9th Circuit Rules Mandatory Class Action Waivers are Illegal in Morris, et al. v. Ernst & Young LLP,

9th Circuit Rules Mandatory Class Action Waivers are Illegal in Morris, et al. v. Ernst & Young LLP, et al.

The 9th Circuit Court of Appeals, in a 2-1 decision, struck down an arbitration clause in an employment agreement that barred workers from pursuing class action claims. In Stephen Morris, et al. v. Ernst & Young LLP, et al., Case No. 13-16599, the 9th Circuit ruled that mandatory class action waivers violate the right to engage in concerted action under federal labor law.

Morris involves an Ernst & Young employment agreement that requires, as a condition of employment, employees to sign agreements that contain a “concerted action waiver,” requiring the employee to pursue legal claims against Ernst & Young exclusively through arbitration, and to arbitrate only as individuals and in “separate proceedings.” The court decided, 2-1 that Ernst & Young’s employment agreement forbidding the workers from joining together violated the right to engage in concerted action under federal labor law. Specifically, the panel held that an employer violates §7 and §8 of the National Labor Relations Act (“NLRA”) by requiring employees to sign an agreement precluding them from bringing, in any forum, a concerted legal claim regarding wages, hours and terms of conditions of employment. The court in Morris held that, by doing so, Ernst & Young interferes with the employee's right to engage in concerted activity under the NLRA, and ruled that “the separate proceedings” terms could not be enforced.

Morris turned on a well established principle that employees have the right to pursue work related legal claims together. 29 USC §157. Concerted activity, the right of employees to act together, is the essential substantive right established by the NLRA. 29 USC §157. The court in Morris held that Ernst & Young interfered with that right when it required employees to sign contracts pledging to resolve all their legal claims in “separate proceedings.”

The decision stems from a potential class action lawsuit filed in 2012 by former Ernst & Young employees Stephen Morris and Kelly McDaniel, who accused the firm of failing to pay overtime to audit staff members. The District Court dismissed their case, relying on the concerted action waivers that both plaintiffs signed as a condition of employment. Because the waivers required they pursue legal claims against the firm through arbitration and only as individuals in separate proceedings, the court dismissed their action, despite plaintiffs’ argument that the waivers violated fair labor laws.

In response, Ernst & Young countered that the Federal Arbitration Act (“FAA”) effectively supersedes the NLRA and entitled it to enforce the terms of the employment contract. Writing for the majority, U.S. Circuit Judge Sidney R. Thomas state that the problem was not that the contract required arbitration, but that “the contract term defeats a substantive federal right to pursue concerted work-related legal claims.” The judge wrote “[t]he rights established in [Section 7] of the NLRA - including right of employees to pursue legal claims together - are substantive,” as opposed to just procedural. “They are the central, fundamental protections of the Act so the FAA does not mandate the enforcement of a contract that alleges their waiver.”

This decision widened the split among appeals courts, following the 7th Circuit’s similar ruling in May. However, at least two other courts, the 5th Circuit and the 8th Circuit, and have decided the waivers do not violate the NLRA. Notably, the 9th Circuit did not extend its ruling to waivers in agreements that aren’t required to be signed as a condition of employment. This leaves open the question as to whether opt-out agreements are still enforceable in the 9th Circuit.

Epic Systems, the defendant in the 7th Circuit case decided in May 2016, has already filed a notice indicating that it plans to appeal the decision in its case to the Supreme Court. It remains to be seen whether Ernst & Young plans to ask the full 9th Circuit to review the decision.

This decision leaves employers in a state of uncertainty, as they will have to contend which different standards they will have to follow based on the recent inconsistent rulings from circuit courts. Because of this, the class waiver battle appears at this point to be destined for the U.S. Supreme Court. Stay tuned.

[About the author: Ms. Nelson is a partner in the Seattle office of Lewis Brisbois and is a member of the firm’s Class Action & Mass Tort Practice and the Professional Liability Practice. She focuses her practice on professional liability and class action matters and has extensive experience in defending class action claims brought under the FDCPA.]