Many employers require their employees to agree to arbitration to address potential legal claims arising from the workplace. Agreeing to these type of mandatory arbitration agreements is often a condition to hiring and the terms also include an employee's waiver of the right to file a class action. Certain federal circuit courts are split on the validity of the class action waiver provisions setting up the likelihood for Supreme Court review, say ABA Section of Litigation leaders.

The U.S. Court of Appeals for the Ninth Circuit is the most recent federal appellate court holding that a class action waiver in an arbitration agreement was unenforceable. In Morris v. Ernst & Young, the Ninth Circuit concluded that such a waiver prevented employees' concerted activity and violated the National Labor Relations Act (NLRA). Three federal circuit courts have reached the opposite conclusion and enforced individual arbitration.

The Statutes and the Federal Agency in Charge  
Two statutes are controlling for determining whether employment arbitration agreements with class action waivers are enforceable: the NLRA and the Federal Arbitration Act (FAA). The NLRA is a mainstay of U.S. labor law. It establishes the rights of employers and employees, including the right of employees to engage in "concerted activities"; encourages collective bargaining; and outlaws unfair labor practices. The FAA was enacted to combat judicial opposition to arbitration agreements. It provides that such agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."

An important player in the dispute over employment class action waivers is the National Labor Relations Act Board, the federal agency that is in charge of enforcing the NLRA. Remedial orders issued by the Board may be challenged in the U.S. courts of appeals. The Board has taken the position that mandatory class action waivers in employment agreements are not enforceable.

Class Action Waiver Is a Condition of Employment
The plaintiffs in Morris are former employees of the defendant, who believe that they were denied overtime wages. In order to work for the defendant, the plaintiffs had to agree to participate in the defendant's dispute resolution program. The arbitration agreement prohibited employees from bringing collective legal claims regarding wages, hours, and the terms and conditions of employment against the company. Specifically, it required employees to exclusively use arbitration for all disputes and to do so only in "separate proceedings."

Lower Court Ordered Individual Arbitration
Despite the concerted action waiver in the arbitration agreement, one of the plaintiffs filed a class action suit in the U.S. District Court for the Southern District of New York. The plaintiff alleged that the defendant violated the Fair Labor Standards Act and California labor laws. After the second plaintiff joined the class action, it was transferred to the U.S. District Court for the Northern District of California. Neither of the plaintiffs attempted to arbitrate their claims before filing suit.

The defendant moved to compel arbitration based on the plaintiffs' class action waiver agreement. The district court granted the motion, ordered the plaintiffs to participate in individual arbitration, and dismissed the case. The plaintiffs then appealed to the Ninth Circuit.

Employees Must Be Able to Act Together
On appeal, the plaintiffs argued that the class action waivers violated the NLRA. In support of their position, the plaintiffs cited a ruling by the Board, In re D.R. Horton, Inc. The Ninth Circuit agreed with the plaintiffs and vacated the district court's order. "Employees have the right to pursue work-related legal claims together," the appellate court explained. This "essential, substantive right" is protected by the NLRA. Because the arbitration agreement required employees to waive that right, it cannot be enforced, the Ninth Circuit concluded.

Waiver Violates Sections 7 and 8 of NLRA
The Ninth Circuit held that Congress' intent in enacting the NLRA is clear and "matches" the Board's reading of the statute. Thus, the appellate court accorded considerable deference to the Board, which intervened as amicus curiae in the case. The Board held that section 7 of the NLRA establishes that employees must be able to pursue their legal claims together in some forum, such as court, arbitration, or elsewhere. Similarly, the Board found that class action waivers violate section 8 of the NLRA. Under that provision, employers cannot force their employees to pursue separate claims.

The appellate court also considered whether the FAA required the enforcement of the arbitration agreement. The court explained that the defendant did not err by requiring arbitration. Instead, the problem with the agreement was that it required "separate proceedings." The court emphasized that substantive federal rights, such as the right of employees to take concerted action, cannot be waived in arbitration agreements. The Ninth Circuit noted that the rights included in section 7 of the NLRA "are the central, fundamental protections" of the statute. The FAA does not require contract terms waiving substantive, nonprocedural rights to be upheld, the Ninth Circuit found.

Noting that the district court's ruling was based on the separate proceedings requirement in the agreement, the Ninth Circuit remanded the case. It instructed the district court to determine if that clause was severable from the arbitration agreement. Ultimately, the Ninth Circuit did not take a position on whether the employees would be required to arbitrate their claims. "At its heart, this is a labor law case, not an arbitration case," it explained.

Dissent Calls Decision "Breathtaking" in Scope and Error
The Morris panel's decision was not unanimous. Judge Sandra S. Ikuta wrote a dissenting opinion, arguing that the decision contradicts Supreme Court precedent. Citing CompuCredit Corp. v. Greenwood, she contends that when a plaintiff argues that a federal law makes an arbitration agreement unenforceable, the Supreme Court requires the party to show that the "federal statute includes an express 'contrary congressional command.'" And the NLRA does not include such a command regarding class action waivers, Judge Ikuta argued. The majority's decision does not honor the FAA's mandate to enforce arbitration agreements on their own terms, the dissent stated.

The Ninth Circuit Is Not Alone
The U.S. Court of Appeals for the Seventh Circuit agrees that such waivers are not enforceable. In Lewis v. Epic Systems Corp., the Seventh Circuit concluded that an arbitration agreement that did not allow collective arbitration or any other collective action violated the NLRA. It was the first federal circuit court to take that position. Like the Ninth Circuit, the Lewis court rejected the defendant's claim that the FAA "overrides" the doctrines protected by the NLRA. "Nothing in the FAA saves the ban on collective action," the Seventh Circuit held.

Other Circuits Approve Use of Class Action Waivers
Three circuits determined that mandatory class action waivers in employment agreements do not violate the NLRA. In doing so, these appellate courts have shown much less deference to the Board.

The U.S. Court of Appeals for the Fifth Circuit expressly refused to enforce the portion of the Board's order issued in In re D.R. Horton, Inc. regarding class action waivers. The Fifth Circuit concluded that the Board "did not give proper weight" to the FAA. "The Board has not shown that the NLRA's language, legislative history, or purpose support" a finding that Congress intended for the FAA not to apply, the Fifth Circuit held. It further held that the ability to file a class action was not a "substantive right."

In Owen v. Bristol Care, Inc., the U.S. Court of Appeals for the Eighth Circuit also rejected the Board's reasoning. Emphasizing the "liberal federal policy favoring arbitration agreements" contained in the FAA, the Eighth Circuit enforced an employer's agreement containing a class action waiver. The U.S. Court of Appeals for the Second Circuit reached the same conclusion in Sutherland v. Ernst & Young. It noted that the Board did not have any "special competence or experience" with the FAA.
Section Leaders Also Split Over Class Action Waivers

Section Leaders Split Over Class Action Waivers
"The Morris decision was well-reasoned in terms of knocking down class action waivers," believes Louis F. Burke, New York, NY, cochair of the Section of Litigation's Alternative Dispute Resolution Committee. As Morris recognizes, the waivers "take away a substantive right to bring a claim in a class action," Burke points out. "Class action waivers may be on their way out," Burke predicts. Indeed, "the Consumer Financial Protection Bureau has passed a rule that bans such waivers" in arbitration agreements, he notes.

"I found the majority's reasoning persuasive and I also found the dissent persuasive," says Michael S. LeBoff, Newport Beach, CA, cochair of the Section's Commercial & Business Litigation Committee. "The two statutes do not appear to have been written to address this situation," he explains. "When trying to reconcile them, reasonable minds can disagree about where the middle ground is between these statutes." However, "the Ninth Circuit's reliance on the Board may tilt the balance and be persuasive for other courts."

Other Section leaders are embracing the dissent in Morris. "The dissent laid out the flaws in the majority's reasoning," remarks M.C. Sungaila, Costa Mesa, CA, chair of the Section's Amicus Briefs Committee and cochair of the Section's Professional Opportunities and Pro Bono Subcommittee of the Appellate Practice Committee. When analyzing employment arbitration agreements with class action waivers, as the dissent explains "the FAA should come first and then the analysis should move through the other statutes," Sungaila continues, pointing out that "Judge Ikuta has a history of dissents that have ended up being persuasive and pivotal."

Potential Supreme Court Action
Although Section leaders are divided on the propriety of class action waivers, they agree that this issue is likely to be decided by the Supreme Court. Petitions for writ of certiorari have been filed in the Ninth Circuit and Seventh Circuit cases. A petition has also been filed in the Fifth Circuit's NLRB v. Murphy Oil USA, Inc., which reaffirmed the Fifth Circuit's conclusion that mandatory arbitration agreements with class action waivers are enforceable.

"The issue is clearly set up for Supreme Court review," Sungaila contends. "It is a fairly robust split among the circuits and even involves some state courts, such as the California Supreme Court." Sungaila has filed amicus briefs on behalf of the International Association of Defense Counsel urging the Supreme Court to grant certiorari.

"I think that the Supreme Court is going to consider this issue," Burke agrees. But the "Court may wait until another justice is confirmed," he says. Still, it may not be long until the Supreme Court takes up the question of class action waivers in employment agreements. Burke thinks the issue may come before the Court in "the first half of next year."

It is hard to predict how the Supreme Court will handle the issue of employment arbitration agreements with class action waivers. But "recently, the Court has issued decisions favoring arbitration," LeBoff notes. Resolution by the Supreme Court will be very helpful, Sungaila maintains. "Right now there is a lot of entropy, and both sides—employees and employers—want to know the rule."

Practical Implications of the Split
Until the Supreme Court resolves the issue, employers are left with a pressing problem. "The circuit split on this issue will lead to a lot of forum shopping," LeBoff expects. And "it is really difficult for employers to know what to do while the law is in flux," he continues. "Until this issue is decided employers are facing the risk that arbitration agreements with class action waivers will not be enforced," LeBoff explains. In particular, the Ninth Circuit's ruling "did not leave a lot of wiggle room for employers to qualify or modify waivers to get around the prohibitions in the NLRA," he notes.

The circuit split is having "widespread impact in employment law," Sungaila says. For example, the Board is pursuing collateral agency actions against employers that move to compel arbitration pursuant to mandatory arbitration agreements with class action waivers. Thus, "employers are being punished for doing something that may be totally permissible in their circuit," she remarks.

But the litigation over class action waivers does not seem to have diminished the popularity of alternative dispute resolution methods. The use of "arbitration continues to grow," Burke observes. He does not believe that Morris will affect that trend.

Sara E. Costello is an associate editor for Litigation News.

Keywords: NLRA, National Labor Relations Act, class action waivers, employment law

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