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Class Action Waivers in Employment Arbitration Agreements

Horton Hatches The Egg: a split circuit elephant-bird

RITA H. LOVET T, JEFFERS DANIELSON SONN & AYLWARD, P.S .

ALASKA BAR ASSOCIATION – LABOR AND EMPLOYMENT LAW SECTION

DECEMBER 7, 2016

Overview• What is a class action waiver in an employment arbitration agreement?

• The context• Federal Arbitration Act (FAA)

• National Labor Relations Act (NLRA)

• US Supreme Court precedent interpreting FAA

• Conflicting Circuit Court decisions and the petitions for cert

• Other pertinent cases (Uber)

• State law considerations

• Enforceability and drafting tips

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Class Action Waivers in Arbitration AgreementsWhat do they look like?

◦ “[c]overed [d]isputes pertaining to different employees will be heard in separate proceedings” (Morris)

◦ “claims will be arbitrated only on an individual basis . . . Waive[d] the right to participate in or receive money or any other relief from any class, collective, or representative proceeding.” (Epic Systems)

◦ “Claims under this Program cannot be litigated by way of class or collective action. . . All Claims between you and us must be decided individually. . .” (Raymours Furniture)

◦ “. . . parties waive their right to commence or be a party to any group, class or collective action claim in arbitration or any other forum. The parties agree that any claim by or against Individual or the Company shall be heard without consolidation of such claim with any other person or entity’s claim.” (Murphy Oil)

◦ Check stand alone agreements, employment agreements, employment policies / handbooks

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The Federal Arbitration Acto 1925 Federal Arbitration Act (FAA); reenacted and codified in 1947 as Title 9

o A contract to settle disputes by arbitration:

o “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 USC § 2.

o FAA intended to:

o “reverse the longstanding judicial hostility to arbitration agreements” EEOC v. Waffle House, Inc., 534 U.S. 279, 289 (2002).

o Create an “emphatic federal policy in favor of arbitral dispute resolution.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 631 (1985).

o Put arbitration agreements on the same footing as other contracts. Gilmer, 500 US 20, 24 (1991).

o Grounds for contract revocation (e.g. illegality, unconsionability, duress, etc.) are only exceptions to enforceability.

o Absent such exceptions, “courts must rigorously enforce arbitration agreements according to their terms, including terms that specify with whom the parties choose to arbitrate their disputes, and the rules under which that arbitration will be conducted.” Am. Express Co. v. Italian Colors Rest., 133 S.Ct. 2304, 2309 (2013).

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National Labor Relations Act• 1935 NLRA

• “It is declared to be the policy of the United States to eliminate the causes of certain substantial obstructions to the free flow of commerce . . .”

• Sought to address inequality in bargaining power between employees and employers through full freedom of association of employees

o §7: “Employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection. . . .”

o §8: It is “an unfair labor practice for an employer . . . to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in [§7].”

• These provisions of the NLRA apply whether or not the workplace is unionized.

• Is collective litigation a concerted activity for the purposes of mutual aid or protection?

• Is the right to a collective litigation a substantive right under section 7, or a procedural right under CR 23?

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High Court FAA Cases – Upholding arbitration, then class waivers

• Mitsubishi Motors, 473 US 614 (1985) – Sherman Act

• Shearson/AmEx, 482 US 220 (1987) – Securities Exchange Act of 1934, Racketeer Influenced and Corrupt Organizations Act

• Rodriguez d Quijas, 490 US 477 (1989) – Securities Act of 1933

• Gilmer, 500 US 20 (1991) – Age Discrimination in Employment Act (ADEA)

• AT&T Mobility LLC v. Conception, 563 US 333 (2011) – FAA preemption of State law, class action waiver

• CompuCredit Corp. v. Greenwood, 132 S.Ct. 665 (2012) – Credit Repair Organizations Act

• AmEx v. Italian Colors Rest., 133 S. Ct. 2304 (2013) – FAA / class action waiver, cost vs. recovery

• DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463 (2015) – FAA preemption of State law, class action waiver

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The Circuit Court Split

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December 2013

5th Circuit

D.R. Horton*

October 2015

5th Circuit

Murphy Oil

May 2016

7th Circuit

Epic Systems

June 2016

8th Circuit

Cellular Sales of Mo.*

August 2016

9th Circuit

Morris

September 2016

2nd Circuit Patterson

* Indicates no petition for cert

D.R. Horton v. NLRB (2012 Board Decision)• Board found DR Horton violated section 8:

• Agreement barred concerted legal claims and thereby exercise of protected, section 7 “substantive rights”

• Employees could reasonably believe they were barred from filing charges with the Board

• There is no conflict with the FAA

• Two federal statutes capable of co-existence

• Both should be given effect absent clearly expressed congressional intent to the contrary

• Even if there were a conflict, NLRA enacted later than FAA; where statutes irreconcilably conflict, latest will prevail (repeal by implication)

• Statutory claims can be arbitrated so long as “a party does not forgo the substantive rights afforded by the statute” Gilmer, at 26.

• Rights at issue here are not FLSA rights, but substantive (not procedural) NLRA rights.

• Arbitration on equal footing with other contracts. Invalid as against public policy if they restrict NLRA rights.

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D.R. Horton – 2013 5th Circuit• Reversed Board’s decision on class action waiver - Board did not give proper weight to the FAA

•Upheld Board’s decision requiring clarity that employees retain rights to pursue unfair labor practice claims with Board

• “The issue here is narrow: do the rights of collective action embodied in this labor statute make it distinguishable from cases which hold that arbitration must be individual arbitration?” Horton, at 25.

•Use of class action procedures (CR 23) is a procedural right, ancillary to litigation of substantive claims

•Under FAA, arbitration agreements must be enforced according to their terms, unless• basis for contract revocation (savings clause) or

• if federal statutory claims involved, FAA mandate is overridden by a “contrary congressional command” (CompuCredit, at 669)

• In text, legislative history, or an inherent conflict between arbitration and the statute’s underlying purpose

• No inherent conflict here as Board processes have “worked in tandem with arbitration agreements in the past”

•NLRB’s position on access to collective procedures in an arbitral or judicial setting is facially neutral, but effect is to disfavor arbitration

• Right to proceed collectively has been foreclosed by prior court decisions (see High Court Decisions)

•NLRA enacted prior to advent of modern class action practice• NLRA protecting right of access to procedure that did not exist when NLRA enacted

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Murphy Oil – 2015 5th Circuit• “I meant what I said – And I said what I meant. . . – An elephant’s faithful – One hundred per cent!”

• Case started in court, went to Board, which found waivers unenforceable – despite prior court decision

• 5th Circuit rejected Board’s decision for same reasons outlined in Horton

◦ Right to pursue a collective action is procedural, not substantive

◦ NLRA provisions do not contain a clear “congressional command to override the FAA”

• “We do not celebrate the Board’s failure to follow our D.R. Horton reasoning, but neither do we condemn its nonacquiescence.”

• Court found Murphy’s dispositive motions in the underlying matter were defensive and not retaliatory

“Though the Board might not need to acquiesce in our decisions, it is a bit bold for it to hold that an employer who followed the reasoning of our D.R. Horton decision had no basis in fact or law or an “illegal objective” in doing so. The Board might want to strike a more respectful balance between its views and those of circuit courts reviewing its orders.”

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Epic Systems – May 2016 – 7th Circuit• 7th Circuit affirmed district court order denying Epic’s motion to dismiss• Contracts that stipulate away an employee’s NLRA rights are unlawful• Eastex, concerted activities include resort to legislative / judicial forums• Section 7’s text, history, purpose support a ruling that class action waivers unenforceable• Court disagrees with 9th Circuit re opt out option*, citing earlier 7th circuit case• Contract limiting section 7 rights as condition of continued employment interferes with employee rights• “. . . it is not clear to us that the FAA has anything to do with this case.”• Courts will harmonize overlapping statutes “so long as each reaches some distinct cases.”• Implied repeal should be found only when there is an “irreconcilable conflict”• FAA and NLRA not in conflict; FAA’s savings clause excepts unenforceable contracts from arbitration

• class action waiver is void as illegal

• Court comments on US cases that hold class action procedures disfavor arbitration• Courts don’t try to harmonize statutes; they aren’t supposed to go out looking for trouble

*9th Circuit found no section 8 violation where employee could have opted out of class action waiver within 30 days after signing, but chose not to. Johnmohammadi v. Bloomingdale’s, Inc. 755 F.3d 1072, 1076 (9th Cir. 2014)

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Morris – August 2016 – 9th Circuit• 9th Circuit agreed with NLRB that mandatory waiver of class proceedings violates section 7 rights

• Court confirmed that mandatory arbitration is permissible in employment contracts

• Court interprets “concerted activity” to include concerted legal claims, finds substantive section7 right

• A ban on initiating concerted legal claims in any forum is a problem, not just in arbitration

• When an arbitration contract professes to waive a substantive federal right, the savings clause of the FAA prevents the enforcement of that waiver

• No conflict here: Court harmonized FAA and NLRA

• FAA preempts laws that seek to preclude mandatory arbitration

• Arbitration is not the issue here, class action waiver is the issue

• FAA is silent on class actions

• Class action waivers defeat “a substantive federal right to pursue concerted work-related legal claims”

• Court cite to and distinguishes its earlier decision in Bloomingdale’s, suggesting Opt Out may have saved E & Y

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Patterson – September 2016- 2nd Circuit◦ All employees as condition of employment must participate in Employment

Arbitration Program (EAP); Mandatory arbitration on an individual basis◦ EAP does not prohibit participation in government investigations or waiver of any

rights under NLRA◦ Plaintiff raised FLSA / state wage issues in federal court◦ Employer moved to dismiss / compel arbitration, district court granted◦ Employees appealed to 2nd Circuit◦ 2nd Circuit upheld lower court, found class action waiver enforceable◦ Short decision, limited reasoning, bound by prior 2nd circuit precedent ◦ Knew issue would need to be resolved by Supreme Court◦ On a “clean slate, we might well be persuaded. . . to join the Seventh and Ninth

Circuits”

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California Uber Alles – O’Connor et al. v. Uber (9th Circuit)• Nearly 250,000 drivers sued Uber alleging misclassification as independent contractors, claiming

entitlement to expense reimbursement, and questioning no tipping policy

• Uber moved to compel arbitration based on agreement with the workers, court denied

• US District Court in California found arbitration clauses invalid under NLRA

• On appeal to 9th Circuit, NLRB appeared as amicus party

• November 2016 NLRB argued:

• “The inclusion of an opt-out provision in an individual-arbitration agreement does not eliminate the agreement’s interference with the NLRA’s core purpose to minimize industrial strife by protecting the right of employees to decide for themselves, when a dispute arises, whether or not to engage in concerted activity for mutual aid and protection.”

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State law considerations• “Washington has a strong public policy favoring arbitration. Because of that clear policy, an employer-employee arbitration

agreement will be upheld even if certain provisions of the agreement are substantively unconscionable so long as those provisions are severable.” Romney v. Franciscan Medical Group, 186 Wash.App 728 (2015).

• Scott v. Cingular Wireless, 161 P.3d 1000 (Wash. 2008) – class action waiver in standard consumer contract for cell phone service was unconscionable because it violated public policy

• Washington: • Procedural OR substantive unconscionability

• Procedural – impropriety during formation

• Substantive – term is one-sided or overly harsh

• Adhesion contracts are not necessarily unconscionable – key is whether the party lacked meaningful choice

• Employment elsewhere is a choice

• Alaska unconscionability statutes based on Restatement of Contracts

• Gibson v. Nye Frontier Ford, Inc., 205 P.3d 1091 (Alaska 2009); arbitration agreement, but wage claims brought in state court

• Appellate review of only larger awards ($50k) is unconscionable

• Provision requiring employee to pay half of arbitration costs unenforceable if employer chose to arbitrate

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SummaryFour petitions for certiorari filed with US Supreme Court

◦ Are employer / employee agreements to arbitrate disputes on an individual basis enforceable?

◦ National Labor Relations Board: restricting class actions interferes with “concerted activities”

◦ Circuit Court Split

◦ 2nd / 5th / 8th Circuits (+CA & NV) upheld waivers, reversing NLRB rulings

◦ 7th / 9th Circuits find class action waivers unenforceable, agree with NLRB

◦ President Elect Trump effect?

◦ Court appointments may tip scale to upholding waivers

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Class action waivers today?• 9th circuit confirmed mandatory arbitration provisions are enforceable• 9th circuit suggests that an opt out provision might have saved E & Y

• NLRB strongly disagrees

• Clear notice of class action waiver; reasonable period of time for employee to opt out of the waiver in writing

• No penalty to employee for opting out

• Approach not without risk

• Arbitration provision; agreement must be express• If in a policy handbook, ensure verification form expressly notes the arbitration and the employee expressly waives the right to seek other

relief, except as permitted (administrative investigations, NLRA charges, etc.) Ashbey v. Archstone Property Management, Inc. 785 F.3d 1320 (9th Cir. 2015)

• Provisions in application, agreement, handbook (if in multiple places) must be consistent• Expressly provide employee has the right to file an NLRA charge• Some courts have required detail regarding which association rules apply, provide a copy of the rules• Severability clause; do you want arbitration to survive without waiver or do you want to go to court?• Consideration for waiver• Careful with fee shifting – carve out for statutory employee coverage• State law defenses: procedurally or substantively unconscionable?

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