Where Are We with the Enforceability of Class Action Waivers in Arbitration Agreements?
With the 9th Circuit’s late summer anti-class action waiver decision, the circuit split widened over the issue of whether employers can require employees, through an arbitration agreement, to waive their rights to bring class or collective actions against their employer. This issue will almost certainly reach the Supreme Court given the deepening divide and the Court’s previous apparent interest in addressing issues surrounding class action waivers and arbitration agreements.
The Issue
There are two conflicting statutes in play here: the Federal Arbitration Act and the National Labor Relations Act.
The FAA promotes and protects the enforceability of arbitration agreements, and generally, it requires courts to enforce arbitration agreements unless another federal statute specifically overrides it or enforcement would impinge upon a “substantive right” afforded to an individual under that statute.
The NLRA provides employees with a substantive right to engage in concerted activity, i.e., to act collectively with respect to their wages and other terms and conditions of their employment.
The question many of the Circuit Courts of Appeals have confronted, and the Supreme Court will hopefully soon confront, is whether the right to pursue relief in court collectively is the equivalent of engaging in protected “concerted activity” – a substantive and therefore non-waivable right.
Conflicting Circuit Court Holdings
In August 2016, the 9th Circuit in Morris v. Ernst & Young became the second circuit to answer that question in the affirmative. That decision mostly mirrored the 7th Circuit’s May 2016 decision in Lewis v. Epic Systems Corporation, concluding that class action waivers in employer-imposed arbitration agreements violate the NLRA. There, the 7th Circuit found that there is nothing quite so “concerted” as a class action litigation, where employees band together to collectively assert a legal challenge to a workplace practice. The 9th Circuit found the same, stating, “this restriction is the ‘very antithesis’ of [the NLRA’s] substantive right to pursue concerted work-related legal claims.”
In contrast to the positions taken by the 7th and 9th Circuits, the 2nd, 5th and 8th Circuits have all previously concluded that such waivers do not violate the NLRA.
Litigants in many of these cases have asked the Supreme Court to resolve the issue and updates will be forthcoming as new developments emerge on that front.
In the meantime, in the absence of a Supreme Court ruling, the National Labor Relations Board (NLRB) adheres to a policy of “nonacquiescence,” meaning it will continue to decide cases based on its analysis and interpretation of the law notwithstanding the rejection of its position by certain of the circuit courts of appeals.
As a result, dozens of cases involving this issue are pending in the federal appellate courts on appeal from rulings of the NLRB and employers have been left scrambling to determine whether to utilize these agreements in certain parts of the country.
Takeaways
All employers should pay close attention to this issue as it doesn’t merely impact unionized workforces. In Morris, employees had attempted to bring a collective/class action under the Fair Labor Standards Act and California labor laws claiming unpaid overtime. They argued that they shouldn’t be forced to arbitrate their claims individually because, in part, their arbitration agreements separately violated the NLRA – a violation that had nothing to do with their claims for unpaid wages.
At the same time, employers should realize the limits of these decisions. First, the NLRA does not cover all employees. Managers and supervisors cannot seek its protections (in most cases), and therefore, cannot use it to invalidate their class action waivers (although query whether that remains the case when the employee is challenging his or her status as an exempt manager/supervisor). Second, if the arbitration provision provides the employee with the ability to opt-out or it permits them to pursue collective/class arbitration (in lieu of litigation), they will likely be unable to successively challenge it.
The law on this question is currently in flux, but the Supreme Court has repeatedly held that arbitration is a matter of contract and that the terms of arbitration agreements will be strictly enforced. In light of this and the fact that we should assume a conservative-leaning judge will fill the current vacancy on the Supreme Court, it is not unreasonable to conclude that another FAA-favorable decision will be headed our way. Regardless of the outcome, we hope to have a decision soon so that the parties to these agreements can act with greater certainty. In the meantime, employers operating in the 7th and 9th circuits should consider whether and how they want to revise their arbitration agreements while this issue remains outstanding.
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