Divided Ninth Circuit Sides with NLRB On Class Action Waivers in Arbitration Agreements

Stephen Young and Kelly McDaniel worked for the accounting firm Ernst & Young (EY). As a condition of employment, they were required to sign agreements requiring them to pursue claims against EY only in arbitration and to arbitrate only as individuals in separate proceedings.

Nevertheless, Morris and then later McDaniel filed a class action against EY in federal court in New York, alleging that the firm misclassified employees to deny them overtime compensation under the Fair Labor Standards Act (FLSA). The case was thereafter transferred to federal court in the Northern District of California. EY moved to compel arbitration, and the lower court granted the motion. The plaintiffs appealed to the Ninth Circuit.

The Ninth Circuit’s Decision

The Ninth Circuit began its analysis by observing that the NLRB ruled in the D.R. Horton case that an employer violates the NLRA when it requires covered employees, as a condition of employment, “to sign an agreement that precludes them from filing joint, class or collective claims addressing their wages, hours or other working conditions against the employer in any forum, arbitral or judicial.” The Court noted that the Board’s reasonable interpretations of the NLRA command deference, while the Board’s remedial preferences and interpretations of unrelated statutes do not. Here, the Court concluded that Congressional intent is clear from the NLRA and is consistent with the Board’s interpretation.

Noting that Section 7 of the Act protects a range of concerted employee activity, it reasoned that a lawsuit filed in good faith by a group of employees to achieve more favorable terms or conditions of employment is protected concerted activity under Section 7.

Section 8 of the NLRA makes it an unfair labor practice for an employer to “interfere with, restrain or coerce” employees in the exercise of their Section 7 rights. According to the Court, the “separate proceedings” clause “prevents the initiation of any concerted work-related legal claim, in any forum,” a clear violation of Section 8.

The Court reasoned that the Federal Arbitration Act (FAA) does not dictate a contrary result. Although the FAA espouses a public policy in favor of arbitration, the arbitration requirement is not the problem. “The same provision in a contract that required court adjudication as the exclusive remedy would equally violate the NLRA. The NLRA obstacle is a ban on initiating, in any forum, concerted legal claims-not a ban on arbitration.” According to the Court,”[t]he same infirmity would exist if the contract required disputes to be resolved through casting lots, coin toss, duel, trial by ordeal, or any other dispute resolution mechanism…” The Court concluded that the problem with the contract at issue is not that it requires arbitration, but that “it defeats a substantive federal right to pursue concerted work-related legal claims.” Thus, the majority of the panel voted to reverse and remand the lower court’s decision.

The Dissent

In an impassioned dissent, Judge Ikuta claimed that the decision is “breathtaking in its scope and in its error; directly contrary to Supreme Court precedent and joins the wrong side of a circuit split.” According to her, the Supreme Court requires that a statute contain an express “congressional command” that overrides the FAA.  In her view, nothing in Section 7 or 8 of the NLRA “comes remotely close” to such a command. “While the NLRA protects concerted activity, it does not give employees an unwaivable right to proceed as a group to arbitrate or litigate disputes.”

Takeaways

The Ninth Circuit has now joined the Seventh Circuit in adopting the NLRB’s rationale. Thus far, the Second, Fifth, and Eighth Circuits have concluded that the NLRA does not invalidate collective action waivers in arbitration agreements. Ultimately, the issue may be decided by the Supreme Court or even Congress. Until then, employers will have to continue to struggle over whether to include class action waivers in their arbitration agreements, and/or to draft the waivers in a manner that may be more palatable to the NLRB.