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Dispute over Compulsory Arbitration Agreements in Employment Cases Widens.

Summary: Employers take note: A battle is brewing over the legality of class action waivers and compulsory arbitration agreements in the employment context. Specifically, the question ...

Employers take note: A battle is brewing over the legality of class action waivers and compulsory arbitration agreements in the employment context. Specifically, the question is whether arbitration agreements that preclude all forms of collective or class actions are unenforceable because they are illegal under the National Labor Relations Act (NLRA).

The battle lines are drawn. On one side stand the U.S. Courts of Appeal for the Second, Fifth and Eighth Circuits with rulings that favor employers (Pro-Employer Rulings). Sutherland v. Ernst & Young LLP, 726 F.3d 290 (2nd Cir. 2013); D.R. Horton, Inc. v. N.L.R.B., 737 F.3d 344 (7th Cir. 2013); Owen v. Bristol Care, Inc., 702 F.3d 1050 (8th Cir. 2013).

On the other side stand the U.S. Courts of Appeal for the Seventh and Ninth Circuits, with recent rulings that favor employees (Pro-Employee Rulings). Lewis v. Epic Sys. Corp., 823 F.3d 1147 (7th Cir. 2016); Morris v. Ernst & Young, LLP, Case No. 13-16599, 2016 WL 4433080 (9th Cir. Aug. 22, 2016). The Seventh Circuit's Lewis case involved allegations that Epic Systems Corporation, a company that offers software solutions to the healthcare industry, misclassified a class of technical writers as being exempt from overtime wage requirements under the Fair Labor Standards Act (FLSA) and Wisconsin law. There, the plaintiff signed an agreement requiring him to bring wage-and-hour claims "through individual arbitration" and waiving "the right to participate in or receive money or any other relief from any class, collective, or representative proceeding."

The Ninth Circuit's Morris case, in turn, arose from allegations that accounting giant Ernst & Young failed to properly classify young accountants under the FLSA and California wage-and-hour law. In that case, the plaintiffs signed an agreement which, by its own terms, was the "sole method for resolving disputes." The agreement further provided that all disputes "pertaining to different Employees will be heard in separate proceedings."

With a 3-2 circuit split on a crucial wage-and-hour question, the Supreme Court is sure to step in.

Heart of the Battle

Section 7 of the NLRA provides in pertinent part that employees shall have the right to, among other things, engage in "concerted activities for the purpose of collective bargaining or other mutual aid or protection." 29 U.S.C. A* 157. Relying on this language, the Pro-Employee Rulings hold that filing collective or class actions is a form of protected "concerted activity."

Conversely, the Federal Arbitration Act (FAA) provides that any contract aiming "to settle by arbitration a controversy thereafter arising out of such contract ... shall be valid, irrevocable, and enforceable." 9 U.S.C. A* 2. Courts have interpreted the FAA to establish a liberal federal policy that favors arbitration and requires courts to place arbitration agreements on par with other contracts.

Nevertheless, the FAA contains a "saving clause" that allows courts to invalidate arbitration agreements so long as they are deemed invalid on the basis of generally applicable principles of contract law that do not disfavor arbitration. Accordingly, there are two questions that lie at the very heart of this battle: First, do arbitration agreements that provide for compulsory and individual arbitration fall within the purview of the FAA's saving clause? Second, if not, which of the two applicable statutory frameworks should control?

Is the FAA's Saving Clause Applicable?

The Pro-Employer Rulings find that arbitration agreements that contain class or collective waivers do not fall within the ambit of the FAA's saving clause. This is because, on balance, refusing to enforce this kind of agreement discourages the use of arbitration. Relying on the Supreme Court's ruling in AT&T Mobility v. ConcepciEn, 131 S. Ct. 1740, (2011) the rulings hold that requiring class arbitration interferes with the fundamental attributes of arbitration. In particular, class or collective proceedings require heightened procedural protections and complex evidentiary considerations that sacrifice arbitration's core principles of efficiency and informality. Accordingly, allowing class arbitration creates a scheme inconsistent with the FAA. Nor is precluding class arbitration a solution because plaintiffs would naturally gravitate toward class litigation. In other words, class or collective mechanisms -- whether in court or arbitration -- inevitably discourage arbitration. To effectuate the FAA's liberal pro-arbitration policy, then, courts must enforce arbitration agreements that contain class waivers.

The Pro-Employee Rulings reach the exact opposite conclusion based on two primary arguments. First, the agreements plainly fall within the scope of the FAA's saving clause because they can be invalidated on the basis of the general principle of illegality because they violate the NLRA. Second, agreements that compel arbitration and forbid class or collective arbitration have the practical effect of prohibiting any form of class or collective proceedings, not just those in arbitration. Therefore, finding those agreements unenforceable does not disfavor arbitration, specifically. Compulsory arbitration remains valid if it permits class arbitration and, conversely, class arbitration waivers remain valid if arbitration is not required.

Which Statutory Framework Controls?

Pro-Employer Rulings conclude there is no evidence that Congress meant the NLRA to override the FAA. First, there is nothing in the text of the NLRA or its legislative history to support such a view. Second, though the FAA was enacted in 1925 and the NLRA in 1935, the FAA was reenacted without substantive change in July 1947. Third, use of class or collective action procedures is not a substantive right. Though the NLRA may be sui generis, numerous courts have held that no such substantive right exists in the context of other employment-related statutory frameworks such as the ADEA and the FLSA. Likewise, it is well settled that Federal Rule of Civil Procedure 23, which establishes the class action mechanism, does not create a substantive right.

Even though the Pro-Employee Rulings find there is no need to reconcile or otherwise choose between the NLRA and the FAA, they still address the nature of the right to resolve disputes on a class or collective basis. Unsurprisingly, they conclude the right is substantive. The Pro-Employee Rulings note that every other provision of the NLRA serves to enforce the rights enshrined in Section 7. Thus, if Section 7 does not create a substantive right, the statute's entire structure and policy flounder. Though not expressly stated, the Pro-Employee Rulings intimate this means the FAA cannot trump the NLRA. This conclusion purportedly follows because arbitration cannot abridge or extinguish a substantive right.

What Can Employers Do?

Defendants in the Morris and Lewis cases have petitioned for writs of certiorari to the U.S. Supreme Court, and briefing is underway. Though the Court is likely to hear one or both cases in the near future, it is nearly impossible to predict how it will rule. The uncertainty is largely the result of the currently vacant seat and the stalled nomination process. With the election now behind us, the coming nomination fights may very well have a significant impact on how this battle is finally resolved.

In the meantime, the circuit-split forces national employers to grapple with inconsistent obligations. Arbitration agreements with class waivers are not likely valid in the following 12 States: Alaska, Arizona, California, Hawaii, Idaho, Illinois, Indiana, Montana, Nevada, Oregon, Washington and Wisconsin. By contrast, the same agreements are likely valid in these 13 States: Arkansas, Connecticut, Iowa, Louisiana, Minnesota, Mississippi, Missouri, Nebraska, New York, North Dakota, Texas, South Dakota, and Vermont. Because the split is geographical, employers should consider transferring lawsuits to more favorable venues whenever possible.

Notably, the Ninth Circuit has held that arbitration agreements with class-waiver provisions are lawful if they allow employees to opt-out of the class-waiver provision. Mohamed v. Uber Techs., Inc., No. 15-16178, 2016 WL 4651409, at *1 (9th Cir. Sept. 7, 2016); Johnmohammadi v. Bloomingdale's, Inc., 755 F.3d 1072 (9th Cir. 2014). Though allowing employees to opt-out undermines the very purpose of such agreements, it ensures the agreements will hold up anywhere within the Ninth Circuit and reduces the number of putative class members. Accordingly, under the current state of the law, employers with significant operations in the Ninth Circuit should give serious consideration to allowing opt-outs.

The views expressed in the article are those of the authors and not necessarily the views of their clients or other attorneys in their firm.

Originally published on the Law Journal Newsletters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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Publication:Inside Counsel
Date:Dec 12, 2016
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