• The Future of Class Action Waivers In Mandatory Arbitration Agreements: Should Employers Be Worried?
  • November 2, 2017 | Authors: Marie Burke Kenny; lauren N. Vega
  • Law Firm: Procopio, Cory, Hargreaves & Savitch LLP - San Diego Office
  • In January 2017, the United States Supreme Court granted review of the Morris et al. v. Ernst & Young, LLP case which held that the National Labor Relations Act (“NLRA”) prohibits class action waivers in mandatory arbitration agreements for employees. As a result, employers with litigation pending in federal court now have an uphill battle when it comes to enforcing class and collective action waivers in mandatory arbitration agreements. Worried employers will have to wait for a final answer on the enforceability of such waivers given that the Supreme Court recently announced that the Court would not hear the Ernst & Young case until the 2017 term, which begins in October 2017.

    In recent years, the National Labor Relations Board (“NLRB”) has increasingly scrutinized employer policies and practices in non-union workplaces. Specifically, the NLRB, a traditionally pro-employee agency, has issued several rulings holding that class action waivers violate employees’ right under Section 7 of the NLRA to engage in “protected concerted activities.” The NLRB broadly interprets Section 7 to protect essentially any conduct related to employment (e.g. wages, hours, and working conditions). The Ninth Circuit’s recent decision in Ernst & Young signaled a disappointing shift in favor of the NLRB’s stance on class action waivers.

    In Ernst & Young, two former employees filed a wage and hour class action against Ernst & Young in federal court. Ernst & Young successfully argued for the dismissal of the class action and the Court compelled the employees’ individual claims to arbitration based on the arbitration agreement signed by the employees. The employees signed a mandatoryarbitration agreement that required them to pursue their legal claims in arbitration and arbitrate “only as individuals and in ‘separate proceedings.’” Such a provision is known as a class or collective action waiver. Because the employees were required to sign the agreements as a condition of being employed by Ernst & Young, the employees challenged the validity of the agreements under several statutes, including the NLRA. Specifically, the employees argued that the class action waiver violated their right to engage in “concerted activity” under the NLRA. On appeal, the Ninth Circuit adopted prior NLRB rulings and held that requiring employees to sign an arbitration agreement precluding them from bringing a collective or class action in any forum is a violation of the NLRA.

    Importantly, the Ninth Circuit’s holding does not extend to class action waivers in arbitration agreements that are not required as a condition of employment. In other words, the Court’s ruling does not apply to class action waivers that an employee voluntarily agrees to in an arbitration agreement. Specifically, an arbitration agreement with a class action waiver would be enforceable if an employee was either given a choice of whether to sign the agreement or was allowed a window of time to “opt-out” of the agreement after signing it. Notably, the Court in Ernst & Young referenced another Ninth Circuit opinion, Johnmohammadi v. Bloomindale’s, Inc. in which the court held that an arbitration agreement containing a class action waiver did not violate the NLRA because the employee was given the opportunity to opt-out of the agreement and pursue class action litigation in court.

    The Ninth Circuit’s decision in Ernst & Young suggests that the NLRB’s assault on class action waivers has finally gained some traction. Notably, the Ernst & Young decision is contrary to the California Supreme Court’s landmark decision in Iskanian v. CLS Transp. Los Angeles, LLC, in which the court held that class action waivers in mandatory arbitration agreements are enforceable under California law. Relying on Iskanian, many California employers have used class action waivers to mitigate the potentially devastating impact of a class action and to effectuate efficient adjudication of individual employee disputes. In the wake of Ernst & Young, however, employers should be aware that a federal district court judge would likely feel compelled to follow that decision and hold that class action waivers in mandatory arbitration agreements are unenforceable. For now, employers seeking to enforce such waivers would be advised to litigate that issue in state court.

    On January 13, 2017, the United States Supreme Court granted review of Ernst & Young and two related cases. While the Seventh and Ninth Circuits have held that class action waivers in mandatory arbitration agreements are unenforceable, the Second, Fifth, and Eighth Circuits have concluded that such waivers are enforceable. The highly-anticipated decision by the United States Supreme Court will ultimately resolve the conflict among the circuits and provide employers with a definitive answer. Unfortunately, that answer likely will not come until 2018.

    How does this decision affect employers? The Ernst & Young decision directly affects employers seeking to enforce a class action waiver in a mandatory arbitration agreement in federal court. Although most class actions are filed in state court, employers should be aware that employees are increasingly filing such cases in federal court to avoid the enforcement of class action waivers. Additionally, employers need to carefully consider the pros and cons of removing a state court class action to federal court given the precedential effect of the Ernst & Young decision. From a practical standpoint, employers should consider adopting arbitration agreements with an opt-out procedure that allows employees to revoke the agreement within thirty days of signing. The Ernst & Young decision expressly recognized that an arbitration agreement with an opt-out procedure does not violate the NLRA. Given the strict drafting requirements for arbitration agreements and the gravity of the Ernst & Young decision, employers should not hesitate to contact counsel to seek guidance in revising existing arbitration agreements or drafting new agreements.