Morris v. Ernst & Young: 9th Cir. Strikes Down Concerted Action Waiver Under Federal Labor Law

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In the ongoing fight over the use and enforceability of collective action waivers, the stage has been set for the United States Supreme Court to weigh in and hopefully offer clarity to labor law practitioners and employers. In 2012, two former employees filed a class and collective action lawsuit against Ernst & Young in the Southern District of New York, alleging violations of the Fair Labor Standards Act (FLSA) due to the company misclassifying them as exempt. Morris, et al. v. Ernst & Young, LLP, et al., No. C-12-04964-RMW. As a condition of their employment, plaintiffs Stephen Morris and Kelly McDaniel were required to sign agreements requiring them to pursue legal claims solely through arbitration and only individually, in “separate proceedings.” The case was then transferred to the Northern District of California, where the court granted the defendant’s motion to compel arbitration, enforced the arbitration agreement’s de facto class action waiver, and ordered the plaintiffs to individual arbitration. Order Granting Defendants’ Motion to Dismiss and Compel Arbitration, Morris, et al. v. Ernst & Young, LLP, et al., No. C-12-04964-RMW (July 9, 2013). The plaintiffs appealed the decision to the Ninth Circuit.

In 2012, in D.R. Horton, 357 NLRB No. 184 (2012), the National Labor Relations Board held that class action waivers violate federal labor law by frustrating employees’ right to engage in concerted activity to improve their working conditions. On appeal in Morris, the issue was whether the district court had properly rejected the plaintiffs’ reliance on federal labor law (specifically the National Labor Relations Act), as interpreted by the NLRB, as a basis for invalidating the arbitration agreement’s class action waiver. A divided Ninth Circuit reversed, thereby joining the Seventh Circuit in adopting the NLRB’s position that collective action waivers do in fact interfere with an employee’s right under the NLRA to engage in concerted activity, and are therefore unenforceable. Morris, No. 13-16599 (9th Cir. Aug. 22, 2016) (slip op. available here); Lewis v. Epic Sys. Corp., 823 F.3d 1147 (7th Cir. 2016) (available here).

The Morris majority concluded, after examining the statutory language of the NLRA and the NLRB’s decision in D.R. Horton, that an employer violates the NLRA when it requires covered employees to sign an agreement precluding them from “filing joint, class, or collective claims.” Slip op. at 6-7, citing D.R. Horton, 357 NLRB No. 184 (2012). The court emphasized that the problem with the agreement was not that it called for arbitration of disputes, but that it prevented employees from acting in concert in any forum to address labor concerns, which undermines the substantive federal right of employees to collectively pursue work-related legal claims:

It would equally violate the NLRA for Ernst & Young to require its employees to sign a contract requiring the resolution of all work-related disputes in court and in “separate proceedings.” The same infirmity would exist if the contract required disputes to be resolved through casting lots, coin toss, duel, trial by ordeal, or any other dispute resolution mechanism, if the contract (1) limited resolution to that mechanism and (2) required separate individual proceedings.

Id. at 16 (emphasis in original). Had Ernst & Young’s arbitration agreement permitted concerted activity, the court held that it would have been enforceable. See id. Further, the panel reasoned that its holding in Morris did not contradict the Federal Arbitration Act (FAA) because the rights in NLRA section 7—including the employees’ right to collective action—are substantive; “when an arbitration contract professes the waiver of a substantive federal right, the FAA’s saving clause prevents a conflict between the statutes by causing the FAA’s enforcement mandate to yield.” Id. at 18-19.

In her dissent, Judge Ikuta sided with the Second, Fifth, and Eighth Circuits, calling the Ninth Circuit majority’s decision “breathtaking in its scope and in its error; . . . [and] directly contrary to Supreme Court precedent.” Slip op., Ikuta dissenting op. at 27. Judge Ikuta’s dissent focused on the existence of a “contrary congressional command,” CompuCredit Corp. v. Greenwood, 132 S. Ct. 665, 669 (2012), i.e. that Congress expressly intended to preclude waiver of the judicial forum, and took the position that, absent an express contrary congressional command, an arbitration agreement’s terms (including those that waive the use of class or collective mechanisms) should be enforced. Id. at 30-36. According to Judge Ikuta, the text of the federal statute at issue, here, the NLRA, must “expressly preclude the use of a predispute[s] arbitration agreement for the underlying claims at issue” to trump the FAA. Id. at 35-36. She found that the NLRA’s right to “concerted activities” did not meet this standard, and that “the Supreme Court consistently rejects claims that a ‘contrary congressional command’ precludes courts from enforcing arbitration agreements according to their terms . . . .” Id. at 36.

At the heart of the dispute seems to be a disagreement over whether the FAA and NLRA can co-exist, or whether one must override the other, and whether the NLRA creates substantive rights. In the past, when the U.S. Supreme Court has weighed in on class action waivers and class arbitration, it has been outside of the employment context and has not involved interpretation of two co-equal federal laws. In Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (2010), the Court held that under the FAA, arbitration on a class basis could not be ordered absent evidence that the parties agreed to such procedure in the arbitration agreement. A year later, in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the Court again expansively interpreted the FAA, holding that state laws prohibiting class action waivers in consumer arbitration agreements were preempted by the FAA.

If the Supreme Court grants certiorari to address the circuit split, how it balances employees’ rights to engage in concerted activity under the NLRA with the “national policy favoring arbitration” under the FAA will surely have tremendous impact on workplace rights throughout the country. Ernst & Young’s petition for review has been joined by several amicus curiae briefs, and the Supreme Court has issued an order extending the time for Morris to file his response to the petition to November 14, 2016.

Authored by:
Jamie Greene, Associate