Seyfarth Synopsis: The Ninth Circuit joined the Seventh Circuit and the NLRB in finding that mandatory arbitration agreements that require all claims to be brought by employees on an individual basis violate the NLRA.

On August 22, 2016, the Ninth Circuit issued an opinion in Morris v. Ernst & Young, LLP, Case No. 13-16599, holding that an arbitration agreement which required employees to individually bring legal claims against their employer exclusively through arbitration violated Sections 7 and 8 of the National Labor Relations Act (“NLRA”).

In the case, an employee who had signed the arbitration agreement brought a class and collective action against the employer alleging employee misclassification to deny overtime wages under the Fair Labor Standards Act (“FLSA”). The employer moved to compel arbitration arguing that the employees had to individually arbitrate their respective claims. The trial court agreed and ordered individual arbitrations.

The Ninth Circuit reversed finding that concerted litigation—class or collective action—is protected activity under Section 7 of the NLRA, is a substantive right under the NLRA, and cannot be waived. Notably, Section 7 of the Act protects employees’ rights to, among other things, “engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” 29 U.S.C. § 157 (emphasis added). The Court held that concerted activity, is the “essential, substantive right” established by the NLRA. Id. slip op.at 6. The Ninth Circuit then noted that Section 8 of the Act “enforces” the rights provided in Section 7, including engaging in concerted activities, by making it an unfair labor practice to interfere with these rights Id. slip op. at 9. Given that Section 7 grants a right to engage in concerted activity and Section 8 precludes an employer from interfering with employees’ Section 7 rights, the Ninth Circuit concluded that an employer violates the Act by: 1) conditioning employment on signing an agreement that precludes collective and class actions, and 2) interfering with employees’ rights to engage in concerted activity.

The Ninth Circuit disagreed with the employer that the Federal Arbitration Act (“FAA”) required the enforcement of the arbitration agreement, finding that at issue here was the fact that the agreement required individual litigation and not that it required arbitration. Under the majorities’ reasoning, it would have found the same violation if the agreement required all suits to be brought in court if the suits had to be brought on an individual basis. The Court further noted that the “FAA does not mandate the enforcement of contract terms that waive substantive federal rights.” Id. at slip op 18.

The dissent disagreed with the majority’s analysis, finding that while the NLRA “protects concerted activity, it does not give employees an unwaivable right to proceed as a group to arbitrate or litigate disputes.” Id. at slip op. 37. The dissent found that the NLRA did not create a substantive right to litigate collective and class actions and concluded “nothing in the text, legislative history, or purposes of [Section] 7 precludes enforcement of an arbitration agreement containing a class action waiver.” Id. at slip op. 37.

Through the Court’s decision in Morris, the Ninth Circuit joins the Seventh Circuit in finding that arbitration agreements waiving collective legal action violate the Act. See Lewis v. Epic Sys. Corp., — F.3d –, 2016 WL 3029464 (7th Cir. 2016). The Second, Fifth, and Eighth Circuits have concluded that the NLRA does not invalidate these agreements.

Given the split in the circuits, cases dealing with these type of mandatory class action waiver agreements will likely continue to be litigated until the Supreme Court rules on this issue.

Employers with these type of agreements need to consider whether they want to maintain these agreements in light of the current split and whether they are better served by making changes to their existing agreements. Employers concerned about their arbitration agreements are advised to consult with their labor and employment attorneys.