Requiring class and collective action waivers as a condition of hire or continued employment violates the National Labor Relations Act, the U.S. Court of Appeals for the Ninth Circuit, in San Francisco, has ruled. Morris v. Ernst & Young, No. 13-16599 (9th Cir. Aug. 22, 2016).

The Ninth Circuit has joined the Seventh Circuit in reaching this conclusion. (See our article on Lewis v. Epic Systems Corp., No. 15-cv-82-bbc (7th Cir. May 26, 2016),Supreme Court Review Likely After Seventh Circuit Creates Split on Class and Collective Action Waivers under NLRA.) The three other circuits (Fifth, Second, and Eighth Circuits) to have considered specifically the issue have concluded such waivers do not violate the NLRA. 

Background

Ever since the U.S. Supreme Court ruled that class claims can be waived if contained in a valid arbitration agreement under the Federal Arbitration Act (“FAA”), employers have entered into such agreements with their employees. The National Labor Relations Board, however, takes the position that prohibitions against class or collective proceedings violate an employee’s rights to engage in protected concerted activity for mutual aid and protection under Sections 7 and 8 of the NLRA.

Disagreeing with the NLRB, the Fifth, Second, and Eighth Circuit Courts each held that such agreements do not violate the NLRA. Now, at least two other federal appellate courts, the Ninth and the Seventh Circuits, agree with the NLRB.

Morris Decision

Stephen Morris and Kelly McDaniel, accountants at Ernst & Young, were required to sign an arbitration agreement as a condition of employment. The agreement not only required an arbitral forum for work-related disputes, but also that disputes “pertaining to different [e]mployees” must “be heard in separate proceedings.” Despite this provision, the plaintiffs filed a class and collective action in federal court, alleging they and others similarly situated had been misclassified under the Fair Labor Standards Act and California labor law. Upon Ernst & Young’s motion, the trial court enforced the arbitration agreement and its class waiver and ordered the parties to separate arbitrations.

The Ninth Circuit reversed the lower court’s order and remanded the case for a determination as to whether the “separate proceedings” clause — the class waiver — could be severed from the agreement.

Essentially following the Seventh Circuit’s reasoning, the Court first deferred to the NLRB’s interpretation of the NLRA. It then held that employees have a substantive right to pursue work-related legal claims and to do so together. It went on to hold that employers cannot defeat such rights by requiring employees, as a condition of employment, to agree to pursue claims on an individual basis. Therefore, the Court concluded that Sections 7 and 8 of the NLRA make class action waivers that are a condition of employment — and the “separate proceedings” provision in the Ernst & Young arbitration agreement — unlawful.

Judge Sandra Ikuta stated in a strongly worded dissent that the majority opinion violated the FAA’s mandate to enforce arbitration agreements in accordance with their terms and was contrary to U.S. Supreme Court precedent.

Like the Seventh Circuit in Epic Systems, however, the majority opinion held the FAA does not require a different result. The Court stated that under the FAA, arbitration agreements must be enforced in accordance with their terms, but that the FAA’s savings clause permits invalidating agreements by “generally applicable contract defenses, such as fraud, duress, or unconscionability.” The Court concluded that a prospective waiver of Section 7 rights renders the agreement unlawful, and that such a rule would be applicable equally to all agreements, not just arbitration agreements. Accordingly, the majority held there is no conflict between the FAA and the NLRA.

Uncertainty Persists

The future of class, collective, and representative action waivers is uncertain. Within the Ninth Circuit (which has jurisdiction over Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington) it remains to be seen if the matter will be heard en banc by the full Ninth Circuit Court of Appeals. If the decision stands, the split on this issue is significant, and the matter is ripe for U.S. Supreme Court review. Many of the Supreme Court’s decisions in the area of class action waivers have been based on 5-to-4 rulings, where the late-Justice Antonin Scalia represented one of the five votes favoring class waivers. The Supreme Court’s composition likely will affect the fate of class action waivers and the outcome of the dispute among the circuits.