Ninth Circuit Struck a Class Action Waiver In an Arbitration Agreement Because it Violates the NLRA

Nicholas Fortuna, August 25, 2016

On Tuesday the Ninth Circuit Court of Appeals held in Morris v. Ernst & Young LLP that the “concerted action waiver” in Ernst & Young’s employment agreements requiring that employees pursue legal claims as individuals in separate arbitration proceedings violates sections 7 and 8 of the National Labor Relations Act (NLRA). The decision is important because it adds to the conflict between appeals courts that have ruled on this issue. The Ninth Circuit is the largest, covering nine western states. As a result, this increases the likelihood the Supreme Court will weigh in and resolve the split between the courts and determine the validity of class and collective action waivers in employment agreements.

The Ninth Circuit said that an agreement precluding employees from bringing, in any forum, a concerted legal claim regarding wages, hours, and terms and conditions of employment violates the NLRA. The court stated that it is well-established that employees have the right to pursue work-related legal claims together and the right to act together is an essential, substantive right set forth by the NLRA. By defining the issue broadly, the Ninth Circuit applied this rule to virtually all employment agreements in its jurisdiction.

The brewing dispute over whether employers can require employees to waive concerted action in filing legal claims has been between the NLRB’s interpretation of employees’ rights under the NLRA and the courts’ interpretation of the Federal Arbitration Act (FAA) requiring enforcement of agreements to resolve legal disputes by arbitration. The NLRB holds that employees’ right to “engage in concerted activity” cannot be waived. Some courts have found that the FAA permits employees to waive “concerted activity” with respect to legal claims in arbitration. Those courts reasoned that the FAA requires courts to enforce arbitration agreements by its terms even if it includes class and collective legal action waivers.

The Ninth Circuit disagreed. Importantly, the court found that the Federal Arbitration Act (FAA) does not require a court to enforce waivers of concerted activity. The requirement of “separate proceedings” in this case appears in the agreement that directs employment-related disputes to arbitration. The obstacle, according to the court, is not that claims must be arbitrated, but that they must be done separately. NLRA does not ban arbitration.

The FAA requires courts to “place arbitration contracts on equal footing with all other contracts.” As a result of the savings clause in the FAA, not all contract terms are entitled to enforcement. Arbitration agreements may be invalidated under recognized contract defenses, such as fraud, duress, or unconscionability.

The Ninth Circuit asserted that 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 work-related legal claims in concert. The court stated that if an “illegal provision not targeting arbitration is found in an arbitration agreement, the FAA treats the contract like any other; the FAA recognizes a general contract defense of illegality. The term may be excised, or the district court may decline enforcement of the contract altogether.” Therefore, portions of the contract may be severed if it’s not crucial to the parties’ agreement.

The court found that the FAA does not mandate the enforcement of contract terms that waive substantive federal rights. Concerted activity in employment is considered a substantive right. The court stated It would be illegal to require an employee to waive it and the FAA does not require such a waiver to be enforced.

The NLRB has been unyieldingly attacking class and collective action waivers in employment agreements to preserve an employee’s right to “concerted activity” under the NLRA. The Ninth Circuit adopted the NLRB’s approach to the issue in Ernst & Young.

This sets up a showdown for Supreme Court Review. A number of circuits have rejected the NLRB’s position and held that class action and collective action waivers in employment agreements were valid, notably the Second, Eleventh and Fifth Circuits. There are reportedly 28 cases pending in the appellate courts on this issue. Observers believe the time is right for the Supreme Court to take it up.