A new decision from the U.S. Court of Appeals for the Ninth Circuit continues to leave employers uncertain as to the enforceability of class action waivers in arbitration agreements. The Seventh and Ninth Circuits are on one side of the issue, and the Second, Fifth, Eighth, and Eleventh Circuits on the other. The Seventh and Ninth Circuits are following the National Labor Relations Board’s (NLRB) position that class action waivers infringe on an individual’s rights under the National Labor Relations Act (NLRA). The new Ninth Circuit decision makes it more likely that the United States Supreme Court will grant review and end the battle between the circuits. In the interim, class action waivers will not be enforced in federal courts in Illinois, Indiana, Wisconsin, California, Arizona, Nevada, Oregon, Idaho, Montana, Washington, Alaska, and Hawaii, the states within the Seventh and Ninth Circuits’ jurisdiction.
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The Ninth Circuit, in Morris v. Ernest & Young, LLP, No. 13-16599, 2016 U.S. App. LEXIS 15638 (9th Cir. Aug. 22, 2016), became the second appellate court to invalidate mandatory class waivers in arbitration agreements. The Seventh Circuit was the first circuit to invalidate a class or collective action waivers in an arbitration agreement in Lewis v. Epic Systems Corporation, 823 F.3d 1147 (7th Cir. 2016), where the court held that when an employer conditions continued employment upon the signing of a class or collective action waiver in an arbitration agreement, the agreement violates the NLRA and is unenforceable under the Federal Arbitration Act (FAA).
The employer in Morris required employees to sign a mandatory arbitration agreement that required employees to arbitrate all claims as individuals and in “separate proceedings.” The employer moved to enforce the arbitration agreement after two employees brought a wage and hour misclassification claim. The trial court ordered individual arbitration and dismissed the case. The employees appealed.
In a 2-1 ruling, the Ninth Circuit followed the NLRB’s position that mandatory arbitration agreements that waive the right to pursue class and collective actions violate the NLRA. (See D.R. Horton, Inc., 357 NLRB 184 (2012); Murphy Oil USA, Inc., 361 NLRB No. 72 (2014).) The Ninth Circuit agreed with the NLRB’s position that joining together to pursue class relief is protected concerted activity under the NLRA. The Ninth Circuit ruled that its holding did not contradict or undermine the FAA because the issue is not whether or not the claims should be arbitrated but whether the class-action waiver was enforceable. The Ninth Circuit reasoned that the “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, if the contract (1) limited resolution to that mechanism and (2) required separate individual proceedings.”
The Morris and Lewis decisions clearly prohibit mandatory class waivers in the Seventh and Ninth Circuit. The Lewis Court did not address whether an agreement with an opt-out provision would be enforceable because the arbitration agreement at issue provided that employees were considered to have accepted the terms of the arbitration agreement through their continued employment with the company. However, the Ninth Circuit in Morris noted in Footnote 4 that agreements that allow employees to “opt-out” do not violate the NLRA. This exclusion provides employers with an opportunity to maintain the enforceability of their class waivers if they provide employees with an opportunity to opt-out. Although this adds an additional level of complexity, it still provides employers with a significant mechanism to help avoid class actions.
At least four other courts, the Second, Fifth, Eighth, and Eleventh Circuits have decided that class action waivers do not violate the NLRA. (See Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297 n.8 (2d Cir. 2013); D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013); Murphy Oil USA v. NLRB, 808 F.3d 1013 (5th Cir. 2015); Owen v. Bristol Care, Inc., 702 F.3d 1050, 1052 (8th Cir. 2013); Walthour v. Chipio Windshield Repair, LLC, 745 F.3d 1326 (11th Cir. 2014).)
The employer in the Seventh Circuit case, Epic Systems, has already filed notice indicating it plans to appeal its decision to the U.S. Supreme Court. It is unclear whether Ernest & Young, the employer in the Ninth Circuit case plans to ask the full Ninth Circuit to review the decision.
Takeaway for Employers:
We do not yet know if or when the United States Supreme Court will end this battle among the circuits on whether class action waivers in arbitration agreements are enforceable. In the interim, employers in the Seventh and Ninth Circuits should review their arbitration agreements to see if they comply with the Lewis and Morris decisions. Employers should consider allowing employees an opportunity to opt-out of the agreement. In the Seventh and Ninth Circuits a mandatory arbitration agreement with a class waiver will be deemed invalid and unenforceable by district courts.