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. 

Arbitration Class Action Waivers Challenged: Seventh Circuit Sides with The National Labor Relations Board on D.R. Horton, in Lewis V. Epic Systems

On May 26, 2016, in Lewis v. Epic Systems Corp., No. 15-2997, 2016 WL 3029464 (7th Cir. May 26, 2016), the Seventh Circuit, fueling a circuit split, sided in favor of the National Labor Relations Board (“the Board”) position in D.R. Horton, Inc., 357 NLRB No. 184 (2012), holding that employers violate Section 7 of National Labor Relations Act (NLRA) by requiring employees covered by the Act to waive, as a condition of their employment, participation in class or collective actions.  Under Section 7 of the NLRA, employers are prohibited from interfering with employees’ right “to engage in…concerted activities for the purpose of collective bargaining or other mutual aid or protection.”

In Epic Systems, Lewis, a technical writer, filed a suit in federal court in Wisconsin on behalf of himself and other technical writers alleging that his employer – Epic Systems Corporation – had violated the Fair Labor Standards Act (FLSA) by misclassifying workers as exempt and depriving them of overtime.  In response, Epic-Systems moved to dismiss Lewis’s claim and compel individual arbitration because he had signed an arbitration agreement that waived his “right to participate in or receive money or any other relief from any class, collective, or representative proceeding.”  Lewis, however, responded that the agreement’s class and collective action waiver was unenforceable because it interfered with his right to engage in concerted activities under Section 7 of the NLRA.  The district court agreed with Lewis’s arguments and the Seventh Circuit affirmed.

Chief Judge Diane Wood explains in Epic Systems that “there is ‘no doubt that illegal promises will not be enforced in cases controlled by the federal law.’”  Epic Sys. Corp., 2016 WL 3029464, at *6 (quoting Kaiser Steel Corp. v. Mullins, 455 U.S. 72, 77 (1982)).  As reasoned in D.R. Horton, Section 7 grants employees the substantive right to act “concertedly for mutual aid or protection” and mandatory arbitration agreements that bar an employee’s ability to bring or join class or collective workplace claims restrict this substantive right. 

D.R. Horton adversaries claim that the Board and now the Seventh Circuit have expressly rejected the Supreme Court’s clear instructions on how to interpret the Federal Arbitration Act (FAA), which says that absent some specific “contrary congressional command” as to whether a claim can be arbitrated, the FAA “requires the arbitration agreement to be enforced according to its terms.”  CompuCredit Corp. v. Greenwood, 132 S.Ct. 665, 673 (2012).  However, as Chief Judge Wood explains in Epic Systems, “[b]efore we rush to decide whether one statute eclipses another, we must stop to see if the two statutes conflict at all.”  Epic Sys. Corp., 2016 WL 3029464, at *5.

The U.S. Supreme Court has made clear that “when two statutes are capable of co-existence ... it is the duty of the courts, absent a clearly expressed congressional intention to the contrary, to regard each as effective.”  Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528, 533 (1995); see also Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 381 (1996) (implied repeal should be found only when there is an “‘irreconcilable conflict’ between the two federal statutes at issue”) (quoting Kremer v. Chem. Const. Corp., 456 U.S. 461, 468 (1982)).  Epic Systems elucidates that the FAA and NLRA are reconcilable by way of the FAA’s savings clause, which provides that if “the provision at issue is unlawful under Section 7 of the NLRA, it is illegal, and meets the criteria of the FAA’s savings clause for non-enforcement,” i.e., that an arbitration agreement’s conflict with federal law is grounds for invalidation.  Epic Sys., 2016 WL 3029464, at *6.  When Congress drafted the FAA, it anticipated that conflicts could arise between it and other Federal laws, and by including the savings clause, it created a means of harmonizing the FAA with laws such as the NLRA. 

The Seventh Circuit’s decision splits with last year’s Murphy Oil USA, Inc. v. N.L.R.B., 808 F.3d 1013 (5th Cir. 2015), in which the Fifth Circuit held the exact opposite, ruling that the employer did not commit unfair labor practices by requiring employees to sign its arbitration agreement or seeking to enforce that agreement in federal district court.  The Fifth Circuit rejected the Board’s position, but the Court did not profess to have the last word on the matter.  The Fifth Circuit wrote, “[a]n administrative agency’s need to acquiesce to an earlier circuit court decision when deciding similar issues in later cases will be affected by whether the new decision will be reviewed in that same circuit…We do not celebrate the Board's failure to follow our D.R. Horton reasoning, but neither do we condemn its nonacquiescence.”  Murphy Oil, 808 F.3d at 1018 (referencing Samuel Estreicher & Richard L. Revesz, Nonacquiescence by Federal Administrative Agencies, 98 YALE L.J. 679, 735–43 (1989)). 

The circuit split on the enforceability of class action waivers has the legal community reeling.  While D.R. Horton, Epic Systems, and the present judicial climate have emboldened the plaintiffs’-side employment law bar nationwide, the debate continues to arouse long-held sentiments that workers’ rights should be subjugated in the name of commerce and contractual rights.  The Supreme Court will likely have to address the conflict presented in D.R. Horton, Murphy Oil, and Epic Systems, and people in the labor and employment law community are on the edge waiting to hear who ends up in the seat formerly held by Justice Antonin Scalia.