NLRA. To the contrary, the respondents point out that representative and class actions have existed since the beginning of the republic, and Equity Rule 38, amended in 1912, provided for class actions well before enactment of the NLRA. The respondents further contend that the FLSA and the NLRA must be read harmoniously and the two statutes provide further evidence of Congress’s intent to protect collective judicial action.
Moreover, since shortly after Congress enacted the NLRA, the National Labor Relations Board consistently has construed the “concerted activities” language to include collective judicial and arbitral disputes. The NLRB’s interpretation of the meaning of the NLRA is entitled to deference.
Invoking the “last-in-time” rule of statutory construction when statutes conflict, the respondents explain the general rule that a later statute expressly or impliedly repeals an earlier statute. Applying this rule, the respondents maintain that to the extent that the Arbitration Act conflicts with the later-enacted NLRA, the Arbitration Act was repealed by necessary implication.
The respondents assert that the right to “concerted” litigation is a substantive right. Employers may not lawfully interfere with this substantive right by coercing employees to waive that right through a mandatory arbitration clause in an employment contract. The Arbitration Act does not create an exception to the “concerted activities” right established in the NLRA.
Finally, the respondents reject Ernst & Young’s contention that any federal statute impacting arbitration agreements must contain a “clear Congressional command” to that effect. Instead, neither CompuCredit nor any other authority requires an explicit reference to the Arbitration Act to outlaw contractual terms.
The Ernst & Young appeal is significant because the Court will now weigh in regarding the enforceability of arbitration clauses contained in employment contracts, particularly such provisions that also contain class action waivers. If enforced, contractual arbitration clauses force employees to arbitrate their grievances with their employers and to forego litigation in court. The addition of class action waivers in arbitration clauses deprives employees of the ability to pursue class action litigation either in judicial forums or in arbitration.
The Court’s ruling in Ernst & Young is tremendously important because of the prevalence of arbitration clauses embedded in employment contracts. Employers nationwide now routinely include arbitration provisions in their employment contracts. The Court’s initial arbitration jurisprudence centered on arbitration provisions in consumer product contracts and warranties. Until now, the Court has not considered the enforceability and legality of arbitration clauses in employment contracts. The Court’s decision potentially will affect millions of workers.
In the consumer arena, the Court’s arbitration jurisprudence generally has not been sympathetic to plaintiffs’ attempts to invalidate and render arbitration clauses unenforceable. Instead, the Court has defaulted to the policy favoring arbitration and the enforceability of arbitration clauses as a matter of contract law. Moreover, the Court has consistently deflected various challenges to class action waivers contained in arbitration clauses.
Although the Court has upheld the primacy of the Arbitration Act in a number of cases involving allegedly conflicting statutes, the purported clash of the Arbitration Act with the NLRA may present the Court with a closer call. The Court may focus on the NLRA’s statutory language repeatedly referring to the protection of collective workers’ rights under the law. The Court might well rely on this statutory language to find Congressional intent to override the Arbitration Act. On the contrary, if the Court resorts to a requirement of express Congressional intent to supersede the Arbitration Act, the plaintiffs’ appeal may fail to gain support.
Recognizing the magnitude of the Court’s decision relating to employer-employee rights, a large array of amicus briefs have been filed in support of the contending parties. Unsurprisingly, the business community and assorted defense organizations have supplied numerous briefs in furtherance of Ernst & Young’s position on the primacy of the Arbitration Act over the NLRA. Countering this, a usual collection of liberal groups, labor organizations, and civil rights advocates have joined to urge the Court to uphold the Ninth Circuit’s decision rendering Ernst & Young’s arbitration provision unenforceable.
Linda S. Mullenix holds the Morris & Rita Atlas Chair in Advocacy at the University of Texas School of Law. She is the author of Mass Tort Litigation (3d ed. 2017). She can be reached at firstname.lastname@example.org. PREVIEW of United States Supreme Court Cases, pages 13–17. © 2017 American Bar Association
For the Petitioners in Nos. 16-285 and 16-300 and the Respondent in No. 16-307:
For the Respondents in Nos. 16-285 and 16-300 and Petitioner in No. 16-307: