Ninth Circuit Issues Surprising Ruling on Class Action Waivers
Today the Ninth Circuit Court of Appeals issued its ruling in Morris v. Ernst & Young, dealing a surprising blow to the enforceability of class and collective action waivers in employment arbitration agreements. More specifically, the Ninth Circuit agreed with the view of the National Labor Relations Board (beginning with the NLRB's D.R. Horton decision) that it is a violation of the National Labor Relations Act (NLRA) for an employer to condition employment on an employee signing an arbitration agreement that waives the employee's ability to pursue claims on a class or collective basis and instead requires that all claims be resolved on an individual basis in arbitration.
Of course, the NLRB's D.R. Horton opinion has been widely rejected by several courts, including the Second, Fifth and Eighth Circuit Courts of Appeal. Prior to today, the Seventh Circuit was the only Court of Appeal to agree (recently) with the NLRB's position. California state courts similarly have rejected the NLRB's position and have enforced class action waivers in employment arbitration agreements. Thus, the majority view is that class action waivers do not violate the NLRA. The minority view is that these waivers violate the NLRA by interfering with employees' right to engage in concerted activity for mutual aid and protection.
Today's Ninth Circuit ruling creates new uncertainty for California employers seeking to enforce arbitration agreements with their employees. Enforceability of a class action waiver will now depend on whether the case is in California state court or in a California federal court. If in California state court, the court likely will enforce a class action waiver in an arbitration agreement. California federal courts, however, are bound to follow Ninth Circuit precedent and will not be able to enforce a class waiver in an arbitration agreement unless the facts can be meaningfully distinguished from those before the Ninth Circuit in the Ernst & Young case. In that regard, it is notable that the arbitration agreement at issue in the Ernst & Young case was mandated on employees as a condition of employment. There is some question whether the enforceability issue would be decided differently if the arbitration agreement at issue was presented to employees with a limited right to opt out of the agreement—thus making any agreement to arbitrate and any waiver of class claims voluntary on the part of the employee. The NLRB has not distinguished between mandatory arbitration agreements and agreements whereby employees are given the right to opt out, but there is some language in Ernst & Young suggesting that there may be a basis for such distinction. There are, of course, downsides to allowing employees the right to opt out and it remains to be seen whether an opt-out right will impact the enforecability analysis in any event.
The split of authority among the Circuit Courts is almost certain to invite review of this issue by the United States Supreme Court. Stay tuned for a petition for review. In the meantime, enforceability of class waiver provisions will largely depend on where a case is venued. Federal courts within the Ninth Circuit (which includes, among other locations, California, Oregon, Washington, Arizona, and Nevada) will not be a favorable venue for employers on this issue.