The Supreme Court may soon be taking on an issue that has divided several of the federal circuit courts. The circuits disagree on a fundamental question that relates to arbitration and labor law – whether an agreement to arbitrate is valid when an employee waives the right to bring claims against an employer as part of a class or collective. In other words, can an employee be barred from being part of a class action lawsuit where there is an agreement to arbitrate and a waiver of the right to pursue collective claims?
In Morris v. Ernst & Young LLP, 9th Cir., No. 13-16599 (Aug. 22, 2016), the Ninth Circuit, in a split decision, held that the National Labor Relations Act (NLRA) precluded employers from “requiring employees to sign an agreement precluding them from bringing, in any forum, a concerted legal claim regarding wages, hours, and terms and conditions of employment.”
The court stated that concerted activity, or the right of employees to act together, is the “essential, substantive right” established by the NLRA. Ernst & Young, in their agreements with employees, required employees to agree to pursue legal claims in arbitration and to arbitrate as individuals and in “separate proceedings.” This, according to the court, ran afoul of the NLRA.
The company, however, argued that the Federal Arbitration Act (FAA) compelled a different result. The FAA requires the enforcement of agreements to arbitrate. According to the company (and the dissent), this creates a situation where the FAA and NLRA are at odds with each other, as each statutory scheme compels a different result.
The court resolved this conflict by stating that the FAA has a “saving clause,” which permits agreements to arbitrate to be invalidated by “generally applicable contract defenses, such as fraud, duress, or unconscionability,” but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. In this case, it would be “illegal” to prohibit concerted action, per the NLRA. Therefore, the court reasons, when an arbitration contract creates a waiver of a substantive federal right, i.e. the NLRA’s right to concerted action, then the savings clause allows the FAA to “yield,” and thus prevents a conflict. Moreover, the court reasoned, the agreement to arbitrate was not the issue; the concern was about the prohibition on concerted action.
This blog has already remarked on the disagreement between the circuits. With the Ninth Circuit joining the fray (alongside the Seventh, which disagrees with the Fifth and the Eighth), the voices calling for the Supreme Court to resolve this issue grow louder. It seems like it is only a matter of time before the Justices of the Supreme Court agree to take up this issue and resolve it once and for all.