It is commonplace in 2016 for employers to require their employees to sign an agreement promising to arbitrate employment claims in lieu of taking the employer to court. Many of these arbitration agreements also contain an additional provision obligating the employee to use arbitration for any claims that might otherwise be brought as part of a so-called class action. These "class action waiver" provisions are very effective because they force the employee to stand alone when suing the company, rather than as part of a larger class action. Naturally, plaintiffs' lawyers don't like class action waivers because they force employees to abandon participation in what could be a lucrative class action lawsuit.
Historically, courts tended to strike down arbitration agreements containing class action waivers. However, these agreements got a new lease on life in 2011 following a much publicized U.S. Supreme Court decision which approved these agreements. Then, in 2014 the California Supreme Court followed suit for most class action claims.
These cases have proven to be a potent weapon for employers facing a class action. Judges throughout the state have routinely dismissed class action claims brought by individuals who signed a class waiver arbitration agreement, requiring them instead to arbitrate their individual claims.
Despite these favorable decisions by the U.S. and California Supreme Court, the federal union-management relations watchdog agency (the National Labor Relations Board) has repeatedly ruled that class action waivers are illegal under the federal labor law. The NLRB's reasoning is that class action waivers are at odds with the National Labor Relations Act which protects an employee's right to join a union or "to engage in other concerted activities for ...their mutual aid or protection." The NLRB believes that participation in a class action lawsuit is a form of protected concerted activity protected by the NLRA.
Up until this year, the NLRB's anti-arbitration stance has met with the disapproval by the federal appellate courts in the Second, Fifth, and Eighth circuits. However, earlier this year, the Seventh Circuit broke ranks with their judicial brethren and sided with the NLRB.
And, just this week, in a case called Morris v. Ernst & Young, LLP, a divided Ninth Circuit Court of Appeals (which covers California) struck down a similar arbitration provision contained in an Ernst & Young employment agreement.
Because of the considerable disagreement among the federal appellate courts, there is a very good chance that the full Ninth Circuit will review the ruling of the three-member panel. And, there is also a strong chance that the U.S. Supreme Court may take up this case or one of the other cases involving class action waivers.
In the meantime, employers with class action waiver agreements are left in a quandary about whether to abandon these agreements or continue using them.
As an initial matter, it is important to keep in mind that Morris is a federal court ruling. As such, it does not bind a California state court judge, who must follow state appellate precedent. Indeed, the California Supreme Court's most recent ruling on the issue expressly considered the NLRB's arguments and then rejected them. This makes us believe that the California state courts may continue enforcing these agreements for now.
For those companies that are extremely risk averse, the only other options may be to abandon class action waivers altogether, or at least add a provision allowing the employee to opt out of that part of the agreement. This option has obvious draw backs as employees may choose to avoid arbitration.
Another alternative is to craft an arbitration agreement that includes a class action waiver, but permits some range of collective activity within arbitration, such as consolidation of claims or the filing of joint claims. This could reduce the risk of violating the NLRA because it would leave open the possibility of employees engaging in concerted activity within the meaning of that statute. At the same time, it would confine the employees to arbitration, and may increase the likelihood that a class action waiver would be enforced.
Or, employers can retain the more robust collective action waiver and try to persuade state trial judges to take their cue from the earlier California and U.S. Supreme Court cases which enforced class action waivers. An obvious drawback is that the company is vulnerable to a charge before the NLRB over the continued use of the agreement, or a court could invalidate the agreement altogether. However, in our view, it is unlikely that the agreement as a whole would be found invalid even if a court refused to enforce the class action waiver. Keeping the class action waiver in the agreement also preserves the employer's legal position as the law continues to develop on this issue.
Until the legal dust settles, there is no guarantee that any of these strategies will be 100% successful in insulating the company from a class action or a claim before the NLRB. These recent developments underscore the need for employers to periodically review any arbitration agreement with expert employment counsel to ensure that the agreement remains enforceable and advances the company's goals.
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