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Ninth Circuit Invalidates Arbitration Agreement with Class Action Waiver

On August 22, 2016, the Ninth Circuit joined the Seventh Circuit in the split amongst U.S. Circuit Courts of Appeal on the issue of enforceability of employment arbitration agreements precluding class actions.

The Ninth Circuit, similar to the Seventh Circuit in Lewis v. Epic Sys. Corp., held in 2-1 decision that an employer violates the National Labor Relations Act (NLRA) when it requires employees to sign an agreement precluding them from pursuing, in any forum, wage-and-hour claims against the employer on a collective basis.  To the contrary, the Fifth Circuit has upheld such arbitration agreements in D.R. Horton, Inc. v. NLRB and Murphy Oil USA, Inc. v. NLRB, finding that class action waivers do not violate the NLRA.

At issue in Morris v. Ernst & Young, LLP was an arbitration agreement that employees were required to sign as a condition of employment that mandated claims be resolved on an individual basis in “separate proceedings.”  The Ninth Circuit held that such an agreement precluding employees from initiating concerted legal action in any forum impermissibly interfered with employee rights to engage in concerted activity under the NLRA and thus could not be enforced.

The Ninth Circuit further held that the Federal Arbitration Act (FAA) did not dictate a contrary result.  The class action waiver was invalid because it defeated a substantive federal right to pursue concerted work-related legal claims, and the FAA recognizes a general contract defense of illegality.

The Dissent

Judge Ikuta’s dissent notes that the majority’s reasoning contradicts that in AT&T Mobility LLC v. Concepcion and Stolt-Nielsen v. Animalfeeds Int’l Corp., and is akin to that in the overturned Gentry v. Superior Court decision.  According to the dissent, requiring arbitration only if class arbitration is permitted is directly contrary to Concepcion and undermines the notion of arbitration as an expedient, streamlined procedure.

The dissent further contends that the majority misapplied the concept of conflicting federal statutes.  Judge Ikuta notes that the standard set forth in cases disregarded by the majority is whether the other federal statute at issue clearly bars class action waivers.  In other words, here there would need to be strong evidence that the NLRA expressly intended to bar class action waivers, which is not possible given that modern day class actions did not exist when the NLRA went into effect.

Considerations for Employers

Significantly for California employers, it appears from footnote 4 of the Ninth Circuit’s opinion that arbitration agreements with class action waivers may still be viable in California so long as the agreements also contain a provision giving employees a limited window to opt out of the company’s otherwise mandatory arbitration program.  Such agreements are potentially enforceable under the Ninth Circuit’s prior decision in Johnmohammadi v. Bloomingdale’s, Inc. and the Morris court reaffirmed the holding that such an opt-out cures any issues of unduly restricting employees’ rights to engage in concerted activity.  Employers should thus consider, among other proactive measures, adding an opt-out provision to their mandatory arbitration agreements.

It is also important to note that, while persuasive authority, a Ninth Circuit decision is not binding on the interpretation of federal law in California state courts.  The California Supreme Court, in Iskanian v. CLS Transportation Los Angeles, LLC, previously rejected D.R. Horton as a valid interpretation of the law and instead held that an express class action waiver in an employment arbitration agreement is enforceable.  That decision is binding on state courts, which means that there is now a greater likelihood of having a class action waiver upheld in state court actions then in federal actions within the Ninth Circuit.  Accordingly, California employers with arbitration agreements containing class action waivers may wish to remain in state court, rather than attempt to remove to federal court.

Given the current split in authority regarding this rapidly changing area of the law, it is essential that California employers consult with legal counsel to ensure that their arbitration agreements are developed with the foregoing issues in mind.  Until such time as the United States Supreme Court issues a definitive decision or decisions to resolve the emerging circuit splits, the enforceability of mandatory arbitration agreements requiring only individual arbitration will remain uncertain.

Copyright © 2017, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Jason Kearnaghan, employment lawyer, Sheppard Mullin Law firm
Partner

Jason W. Kearnaghan is a partner in the Labor and Employment Practice Group in the firm's Los Angeles office.

Mr. Kearnaghan represents employers in state and federal courts with respect to all facets of employment law including wrongful discharge, employment discrimination, retaliation, sexual harassment, and hostile work environment.  A significant portion of his practice is devoted to the defense of complex wage and hour class action litigation.  He has experience representing employers in union negotiations, organizing campaigns, elections,...

213-617-5516
Melanie Hamilton, Attorney,
Associate

Ms. Hamilton is an associate in the Labor and Employment Group in the firm's Orange County office.

Areas of Practice

Ms. Hamilton specializes in labor and employment matters on behalf of employers, including wage and hour violations, employment discrimination, wrongful termination in violation of public policy, and sexual harassment.

213-617-5506
Thomas Kaufman, Legal Specialist, Sheppard Mullin, Labor, Employment
Partner

Mr. Kaufman is a partner in the Labor & Employment Practice Group in the firm's Century City office.

Areas of Practice

Mr. Kaufman's practice is in employment litigation defense, with an emphasis on California Labor Code and federal wage/hour class actions.  Mr. Kaufman has handled class litigation matters for a wide variety of industries, including banks and mortgage lenders, hospitals, large newspapers, information technology companies, restaurants, and other retailers.  Mr. Kaufman also is...

310-228-3748