Arbitration is a critical tool for California and small and medium businesses to deal with the escalating costs of traditional litigation. Arbitration allows employer-employee disputes to be resolved in a quicker, less formal manner. That does not sit well with many judges and plaintiff’s attorneys, who continue to mount attacks on the validity of arbitration agreements despite the mandates of federal law and binding U.S. Supreme Court precedent.
Ernst & Young Faces Class Action Despite Signed Arbitration Agreements
On August 22, a three-judge panel of the U.S. Ninth Circuit Court of Appeals issued a decision that one of the judges said “effectively cripples the ability of employers to enter into binding agreements to arbitrate.” The case, Morris v. Ernst & Young, LLP, is a proposed class action brought by two former employees of the well-known accounting firm Ernst & Young.
The plaintiffs claim they were “misclassified” during their employment with the firm. As a result, they say they were illegally denied overtime pay. Now, the plaintiffs claim to be acting on behalf of themselves and all “similarly situated” Ernst & Young employees who were supposedly denied overtime wages.
Ernst & Young moved to compel arbitration of the plaintiffs’ claims. Both plaintiffs signed an arbitration agreement during their employment with the firm. This agreement said mediation, followed by binding arbitration if necessary, was “the sole method for resolving disputes” arising from each plaintiff’s employment.
The arbitration agreement also provided that “disputes pertaining to different employees will be heard in separate proceedings.” In other words, by signing the arbitration agreement the employee waived the right to bring a class action against the firm.
You are probably familiar with the term “class action” even if you have never been a party to one. Basically, a class action is a procedural mechanism for consolidating multiple related claims into a single lawsuit. Nobody has the right to bring a class action. Federal court rules permit a judge to “certify” a class if the plaintiffs meet certain legal standards.
In a 2011 decision, AT&T Mobility LLC v. Concepcion, the U.S. Supreme Court explained that arbitration is incompatible with the class action mechanism because the latter “interferes with fundamental attributes of arbitration.” A class action is not designed to be resolved quickly and informally. This is precisely why employers like Ernst & Young incorporate a class action waiver into their arbitration agreements.
How Courts Outside of California View Class Action Waivers
But is it legal to ask employees to agree to a class action waiver? According to most courts that have studied the issue, the answer is yes. In fact, the U.S. Second Circuit Court of Appeals ruled on this precise issue in 2013 in a nearly identical case against Ernst & Young in New York. The Second Circuit held in Sutherland v. Ernst & Young, LLP, that federal labor law did not “invalidate a class-action waiver provision in an arbitration agreement.”
Similarly, the U.S. Eighth Circuit Court of Appeals ruled earlier this year in Cellular Sales of Missouri, LLC v. National Labor Relations Board that a “mandatory agreement requiring individual arbitration of work-related claims” does not violate federal law. The Eighth Circuit, in turn, cited the Fifth Circuit’s 2013 opinion in D.R. Horton, Incorporated v. National Labor Relations Board, which reached the same conclusion.
Given all this, you might expect the Ninth Circuit would follow suit in the Morris case and enforce Ernst & Young’s class action waiver. But that was not the case. Instead, by a 2-1 vote the Ninth Circuit panel held the waiver violates federal law, specifically the National Labor Relations Act (NLRA), and is therefore invalid.
Labor Law vs. Arbitration Law
The NLRA is the basic federal labor law which spells out the rights of employees. Section 7 of the NLRA states employees “have the right to self-organize…and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” Section 8 prohibits employers from interfering with an employee’s Section 7 rights.
The question in Morris and the other cases mentioned above is whether a class action waiver violates an employee’s Section 7 right to “pursue work-related legal claims together.” The Second, Fifth, and Eighth Circuits said that it does not. The majority of the Ninth Circuit panel said that it does.
The Ninth Circuit argued that is “well-established that the NLRA establishes the right of employees to act in concert.” Ernst & Young’s class action waiver violates that right, the majority said, because “the employee is obligated to pursue work-related claims individually and, no matter the outcome, is bound by the result.” This is the “antithesis” of the “substantive right” guaranteed by Section 7.
The problem with the Ninth Circuit’s reasoning is that it conflicts with the Federal Arbitration Act (FAA), which declares arbitration agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The Supreme Court’s Concepcion decision expressly said the FAA protects the ability of parties to make and enforce class action waivers.
The Concepcion court explained the whole point of the FAA was to permit “discretion in designing arbitration processes” in order to “allow for efficient, streamlined procedures tailored to the type of dispute.” Requiring parties to arbitrate multiple claims as a class rather than individually “sacrifices the principal advantage of arbitration,” the Court said, namely its “informality.”
But despite the Supreme Court’s clear position favoring arbitration, the Ninth Circuit insisted that Section 7 of the NLRA was a “contrary congressional command” that overrides the FAA. In short, the “NLRA establishes a core right to concerted activity.” Ernst & Young, as an employer bound by the NLRA, cannot enforce any contract that is “structured so as to exclude all concerted employee legal claims.” Whether those claims are heard in court or before an arbitrator, the Ninth Circuit said “employees must be able to act in the forum together.”
Dissent Suggests Possible Supreme Court Review
Of course, the Ninth Circuit panel was not unanimous in its decision. One judge dissented, supporting the position of the three other federal appeals courts that previously ruled in favor of class action waivers. The dissent specifically disagreed with the majority’s view that Section 7 was a “contrary congressional command” against arbitration.
The dissent pointed to a 2012 Supreme Court decision, CompuCredit Corp. v. Greenwood, which said that when Congress wants to prohibit or restrict arbitration clauses, it do so clearly and not in an “obtuse” manner. To put it simply, unless the text of a federal statute expressly bans arbitration, the courts should not assume otherwise.
Here, the dissent noted that nothing in the language of Section 7 “comes remotely close” to banning class action waivers. Nor does Section 7 create “a substantive right to the availability of class-wide claims that might be contrary to the FAA’s mandate.” Section 7 merely guarantees the ability of employees to engage in “concerted” action.
The dissent suggested “concerted” action can include many things short of filing a class action. Employees may choose to share legal strategies, hire the same attorney to represent them, or even lobby the government to investigate an employer. “But the language does not expressly preserve any right for employees to use a specific procedural mechanism to litigate or arbitrate disputes collectively,” the dissent concluded.
Unfortunately, the majority’s view is the law of the Ninth Circuit—which means all of California—at least for now. Due to the sharp division within the Ninth Circuit panel, Ernst & Young is likely to seek a review of the panel’s decision by the full Ninth Circuit. And even if that effort is unsuccessful, the Ninth Circuit’s split with the Second, Fifth, and Eighth Circuits suggests this case may end up before the Supreme Court.
So what do you need to know as a California small-medium business in the wake of the Ninth Circuit’s Morris decision? Here are a few takeaways:
* The Ninth Circuit has not banned arbitration of employee class actions. It has merely prohibited employers from requiring employees to arbitrate claims individually rather than as a class.
* The Ninth Circuit did not automatically invalidate any arbitration agreement that includes a class action waiver. In the Morris case, the court said the waiver may be “severable” from the rest of the arbitration agreement. The Ninth Circuit left that determination to the trial court.
* The Ninth Circuit’s decision does not affect other types of arbitration agreements, such as those between a small-medium business and its customers. The Ninth Circuit exclusively relied on labor law in deciding Morris, which is inapplicable in other contexts.
Despite its relatively limited scope, the Morris decision still creates a degree of uncertainty around employee arbitration agreements that contain class action waivers. If you are still unsure of how this affects your small or medium business, you should speak with an experienced California employment lawyer. And if you are facing any type of legal action from a dissatisfied employee or former employee, please contact the attorneys at VisionLaw® right away.