In Kim, California Supreme Court Protects Employees' Rights to Bring PAGA Claims

Earlier this month, the Supreme Court of California ruled that an employee does not lose standing to pursue a claim under the Private Attorneys General Act of 2004, California Labor Code § 2698, et seq. (PAGA) where that employee settles and dismisses his or her individual claims. In Kim v. Reins International California, Inc. (full opinion here), the Court rejected the employer’s injury-focused argument that an employee who settles his or her individual claims is no longer a “person aggrieved” for purposes of PAGA. The result is a positive judicial step in the right direction in ensuring that PAGA will continue to be a viable tool that may be used to protect the public interest in enforcement of the State’s labor laws.

The Plaintiff in Kim brought a putative class action claiming that he had been misclassified as exempt from overtime laws. The operative complaint alleged claims for failure to pay wages and overtime (Cal. Labor Code § 1194), failure to provide meal and rest periods (Cal. Labor Code § 226.7), failure to provide accurate time statements (Cal. Labor Code § 226(a)), waiting time penalties (Cal. Labor Code § 203), and unfair competition (Cal. Bus. & Prof. Code § 17200). It also sought civil penalties under PAGA. The employer compelled Plaintiff to arbitration and the PAGA litigation - which could not be compelled to arbitration, under Iskanian v. CLS Transportation Los Angeles (as explained here) - was stayed pending arbitration. While the PAGA action was stayed, the employer made a statutory offer to settle Plaintiff’s individual claims pursuant to Cal. Code Civ. Proc. § 998. Despite the settlement encompassing only Kim's "individual claims" (as discussed in footnote 7 of the Supreme Court opinion), the company sought and the court granted summary adjudication on the PAGA claim, concluding that Plaintiff lacked standing because his rights had been completely redressed by the settlement of his individual claims. The Appellate Court affirmed, leaving the California Supreme Court to weigh in on standing in PAGA cases.

Looking to the statutory language, the Supreme Court concluded that the settlement of individual claims does not strip an individual employee of standing to bring a PAGA claim. First, the plain language of PAGA only requires that a plaintiff be an aggrieved employee – someone “who was employed by the alleged violator” and “against whom one or more of the alleged violations was committed.” In rejecting the employer’s argument that a continuing injury was required to meet this definition, the Court explained that an injury-centric focus was misplaced as PAGA standing is defined in terms of an employer’s violations rather than an employee’s injuries. PAGA does not require an employee to claim any economic injury resulted from a labor violation, only that the labor violation itself occurred. Whereas the employer’s reading would read in requirements not found in the text itself, PAGA’s language only requires that an employee have suffered “one or more of the alleged violations” committed, which permits an employee to serve as a PAGA representative for violations that the employee did not personally experience, as the Court of Appeal in Huff v. Securitas had explained (see our amicus brief here for discussion of Huff).

The Court went on to discuss that injury is not a requirement for civil penalties; damages and civil penalties serve different purposes. In the case of PAGA, the statutory purpose is to remediate present violations and deter future violations as a matter of public interest, not to redress employees injuries. The Court also distinguished PAGA actions from class actions, emphasizing that whereas in a class action the representative only possesses his or her own claim for relief, a PAGA claim is brought on behalf of all affected employees as the state’s designated proxy, as in a qui tam action.

Turning to broader policy considerations, the Court explained that a narrower interpretation of who was an aggrieved employee for purposes of PAGA would have the effect of eliminating employees that settled their claims from the group of individuals eligible to receive a share of the penalties, which in turn would mitigate or potentially completely eliminate the amount of penalties that the state could collect. The Court also reasoned that, in light of plaintiffs' recognized ability to bring stand-alone PAGA claims, standing for a PAGA claim cannot be dependent on the maintenance of an individual claim as PAGA-only cases are not cases in which individual relief has been sought. Further, as there are numerous Labor Code violations that do not have a private right of action (for example, Cal. Labor Code § 558, which we previously discussed here) but can be vindicated in a PAGA action, it would be inconsistent to require a plaintiff to have an unredressed injury to have standing. Finally, the Court rejected as unsupported the employer’s arguments that the legislative history supported its argument or that Plaintiff should be precluded from raising his claim.

Notably, the Court also described Reins's conduct as "troubling." Specifically, Reins explicitly carved out Plaintiff's PAGA claim and made its settlement offer pursuant to California Code of Civil Procedure § 998, which permits defendants to recover defense costs if a jury awards a smaller award to the plaintiff than the defendant previously offered in settlement. The Court opined that "if Reins's prior conduct did not amount to an estoppel, this turnabout was hardly fair play," and observed that reaching a contrary holding would present plaintiffs with a difficult choice: "either reject the offer and risk incurring substantial liability for costs or accept the offer and lose the ability to pursue the PAGA claim."

Ultimately, the Court’s ruling in Kim is an important step in protecting employees’ rights by upholding a system designed to ensure that California’s Labor laws are properly enforced. PAGA remains an important and efficient tool in curbing an employers’ widespread misconduct. If you are seeking to assert wage claims representing your co-workers, contact Bryan Schwartz Law.

CoreLogic Sanctioned Over $86,000 For Violating Court Orders Compelling Arbitration

This week, a federal court in Orange County issued an order requiring CoreLogic, a real estate appraisal company, to pay over $86,000 in sanctions for “willfully and unreasonably disobey[ing]” court orders regarding arbitration.

Bryan Schwartz Law, along with co-counsel Nichols Kaster, LLP, filed a class and collective action case against CoreLogic at the end of 2017. The plaintiffs in Mitchell v. CoreLogic, Inc. et al., Case No. 8:17-cv-02274-DOC-DFM (C.D.Cal.) – real estate appraisers for defendant CoreLogic – alleged a variety of violations of state and federal wage and hours laws, including failure to pay overtime, failure to provide adequate meal and rest breaks, and failure to pay premiums for missed breaks.

In February 2019, CoreLogic successfully moved to compel many of the plaintiffs to arbitration, but then balked when approximately 160 of the plaintiffs filed arbitrations and CoreLogic was suddenly faced with the accompanying bills. CoreLogic twice sought relief from U.S. District Court Judge David O. Carter, and twice the judge denied its request.

In its first effort to avoid the very arbitration it moved to compel, CoreLogic raised a variety of administrative issues, which the court rejected. In his order on May 28, 2019, Judge Carter stated:

 “CoreLogic moved this Court to order Plaintiffs to arbitrate their claims. As CoreLogic previously argued, issues of arbitrability or the implication of statutes of limitation must be resolved by the arbitrator . . . CoreLogic asked for resolution of any and all disputes by the arbitrator. Having compelled arbitration, the Court will not now stay those proceedings due to associated costs.”

Undeterred, CoreLogic tried again to get out of the arbitrations by arguing that certain “threshold issues” had to be resolved before it proceeded with certain arbitrations. In a December 17, 2019 order, Judge Carter stated:

“The Court is very concerned about (and will no longer tolerate) more foot dragging on this issue. The Court ORDERS the parties to refile these cases with the [American Arbitration Association] and participate in the arbitration proceedings.”

In a follow up order on January 9, 2020, Judge Carter ordered CoreLogic to pay $18,482.49 in sanctions to Bryan Schwartz Law and $67,482.49 to Nichols Kaster for the attorneys’ fees and costs incurred in complying with the court’s prior orders to arbitrate.

CoreLogic’s tactics are part of a growing trend of companies that, upon forcing arbitration, balk when they have to pay up. Thankfully, the court’s sanctions order here is also part of a growing trend of courts calling companies’ bluff.

The issue of arbitration is an evolving one in CA. Bryan Schwartz Law is committed to holding companies accountable when they force their employees to arbitrate rather than allow their employees to have their day in court. The sanctions order is yet another victory in holding corporate America accountable.

If you have been forced to arbitrate your claims but your employer is not cooperating, contact Bryan Schwartz Law today.

Lamps Plus Dims the Future of Class Arbitration.

The Supreme Court dealt another blow to employees seeking to assert their workplace rights with its decision in Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019), all but killing the possibility of concerted arbitration in most cases. Lamps Plus is centered around mandatory, pre-dispute arbitration agreements. Employees often sign mandatory arbitration agreements as a condition of their employment. When faced with unlawful conduct in the workplace, these agreements prevent employees from suing their employers in court. Instead, employees must adjudicate disputes in arbitration, which is often a process skewed toward employers. Bryan Schwartz Law has blogged about problems with arbitration several times, including here, here and here. Though the Supreme Court pretends that arbitration is a more efficient and cost-effective means of resolving a conflict, arbitration is really only more efficient and cost-effective to the extent that it kills statutorily-protected claims all together – nothing more than a windfall for law-breakers, harming workers and consumers and preventing law-abiding businesses from competing on a level playing field.

In Lamps Plus, the Court examined when arbitration claims could be brought on behalf of multiple employees in a single action. Often, employees with valid grievances cannot and would not sue their employers individually because the cost of hiring an attorney outweighs the value of their claims and litigation and arbitration are time-consuming, draining, and always raise fears of retaliation. Fortunately, employees can band together against an employer as a class or collective, allowing them to bring claims together that would be too costly and difficult to pursue as individuals.

Over the past decade, the Supreme Court has chipped away at the availability of both class actions in court and class arbitration through its interpretation of the Federal Arbitration Act (“FAA”). In 2010, the Court held that individuals cannot pursue class arbitration if it is not permitted by their arbitration agreement. Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010). In April of this year, the Supreme Court extended Stolt-Nielsen’s holding to include contracts that are ambiguous on the issue of class arbitration in its Lamps Plus decision. Like silent arbitration agreements, the Court held, ambiguous arbitration agreements do not provide employees the option of pursuing class arbitration.

In Lamps Plus, the company was alleged to have disclosed sensitive personal information belonging to 1,300 employees, including that of the plaintiff, Frank Varela.  As a result, Mr. Varela was the victim of identity theft. Mr. Varela sued Lamps Plus on behalf of himself and the other employees affected by the security breach.

Lamps Plus moved to kick the case out of court and into arbitration based on Mr. Varela’s arbitration agreement. The District Court granted Lamps Plus’s motion. However, it rejected Lamp Plus’s request for individual arbitration and instead authorized Mr. Varela to proceed with class arbitration.

The Ninth Circuit affirmed. The court determined that the language in Mr. Varela’s arbitration agreement was ambiguous on the issue of class arbitration. In resolving the ambiguity, the court applied the California legal principle requiring ambiguous contract terms be construed against the drafter, a doctrine known as contra proferentem. All fifty states apply contra proferentem because it encourages clear contract drafting. Lamps Plus 139 S. Ct. 1407 (Kagan, J., dissenting). Here, Lamps Plus submitted that the contract only conveyed consent to individual arbitration, while Mr. Varela argued that the contract implied consent to class arbitration. The court construed the meaning of the contract against the drafter, Lamps Plus. Thus, the court disagreed with Lamps Plus’s interpretation and ruled Mr. Varela could bring a class arbitration claim.

The Supreme Court rejected the Ninth Circuit’s application of contra proferentem and held that contracts ambiguous on the issue of class arbitration do not authorize class arbitration. In its reasoning, the Court relied heavily on a false distinction between individual and class arbitration. The majority opined that class arbitration does not achieve the FAA’s goals of making litigation faster, simpler and less expensive. Lamps Plus, 139 S. Ct. at 1416. According to the current Supreme Court majority, class arbitration “makes the process slower, more costly, and more likely to generate procedural morass than final judgement.” Id. (citing AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 348 (2011)).  Therefore, the Court concluded that the term “arbitration” does not intrinsically include class arbitration. The Court’s reasoning is based on the mistaken belief that individual arbitrations are indeed faster, simpler, and less expensive. Id. This leap of reasoning is unsupported, in fact, and contrary to the experience of this firm. Hundreds of individual arbitrations are not actually faster, simpler, or less expensive than a single class case.

The Court then decided how to interpret the ambiguity in Mr. Varela’s contract. The Court conceded that, normally, courts apply state law when interpreting contracts. Id. at 1415. Here, however, the Court held that the federal FAA conflicts with the state doctrine of contra proferentem, thereby displacing it. Id. at 1417-18.

According to the Court, the two laws conflict because, under the FAA, “[a]rbitration is strictly a matter of consent.” Id. at 1415 (quoting Granite Rock Co. v. Teamsters, 561 U.S. 287, 299 (2010)).  Contra proferentem, on the other hand, provides a method of contract interpretation that disregards consent between the parties in favor of a practical solution. Id. at 1418. Considering this manufactured conflict between supposed “consent” between parties under the FAA (which, as Justice Ginsburg explained in her dissent, is a fallacy) and standard principles of contract law, the Court decided that the FAA applies instead of contra proferentem. Id. Thus, the Court held employees cannot pursue class arbitration if their contracts are ambiguous on the issue. Id. Rather, arbitration agreements only authorize class arbitration when there is clear language that shows both parties intended to provide for class arbitration. Id.

This opinion inspired a flurry of dissents. In the main dissent, Justice Kagan argued that Mr. Varela’s contract was not ambiguous in the first place – it clearly allowed for class arbitration. Id. at 1428-29. Even if the contract were ambiguous, she argued, contra proferentem should apply because it does not conflict with the FAA. Id. at 1430-35. Justice Sotomayor’s dissent rejected the notion that class arbitration is fundamentally different from individual arbitration. Id. at 1427. She argued that consent to arbitration necessarily includes the ability for complainants to proceed as a class. Id. Justice Breyer argued that the Court of Appeals lacked jurisdiction altogether. Id. at 1422-23.

Justice Ginsberg crafted the most scathing dissent. She called out the disingenuity of the majority’s central premise that arbitration “is strictly a matter of consent.” Id. at 1421. In reality, people rarely have genuine choice when signing arbitration agreements. Rather, they are often a condition of employment. Id. When Congress passed the FAA in 1925, Ginsberg noted, Congress intended arbitration to simplify dispute resolution between businesses with equal bargaining power. Id. at 1420. This is a far cry from the role of arbitration today. Now, employers can force arbitration agreements on employees to insulate themselves from the consequences of unlawful employment practices. As Ginsberg argued in her dissent, mandatory individual arbitration thwarts “effective access to justice.” Id. at 1422.  

It is the unfortunate reality that a growing number of employees must agree to mandatory, pre-dispute, individual arbitration as a condition of employment. Nevertheless, employees may overcome arbitration agreements, or make employer’s pay in arbitration – employers sometimes fail to obtain arbitration consent from all employees, or waive a right to compel arbitration by proceeding in court extensively before moving to compel arbitration. Employers do not expect massive numbers of employees to file in arbitration – they hope employees will simply abandon their claims. However, mass filing of arbitrations by aggrieved employees sends a strong message: arbitration is not meant to be a get-out-of-jail free card. In California, employees have the option of bringing a representative action under the Private Attorneys General Act of 2004 (“PAGA”), standing in the shoes of the state, which cannot be compelled involuntarily to arbitration. With our vigilance, and notwithstanding the best efforts of the present U.S. Supreme Court to abandon workers’ rights to the whims of big business, workers’ claims may yet be vindicated. If you are an employee and have questions about a supposed arbitration agreement between you and your employer, contact Bryan Schwartz Law 

The United States Supreme Court Hears Oral Argument on Individual Arbitration Agreements in Employment Contracts in Epic Systems Corp. v. Lewis and Consolidated Cases

On Monday, the Supreme Court of the United States heard oral argument in one of the most important employment cases in recent history. In Epic Systems Corp. v. Lewis, and consolidated cases, Ernst & Young LLP v. Morris, and N.L.R.B. v. Murphy Oil, Inc., petitioners asked the Court to address whether employees can join together to sue their employer for labor violations, or whether employers may enforce individual arbitration agreements. Transcript available here. Bryan Schwartz Law has previously blogged about the Morris, Lewis, and Murphy Oil cases here, here, and here. Based on the questioning at oral argument, the conservative justices of the Roberts Court appear poised to deliver a victory to big business at the expense of employees.

Background

Whether individual arbitration clauses in employment agreements are enforceable will depend on the Court’s interpretation of two federal laws, the Federal Arbitration Act of 1925 (FAA) and the National Labor Relations Act of 1935 (NLRA).

The FAA provides that arbitration agreements “shall be valid,” except, according to a savings clause, “upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Arbitration agreements require parties to resolve legal disputes in front of a private arbitrator rather than in a court of law. Employers frequently seek to condition employment on a worker’s agreement to forego class-wide relief if a dispute arises, and instead pursue their claims in individual arbitrations.

Section 7 of the NLRA prohibits employers from interfering with employees’ right to engage in “concerted activities” for their “mutual aid or protection.” 29 U.S.C. § 157. Class actions have long been considered a concerted activity, which permit large numbers of employees who share common disputes with large employers to band together to pursue relief they would otherwise have foregone due to fear of being singled out for retaliation, or because the cost of hiring an attorney for their individual case would dwarf the amount of their individual wage claims. Agreements to arbitrate individually are in tension with the NLRA’s right to “concerted” activity.

During the years John Roberts has served as Chief Justice, the Supreme Court has consistently stretched the FAA to favor big business, and disfavor class actions.[1] In 2011 and 2013, the Supreme Court held that the FAA allows companies to use fine-print arbitration clauses to force consumer and merchant disputes to be arbitrated on an individual basis. See AT&T v. Concepcion, 563 U.S. 333 (2011) (Scalia, J.); American Express v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013) (Scalia, J.). Bryan Schwartz Law previously blogged about Concepcion and Italian Colors here and here. These rulings effectively bar claims by millions of individuals who have each suffered a relatively small injury by a corporation, by baring them from using the class action mechanism.

Unlike consumers or merchants, federal law specifically recognizes a worker’s right under the NLRA to engage in “concerted activity” against employers. In Lewis v. Epic Systems Corp., and Morris v. Ernst & Young LLP, the Seventh and Ninth Circuit Courts of Appeal recognized “concerted activity” as a substantive federal right which would render individual arbitration clauses unenforceable against employees under the FAA’s savings clause. The employers appealed.

In Epic Systems Corp. v. Lewis, and the consolidated cases, petitioners asked the Court to determine whether the FAA gives an employer the freedom to condition employment on an employee’s agreement to proceed individually in arbitration. Put another way, the issue was whether the NLRA gives workers a chance at a more level playing field, by protecting  employees from their employer’s attempts to restrain their ability to act jointly to vindicate rights in an arbitral or other forum.

Oral Argument

Questioning from conservative Justices Roberts and Alito suggests they will back the employers’ arguments that the right to “concerted activity” ends at the courthouse or arbitral forum’s doors. These justices seem satisfied to interpret the FAA to permit companies to use forced individual arbitration to bar workers from coming together in a concerted or joint legal action against their employer. (See Transcript, pp. 5, 34-36, 41-44). They appear inclined to subordinate the purpose of the NLRA to the FAA’s mandate to honor arbitration agreements absent some very specific Congressional command. (See Transcript p. 4). Justice Thomas and the Supreme Court’s newest addition, Justice Gorsuch, were silent throughout the argument, but can be expected to vote with the vocal conservative Justices.

Justice Kennedy seems poised to contort the language of the NLRA to the benefit of employers, too. In the first question of the day, Justice Kennedy suggested the meaning of “concerted action” under the NLRA may somehow exclude class actions. (Transcript p. 5. Justice Kennedy raised a hypothetical of two employees seeking to arbitrate their wage claims. (Transcript pp. 15-16). He implied that employees’ concerted activity rights could be satisfied if each employee hired the same attorney for individual representation – though the whole point of class action is the efficiency of not having countless individual actions seeking the same relief. Justice Kennedy showed no apparent concern for workers’ potential confidentiality concerns, or conflicts of interest that can arise in separate individual representation of numerous employees against a single employer. (Transcript pp. 37). Justice Kennedy suggested, that “many of the advantages of concerted action can be obtained by going to the same attorney” (Transcript p. 39), but this is absurd: corporations and everyone else know that most workers will never step forward individually to prosecute their claims. Companies don’t want to arbitrate at all – they want to eliminate legal challenges by workers, and know the Supreme Court has gifted them a sledgehammer for doing so, with the creative distortion of the FAA to ban group litigation.

Even before Concepcion, Justice Kennedy has been willing to twist the plain language of the FAA to the benefit of employers. In Circuit City Stores, Inc. v. Adams, 532 U.S. 105, he interpreted the FAA to apply to all employment contracts, except for interstate transportation workers, despite the fact that the plain language of the FAA suggests the Act excludes all employees working in interstate commerce. 9 U.S.C. § 1 (“nothing herein contained shall apply to contracts of employment of seamen, or railroad employees, or any other class of workers engaged in foreign or interstate commerce.”) (emph. added).

To the Court’s progressive wing, the resolution of these issues could not be clearer – the NLRA is a Congressional command that falls within the FAA’s express savings clause, and the NLRA prevents employer restraints on employees’ concerted action, including joint efforts to seek labor law remedies.  

Justice Breyer made his view clear that the NLRA requires invalidation of forced individual arbitration agreements in employment contracts, because, under the NLRA, “what the employer cannot stop is joint effort” including bringing legal claims in a class or collective action. (Transcript, pp. 56-57). Enforcing individual arbitration agreements would gut a foundation of labor law that represents “the entire heart of the New Deal.” (Transcript, pp. 7-8).

Justice Ginsberg described as the “driving force” of the NLRA the recognition of an “imbalance” in bargaining power between employers and employees, and explained that the protection of employees’ “concerted activity” was meant to correct that imbalance. (Transcript, pp. 5-6). A worker with small monetary damages can thereby join with other workers sharing similar claims in order to bring a larger claim to recover their damages jointly. (Transcript, pp. 21).

Justice Kagan pointed to the Supreme Court’s prior precedent, federal statutes, and the Constitution in support of the progressive wing’s straightforward position. The Supreme Court in Eastex v. N.L.R.B., 437 U.S. 556, 565-566, 566 n. 15 (1978) recognized that the NLRA protects employees from retaliation by their employers when they resort to “administrative and judicial forums” for their mutual aid and protection. (Transcript, pp. 6-7). Sections 102 and 103 of the Norris-LaGuardia Act of 1932, upon which the NLRA was modeled, state that any contract that prevents concerted activities of workers for their mutual aid and protection “shall not be enforceable in any court.” (Transcript, pp. 18). Once such a basic right has been articulated, as in, e.g., the First Amendment right to free speech, its broad protection may not be easily narrowed in its exercise. (Transcript, pp. 66).  

To Justice Sotomayor, the NLRA is a federal law that invalidates contracts that constrain concerted activity, making forced individual arbitration clauses illegal and unenforceable, in much the same way that “state law concepts like fraud[ and] duress,” invalidate contracts. (Transcript pp. 13-14).

No Proportional Check on Corporate Wrongdoing

The conservative justices of the Roberts Court appear determined to interpret the FAA based on its text, or as Congress intended, but rather by any means available to protect large corporations against consumers, small businesses, and now employees. Berkeley Law’s Dean, and the famed constitutional law scholar Erwin Chemerinsky, has observed that to effectively protect their rights employees need a proportional response to violations by large corporations:

With the rise of the large corporation in the early twentieth century, courts and legislatures developed class actions as a procedural device to protect individuals from the harms of exploitation by large entities. Courts and legislatures realized that large entities have incentives to engage in widespread but small violations of the law, because corporations know that people cannot afford to sue over a small violation of the law. When individual litigation is not economically rational, the threat of litigation is not an effective deterrent to illegal behavior. Absent a robust government bureaucracy dedicated to enforcing consumer- or employee- protection laws, class actions are an essential aspect of law enforcement. And even the most aggressive enforcement agency cannot deal with even a significant fraction of law violations. Litigation is essential for deterring wrongdoing and class actions suits are necessary when a large number of people suffer a relatively small injury.[2]

If the Supreme Court proceeds as expected, based on Monday’s oral argument, millions of workers will lose an effective means to remedy many violations of their rights. More and more employees will be forced to enter into individual arbitration agreements and face their employers alone.

---

[1] Jessica Silver-Greenberg & Robert Gebeloff, “Arbitration Everywhere, Stacking the Deck of Justice,” N.Y. Times, Oct. 31, 2015.

[2] Erwin Chemerinsky, The Case Against the Supreme Court, § II.5 (2014).

The Supreme Court to Consider Employees' Right to Seek Class-wide Relief

On Friday, January 13, 2017, the Supreme Court granted certiorari to consider the consolidated appeals of Epic Systems Corp. v. Lewis, Ernst & Young v. Morris, and NLRB v. Murphy Oil. The Court will consider a circuit split regarding whether arbitration agreements containing class action waivers are enforceable under the Federal Arbitration Act in the employment context. In Murphy Oil, the Fifth Circuit held that a corporate defendant did not commit unfair labor practices by requiring employees to sign its arbitration agreement, which contained a class action waiver. In Epic and Ernst & Young, the Seventh and Ninth Circuits held otherwise -- that class waivers in arbitration agreements signed by employees violated the National Labor Relations Act because the waivers restricted the workers' right to concerted action. Bryan Schwartz Law blogged about the appellate decisions here and here.

These cases do not dispute that employees may waive their right to proceed with claims against their employer in any forum other than arbitration. Rather, the Seventh and Ninth Circuits have held that employees cannot waive their right to proceed as a class in any forum. These circuits, as well as the current National Labor Relations Board, agree that the National Labor Relations Act of 1935 protects private sector employees' right to concerted action in workplace disputes.

This long-enshrined federally-granted right to concerted action has come under attack since the Supreme Court decided AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). Concepcion broadly interpreted the Federal Arbitration Act of 1925 to preempt state laws that prohibit contracts from disallowing class-wide arbitration. While Concepcion was a consumer case, many courts, including the Fifth Circuit, have applied its holding to force employees to proceed with their claims against employers in arbitration, and to do so individually, rather than on a class-wide basis.

The Supreme Court should restore order in the lower courts by clarifying that the National Labor Relations Act protects workers' right to concerted action, that this right is not preempted by the Federal Arbitration Act, and that courts must stop applying Concepcion and its progeny to deny workers the right to proceed as a class in any forum. 

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.