D.R. Horton Rising: The Ninth Circuit Sides with the Seventh Circuit and the National Labor Relations Board on Class Action Waivers, in Morris v. Ernst & Young, LLP

In the Ninth and Seventh Circuits, employers cannot force

employees to sign class action waivers as a condition of 

employment, because the NLRA provides employees the 

right to vindicate employment rights collectively.

Yesterday, the Ninth Circuit took sides in a major split within the U.S. Courts of Appeals over the enforceability of class arbitration waivers. In Morris v. Ernst & Young, LLP, No. 13-16599, Slip. Op. (9th Cir. Aug. 22, 2016), the Ninth Circuit held that employers violate Sections 7 and 8 of the National Labor Relations Act (“NLRA”) by requiring employees covered by the NLRA to waive, as a condition of their employment, participation in “concerted activities” such as class and collective actions. (Slip Op. at 1.)

By this holding, the Ninth Circuit joins the Seventh Circuit, which in Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. May 26, 2016) adopted the National Labor Relations Board (“The Board”) position in D.R. Horton, Inc., 357 NLRB No. 184 (2012). Under this line of authority, the Federal Arbitration Act (“FAA”) does not mandate enforcement of a contract that waives the substantive federal right to engage in concerted action established in Section 7 of the NLRA. (Slip Op. at p. 18-19.) Bryan Schwartz Law blogged in detail about the Lewis v. Epic Systems Corp. decision, here.

In Morris, two employees filed a class and collective action alleging that their employer had misclassified workers as exempt and deprived them of overtime in violation of the Fair Labor Standards Act (“FLSA”) and California labor laws. As a condition of employment, the employees were required to sign contracts containing a “concerted action wavier” that obligated them (1) to pursue legal claims against their employer exclusively through arbitration and (2) to arbitrate individually in “separate proceedings.” Based on these agreements, the employer moved to compel the employees to arbitrate their claims individually. The U.S. District Court granted the employer’s motion. (Slip Op. at p. 4-5.)

The Ninth Circuit reversed, reviewing the decision to compel arbitration de novo. Chief Judge Sidney R. Thomas explained in the opinion:

This case turns on a well-established principal: employees have the right to pursue work-related legal claims together. 29 U.S.C. § 157; Eastex, Inc. v. NLRB, 437 U.S. 556, 566 (1978). Concerted activity – the right of employees to act together – is the essential substantive right established by the NLRA. 29 U.S.C. § 157. Ernst & Young interfered with that right by requiring its employees to resolve all of their legal claims in “separate proceedings.” Accordingly the concerted action waiver violates the NLRA and cannot be enforced.

(Id. at p. 6.)

The Ninth Circuit explained that the FAA does not dictate a contrary result. (Id. at 14.) While the FAA creates a “federal policy favoring arbitration” clause enforcement, the Act contains a savings clause that prohibits enforcement of arbitration agreements that defeat substantive federal rights, including the right to engage in concerted activity under the NLRA. (Id. at 15, 26.) In Morris, employees’ waiver was illegal not because it required the employees to pursue their claims in arbitration, but rather, because they could not do so in concert. (Id. at p. 16.)

Other circuit courts have taken a contrary position, enforcing employers concerted action waivers under the FAA. See Cellular Sales of Missouri, LLC v. N.L.R.B., 824 F.3d 772, 776 (8th Cir. 2016); Murphy Oil USA, Inc. v. N.L.R.B., 808 F.3d 1013 (5th Cir. 2015); Owen v. Bristol Care, Inc., 702 F.3d 1050, 1053-54 (8th Cir. 2013); D.R. Horton, Inc. v. NLRB, 737 F.3d 344, 361 (5th Cir. 2013); Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297 n.8 (2d Cir. 2013).

As more circuits choose sides on whether class action waivers in arbitration agreements are enforceable, Supreme Court review becomes an inevitability. 

The High Court would also be wise to resolve a disagreement between the Ninth and Seventh Circuits regarding such waivers. In the Seventh Circuit, any “[c]ontracts that stipulate away employees’ Section 7 rights . . . are unenforceable.” Epic, 823 F.3d at 1155. The Ninth Circuit precedent is narrower, making such contracts enforceable if employment is not conditioned on agreeing to the clause. (Slip. Op. 11, n. 4.) For example, if an employee has the opportunity to opt-out of a class action waiver and keep his or her job, but chooses not to, that waiver would be enforceable by the employer in the Ninth Circuit. (Id. (citing Johnmohammadi v. Bloomingdale’s, Inc., 755 F.3d 1072, 1076 (9th Cir. 2014))). The Seventh Circuit provides a clearer rule, one that better comports with the purposes of the NLRA, and one that the Supreme Court should adopt.

For now, workers in the Ninth and Seventh Circuits, as well as their advocates, should take note that employers cannot force employees to sign class action waivers as a condition of employment, because Epic and Morris tell us that the NLRA provides employees with the right to vindicate their employment rights collectively.