On August 22, 2016, the U.S. Court of Appeals for the 9th Circuit (which covers California) struck down a "concerted action waiver" (i.e., a waiver of class, collective or other group actions) in an arbitration agreement. This decision directly conflicts with opinions by other federal appellate courts as well as those of the California State Supreme Court. Accordingly, some employers are considering whether to reassess arbitration agreements that contain such waivers.

In Morris v. Ernst & Young, LLP, the Ninth Circuit held that Ernst & Young's mandatory arbitration agreement was invalid because it required that employees bring all claims in arbitration and limited such claims to those brought on an individual (as opposed to a class or collective-wide) basis. Aligning with the view of a recent decision from the Seventh Circuit Court of Appeals, the Ninth Circuit held that an employee's right to bring a "concerted legal claim" regarding wages, hours, and the terms and conditions of employment is a "substantive right" under Sections 7 and 8 of the National Labor Relations Act (the "NLRA"), which cannot be waived. The Ninth Circuit's opinion deepens the split with the bulk of circuits, several of which have upheld the use of such waivers. Thus, many believe that this issue is now ripe for review by the U.S. Supreme Court and expect Ernst & Young to appeal. 

A Summary of Morris 

As a condition of employment at Ernst & Young, the company required employees to sign an arbitration agreement that included a "concerted action waiver"—meaning that any claims that they brought against the company had to be brought individually—rather than as class or collective actions. Nevertheless, plaintiffs filed a class and collective action in federal court alleging that Ernst & Young had misclassified them and similarly situated employees in violation of the Fair Labor Standards Act ("FLSA") as well as state law. The trial court compelled the case to arbitration on an individual basis, and plaintiffs appealed.
On appeal, the plaintiffs argued that the provision requiring them to bring individual actions only in "separate proceedings" violated their right to engage in "concerted activities for the purpose of collective bargaining and other mutual aid or protection" under the NLRA , the Norris-LaGuardia Act, and the FLSA. Chief Judge Sidney Thomas, writing for the majority, agreed. 

The Court held that the NLRA explicitly grants to employees the right to seek improvement in their working conditions through judicial and administrative forums, which includes a "lawsuit filed in good faith by a group of employees." This right, together with the right to engage in concerted activities for their mutual aid and protection, "establish the right of employees to pursue work-related legal claims, and to do so together." As such, the Court held that the ban on concerted legal action itself was an unfair labor practice under the NLRA and that requiring employees to sign such a contract constituted a second violation.

The Court dismissed Ernst & Young's argument that the Court's ruling was in tension with its rights under the Federal Arbitration Act ("FAA"). The Court held that the illegality of the requirement that employees bring separate, individual proceedings in arbitration had nothing to do with arbitration as a forum. Rather, the problem with the contract was that it "defeats a substantive federal right to pursue work-related legal claims.”

Based on the central premise that the right to engage in collective legal action is a substantive, rather than a procedural, right, the Court concluded that the FAA does not and cannot mandate the enforcement of a contract that alleges its waiver. 

What Should California Employers Do In Response, If Anything?

Given the split among the circuits on this issue, an appeal to the United States Supreme Court seems likely. If there is further appeal or review, the Morris decision will not have precedential effect until that appeal is resolved. If there is no appeal (or if no review is granted), then Morris could affect the enforceability of class or collective action waivers in arbitration agreements, particularly in federal courts. In the meantime, the California Supreme Court's holdings in Iskanian v. CLS Transportation Los Angeles, LLC, that: (1) the FAA preempts any state law rule that restricts enforcement of terms in an arbitration agreement; and (2) the NLRA does not prevent the enforcement of a class action waiver in an arbitration agreement remain the controlling law in the state, particularly for state law claims. Employers should monitor Morris and other potential developments in this area of the law and make informed decisions regarding whether to review or revise existing arbitration agreements with similar waivers.