The Ninth Circuit recently decided where it would stand in the circuit split regarding the enforceability of concerted action waivers. In Morris v. Ernst & Young, LLP, No. 13-16599 (9th Cir. Aug. 22, 2016), the defendant, Ernst & Young, required its employees to sign agreements that contained a “concerted action waiver” as a condition of their employment. The waiver required employees to pursue legal claims against the Ernst & Young exclusively through arbitration and only as individuals in “separate proceedings.” However, despite this provision, plaintiff employees brought a class and collective action against Ernst & Young in a federal court, and Ernst & Young moved to compel arbitration pursuant to the agreements signed by the plaintiffs. The district court ordered the plaintiffs to proceed to individual arbitration and dismissed the case, but the Ninth Circuit reversed and remanded the decision of the district court.

On appeal before the Ninth Circuit, the plaintiffs argued that Ernst & Young’s concerted action waiver violated, amongst other federal statutes, the National Labor Relations Act (“NLRA”). The plaintiffs relied on determinations by the National Labor Relations Board (“NLRB”) that concerted action waivers violate the NLRA. The Ninth Circuit agreed with the plaintiffs, stating that the NLRA protects concerted activity, which is the right of employees to act together with respect to work-related legal claims, and that Ernst & Young’s concerted action waiver, by precluding employees from filing joint, class, or collective claims against their employer, interfered with that right. Ernst & Young’s concerted action waiver was therefore illegal and unenforceable.

Ernst & Young argued that the Federal Arbitration Act (“FAA”) trumped the NLRA and allowed it to enforce its concerted action waiver. The Ninth Circuit disagreed. First, the Court held that NLRA’s ban on concerted action waivers did not conflict with the FAA. The Court stated that its decision in finding the concerted action waiver unenforceable had nothing to do with disfavoring arbitration as a forum for resolving disputes and everything to do with the simple fact that Ernst & Young’s concerted action waiver, which forced employees to waive a substantive federal right under the NLRA, was illegal. In fact, Ernst & Young’s concerted action waiver would still have violated the NLRA even if it had required employees to resolve all work-related disputes in court, but in separate proceedings. Second, the Court observed that the FAA did not mandate the enforcement of contract terms that waive substantive federal rights, such as the rights under the NLRA. To the contrary, the Court held that FAA’s “saving” clause, which provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for revocation of any contract,” causes the FAA’s enforcement mandate to yield where enforcing an arbitration agreement would implicate a substantive federal right.

In deciding Morris, the Ninth Circuit sided with the Seventh Circuit in striking down concerted or class action waivers as illegal. Prior to the Ninth Circuit’s decision, the Seventh Circuit was the first court of appeals to strike down class waivers in Lewis v. Epic Systems, but, with the Second, Fifth, and the Eighth Circuits upholding class waivers and at least one district court issuing an opinion harshly criticizing the Seventh Circuit’s decision, employers could potentially argue that the Seventh Circuit decision was an outlier. However, after the Ninth Circuit’s decision in Morris, the argument for enforcing class waivers has just become more difficult than before as the Ninth Circuit decision made it clear that there is a circuit split among the federal appeals courts on this issue. Hopefully, U.S. Supreme Court will be inclined to rule on the dispute now that the federal courts of appeal are divided.

In the meantime, employers in California should review and adjust their employment agreements in light of the Morris ruling. Additionally, employers operating across multiple jurisdictions would find it prudent to consider developing specific policies/practices regarding concerted/class action waivers based on location to reflect the relevant jurisdiction’s views on enforcing concerted/class action waivers.