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Employee Arbitration Agreements and Class Action Waivers

By Christopher D. Durham
November 7, 2016
New York Law Journal

Employee Arbitration Agreements and Class Action Waivers

By Christopher D. Durham
November 7, 2016
New York Law Journal

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Christopher DurhamClass action waivers are an important tool for employers with employee arbitration agreements to limit their exposure to proceedings initiated by employees or former employees on a classwide basis.

Class action arbitration waivers have taken on even greater significance in recent years with the proliferation of collective actions under the Fair Labor Standards Act (FLSA), as such actions can be burdensome and costly to defend, even in an arbitral forum

In the first days of 2012, the National Labor Relations Board (NLRB or the Board) shocked the employer community when, in D.R. Horton, 357 NLRB No. 184 (2012), it held that class action waivers by employees in arbitration agreements with their employers violated the National Labor Relations Act (NLRA). Nearly five years after D.R. Horton, employers face considerable uncertainty as to the legality of class action waivers in employee arbitration agreements. However, with a recently emerged circuit court split between appellate courts siding with and against the NLRB's invalidation of employee class action arbitration waivers, it is more likely than at any point since D.R. Horton that employers finally will get legal clarity on this key issue.

NLRB's Invalidation Of Employee Class Action Arbitration Waivers

In D.R. Horton, the NLRB held that the arbitration agreement D.R. Horton required its employees to sign interfered with the exercise of employees' rights under §7 of the NLRA, which among other things, grants to employees the right "to engage in … concerted activities for the purpose of collective bargaining or other mutual aid or protection." 29 U.S.C. §157. The Board reasoned that the NLRA protects the right of employees to "join together to pursue workplace grievance, including through litigation" and arbitration, and that "an individual who files a class or collective action regarding wages, hours or working conditions, whether in court or before an arbitrator, seeks to initiate or induce group action and is engaged in conduct protected by Section 7," which conduct the Board described as "central to the [NLRA's] purposes." 357 NLRB No. 184, at 2279. Accordingly, the NLRB held that class action waivers in arbitration agreements constitute an unfair labor practice under §8(a)(1) of the NLRA [29 U.S.C. §158(a)(1)], which forbids employers to "interfere with, restrain or coerce employees in the exercise of the rights guaranteed" by §7 of the NLRA.

Since D.R. Horton, undeterred by circuit court holdings to the contrary, the Board has doubled down on its invalidation of employee class action arbitration waivers. See Murphy Oil USA, 361 NLRB No. 72 (2014).

Emerging Split Amongst U.S. Circuit Courts of Appeal

The results of litigation on this issue at the U.S. Court of Appeals level is less clear-cut. The Fifth Circuit Court of Appeals twice has rejected the NLRB's position that class action waivers in employee arbitration agreements violate §7 of the NLRA. In a late 2013 decision, the Fifth Circuit refused to enforce the Board's holding in D.R. Horton that employee class action arbitration waivers violate the NLRA. D.R. Horton v. NLRB, 737 F.3d 344 (5th Cir. 2013). Central to the Fifth Circuit's decision was its conclusion that the Board's invalidation of class action arbitration waivers conflicted with the Federal Arbitration Act (FAA). Significantly, the court determined that "requiring the availability of class actions 'interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA." Id. at 359-60 [quoting AT&T Mobility v. Concepcion, 131 S. Ct. 1740, 1748 (2011)]. The Fifth Circuit concluded that because the Board's interpretation of the NLRA did not fall within the FAA's "saving clause"—which requires enforcement of an arbitration provision "save upon such grounds as exist at law or in equity for the revocation of any contract (9 U.S.C. §2)—and "because the NLRA does not contain a congressional command exempting the statute from application of the FAA," the class action arbitration waiver at issue did not run afoul of the NLRA. 737 F.3d at 362. In so holding, the Fifth Circuit found, in stark contrast with the NLRB, that the "use of class action procedures … is not a substantive right." Id. at 357.

More recently, the Fifth Circuit reaffirmed its holding that employee class action arbitration waivers are not unlawful under the NLRA and refused to enforce the Board's decision to the contrary in Murphy Oil USA v. NLRB, 808 F.3d 1013 (5th Cir. 2015), for the same reasons it had refused to enforce the Board's decision in D.R. Horton.

Two other circuit courts of appeal have sided with the Fifth Circuit in rejecting the NLRB's holding in D.R. Horton and refusing to invalidate employee class action arbitration waivers. In Sutherland v. Ernst & Young, 726 F.3d 290 (2d Cir. 2013), the Second Circuit Court of Appeals upheld an arbitration agreement compelling employees to arbitrate FLSA claims on an individual basis. In its decision, the appellate court expressly declined to follow the Board's decision in D.R. Horton. The Eighth Circuit Court of Appeals also has rejected the NLRB's holding in D.R. Horton, upholding a class action arbitration waiver of FLSA claims in Owen v. Bristol Care, 702 F.3d 1050 (8th Cir. 2013). Just a few short months ago in June 2016, the Eighth Circuit reaffirmed its Bristol Care holding when it rebuffed the NLRB's direct challenge to a class action waiver in Cellular Sales of Missouri v. NLRB, 824 F.3d 772 (8th Cir. 2016).

Very recently, however, two other circuit courts—the Seventh Circuit and the Ninth Circuit—have sided with the NLRB and held that employee class action arbitration waivers are unlawful because they violate the NLRA. In late May 2016, siding with the Board's decision in D.R. Horton, the Seventh Circuit held that an employee arbitration agreement barring class or collective arbitration violated §7 of the NLRA. Lewis v. Epic Systems, 823 F.3d 1147 (7th Cir. 2016). In its decision, the Seventh Circuit leveled pointed criticism at the Fifth Circuit's opinion in D.R. Horton v. NLRB, stating that the Fifth Circuit made "no effort to harmonize the FAA and NLRA" (id. at 1158) and holding that "there is no conflict between the NLRA and the FAA, let alone an irreconcilable one." Id. at 1157.

Similarly, in late August 2016, in Morris v. Ernst & Young, 2016 WL 4433080 (9th Cir. Aug. 22, 2016), the Ninth Circuit agreed with the NLRB and the Seventh Circuit that an employee class action arbitration waiver violated §7 of the NLRA and therefore was unlawful. Notably, the court did not extend its holding beyond only mandatory class action arbitration waivers (i.e., waivers required to be signed as a condition of employment or continued employment), meaning that arbitration agreements with class action waivers that provide employees with the opportunity to opt out may currently be enforceable in the Ninth Circuit.

Where Do We Go From Here?

Ever since the NLRB's game-changing decision in D.R. Horton to ring in the new year in 2012, employers have been faced with the decision between ceding to employees the right to arbitrate claims in a class or collective action and potentially violating the NLRA. This decision has been particularly challenging for those employers who have geographically diverse businesses with employees located in multiple jurisdictions, and employers who find themselves in jurisdictions where federal courts have not yet weighed in on the issue.

However, this confusion seems likely to end in the near future. In early September 2016, both Epic Systems and Ernst & Young filed petitions for certiorari with the U.S. Supreme Court, asking the Supreme Court to review the recent decisions by the Seventh and Ninth Circuits invalidating employee class action arbitration waivers. The NLRB followed suit only days later, asking the Supreme Court to review the Fifth Circuit's decision in Murphy Oil.

Given the circuit split and the fact that parties on both sides of the issue are asking the Supreme Court to weigh in, it is likely that the court will take up the issue in the near future. How the Supreme Court will rule is much less certain. The late Justice Antonin Scalia arguably was the strongest pro-arbitration voice on the Supreme Court and authored the court's two most recent pronouncements upholding class action waivers in arbitration agreements: AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), and American Express v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013).

That the NLRB—which has passed up previous opportunities to have the Supreme Court review the issue—has elected to seek Supreme Court review now appears to suggest that the Board sees an opening to obtain high court approval of its D.R. Horton decision, which would likely be detrimental to employers and immediately invalidate class action waivers in employee arbitration agreements across the country. Conversely, with the current 4-4 split on the Supreme Court, it is possible that the court may not reach a majority decision, leaving in place the current patchwork of appellate court decisions that, while vexing to some employers, may be viewed as a triumph for employers in the Second, Fifth and Eighth Circuits. It is also possible that the court rejects the reasoning of the NLRB and the Seventh and Ninth Circuits, in line with a series of decisions in which the court has expressed a strong preference for arbitration under the FAA.

This issue merits prudent monitoring by employers going forward. Particularly if the Supreme Court sides with the NLRB and invalidates countless existing class action arbitration waivers nationwide, affected employers will want to implement a game plan to deal with the potential implications of such a decision and take other steps to protect themselves against the threat of a class or collective arbitration.

Reprinted with permission from New York Law Journal, © ALM Media Properties LLC. All rights reserved.