Notwithstanding repeated decisions by the U.S. Supreme Court affirming the validity of class action waivers in arbitration agreements(1), a recent circuit split and three pending cert petitions raise the specter of another challenge to such waivers specifically in the employment context.
On Sept. 9, 2016, the National Labor Relations Board, joined by the U.S. Department of Justice, filed a petition for writ of certiorari with the Supreme Court, seeking review of the Fifth Circuit's decision in Murphy Oil USA v. NLRB, 808 F.3d 1013 (5th Cir. 2015).
In Murphy Oil, the U.S. Court of Appeals for the Fifth Circuit held that a mandatory class- and collective-action waiver in an employer's arbitration agreement did not violate the National Labor Relations Act (NLRA) because the use of class action procedures is not a substantive right under the NLRA. The NLRB argued that such waivers violate the NLRA because they deprive employees of their statutory right to engage in "concerted activities" in pursuit of their "mutual aid or protection."
The question of whether class-action and collective-action waivers in employment arbitration agreements violate the NLRA or are enforceable under the Federal Arbitration Act, 9 U.S.C. ¤1 et seq. (FAA), has split the federal circuits. In this article, we analyze recent appellate cases that crystallize the issue and address how employers may take steps to modify their arbitration programs to maximize the likelihood that they continue to pass legal muster.
'Concepcion' and 'D.R. Horton'
In 2011, the U.S. Supreme Court decided AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), the landmark decision that held that state law doctrines that "disfavor arbitration" would be preempted by the Federal Arbitration Act if "[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA." Id. at 344.
Although Concepcion arose in the context of a consumer's class action challenge to a sales tax charge in a contract with a cell phone provider, the decision was considered by many employment law practitioners to be relevant to the enforceability of individual arbitration provisions in employment agreements, if only because it evinced a strong Supreme Court preference to enforce the "liberal federal policy favoring arbitration." Id. at 339.
The NLRB has taken the position that class and collective action waivers in employment agreements are unlawful under federal labor law. See D.R. Horton, 2012 WL 36274 (NLRB Jan. 3, 2012). In the board's view, Sections 7 and 8 of the NLRA prohibit an employer from "requir[ing] employees covered by the Act, as a condition of their employment, to sign an agreement that precludes them from filing joint, class, or collective claims addressing their wages, hours or their working conditions against the employer in any forum, arbitral or judicial." Id. at *1. D.R. Horton found Concepcion inapplicable because it did not address the NLRA or the employment context.
Section 7 provides that "[e]mployees shall have the right toÉengage inÉconcerted activities for the purpose of collective bargaining or other mutual aid or protection." 29 U.S.C. ¤157. Section 8 provides that employers may not "interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in [Section 7]." Id. at ¤158.
The NLRB has sought ratification of its position in the courts, with mixed success. The Second, Fifth and Eighth circuits have rejected the board's reasoning. See Sutherland v. Ernst & Young, 726 F.3d 290 (2d Cir. 2013); D.R. Horton v. NLRB, 737 F.3d 344 (5th Cir. 2013); Murphy Oil USA v. NLRB, 808 F.3d 1013 (5th Cir. 2015); Cellular Sales of Missouri v. NLRB, 824 F.3d 772 (8th Cir. 2016). The Seventh and Ninth circuits, however, have adopted the board's position. See Morris v. Ernst & Young, No. 13-16599, 2016 WL 4433080 (9th Cir. Aug. 22, 2016); Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016).
In Sutherland, the U.S. Court of Appeals for the Second Circuit held that the Fair Labor Standards Act (FLSA) "does not preclude the waiver of collective action claims." 726 F.3d at 296. The Second Circuit reasoned that the FLSA's opt-in requirement for collective actions meant that Congress also gave employees the power to waive their right to participate in collective actions.
The Second Circuit also invoked Concepcion: "Supreme Court precedents inexorably lead to the conclusion that the waiver of collective action claims is permissible in the FLSA context." Id. at 297.
In Patterson v. Raymours Furniture Co., 2016 WL 4598542 (2d. Cir. Sept. 2, 2016) (Summary Order), the Second Circuit held that it was bound by its Sutherland decision and summarily affirmed the district court's holding that the employer's class action waiver in its employment agreement was enforceable.
Raymours Furniture required that all its employees, as a condition of their employment, participate in the company's Employment Arbitration Program, which required that employees submit all employment and compensation-related claims to arbitration on an individual basis.
Plaintiff Connie Patterson had brought a putative class and collective action asserting claims against Raymours under the FLSA and New York Labor Law, arguing that Raymours' "ban on class or collective litigation or arbitration of workplace grievances violated the employees' right under the NLRA 'to engage inÉconcerted activities.'" In Patterson, the Second Circuit summarized the state of the law on the question of mandatory class action waivers in employment agreements as follows:
The National Labor Relations Board has repeatedly concluded that Sections 7 and 8(a)(1) of the NLRA and Sections 2 and 3 of the [Norris-La Guardia Act] foreclose enforcement of arbitration agreements that waive an employee's right to pursue legal claims in any judicial or arbitral forum on a collective basis. The circuit courts, however, are irreconcilably split on the question.
The Fifth and Eighth Circuits have reversed the Board's rulings on three separate occasions. The Seventh and Ninth Circuits, on the other hand, have agreed with the Board that clauses precluding employees from bringing, in any forum, a concerted legal claim violate the NLRA, and have further held that such agreements are unenforceable under the FAA. Id. at *2 (internal citations omitted).
The Fifth Circuit in particular has had a contentious history with the NLRB. In Murphy Oil, the court held that Murphy Oil did not commit unfair labor practices by requiring employees to sign an arbitration agreement in which they waived their right to pursue class and collective actions.
The Murphy Oil holding was not unexpected. Two years prior, in D.R. Horton v. NLRB, 737 F.3d 344 (5th Cir. 2013), the Fifth Circuit held "(1) the NLRA does not contain a 'congressional command overriding' the Federal Arbitration Act; and (2) 'use of class action proceduresÉis not a substantive right' under Section 7 of the NLRA." Murphy Oil, 808 F.3d at 1016 (quoting D.R. Horton, 737 F.3d at 357, 360-62).
The Fifth Circuit concluded: "This holding means an employer does not engage in unfair labor practices by maintaining and enforcing an arbitration agreement prohibiting employee class or collective actions and requiring employment-related claims to be resolved through individual arbitration." Id.
The Seventh and Ninth circuits, by contrast, have held that Supreme Court precedent, including Concepcion, does not compel the conclusion that class action waivers must always be enforced. In Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016), the U.S. Court of Appeals for the Seventh Circuit held that Sections 7 and 8 of the NLRA rendered Epic's arbitration provision unenforceable.
Epic required employees to agree to bring any wage-and-hour claims against the company only through individual arbitration and the agreement did not permit collective arbitration or collective action in any other forum. Id. at 1151, 1155. Epic has filed a cert petition seeking review of the decision.
The U.S. Court of Appeals for the Ninth Circuit has held that an arbitration agreement mandating individual arbitration may be enforceable where the employee had the right to opt out of the agreement without penalty, reasoning that the opt-out meant that the employer did not "interfere with, restrain, or coerce" the employee in violation of the NLRA. Johnmohammadi v. Bloomingdale's, 755 F.3d 1072, 1077 (9th Cir. 2014).
And in Morris v. Ernst & Young, No. 13-16599, 2016 WL 4433080 (9th Cir. Aug. 22, 2016), the Ninth Circuit held that the "Board's interpretation of ¤7 and ¤8 is correct. Section 7's 'mutual aid or protection clause' includes the substantive right to collectively seek to improve working conditions through resort to administrative and judicial forums. Under ¤8, an employer may not defeat the right by requiring employees to pursue all work-related legal claims individually." Id. at *5 (internal quotations and citations omitted). Ernst & Young has filed a cert petition seeking review of the decision.
In its cert petition, the NLRB highlighted this clear circuit split and framed the question presented as:
Whether arbitration agreements with individual employees that bar them from pursuing work-related claims on a collective or class basis in any forum are prohibited as an unfair labor practice under 29 U.S.C. ¤158(a)(1), because they limit the employees' right under the National Labor Relations Act to engage in 'concerted activities' in pursuit of their 'mutual aid or protection,' 29 U.S.C. ¤157, and are therefore unenforceable under the saving clause of the Federal Arbitration Act, 9 U.S.C. ¤2.
The Second Circuit's recent decision in Patterson confirms that class and collective action waivers in employment arbitration agreements remain enforceable in New York. In light of the disagreements among the federal courts of appeals on this question, however, national employers or those that operate in multiple jurisdictions may face inconsistent rules depending on where an employee may choose to commence a lawsuit.
Employers may wish to review their arbitration programs to assess whether they comply with the current law in the relevant circuit regarding the enforceability of mandatory individual arbitration provisions. One revision employers may wish to consider is whether to allow employees to opt out of a mandatory arbitration program after a dispute has arisen.
This alternative may avoid objections from the NLRB, but necessarily will result in some cases proceeding to litigation in courts with the possibility of class actions. As noted, the Ninth Circuit has indicated that an opt-out arbitration program may satisfy the NLRA.
Christina Andersen, an associate at the firm, assisted with the preparation of this article.
1. See, e.g., Am. Exp. Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013); AT&T Mobility v. Concepcion, 563 U.S. 333 (2011); Stolt-Nielsen v. AnimalFeeds Int'l Corp., 559 U.S. 662 (2010).