Ninth Circuit Holds Class Action Waivers in Employment Agreements Violate the National Labor Relations Act

A panel of the Ninth Circuit Court of Appeals held 2-1 that class action waivers in arbitration agreements violate the National Labor Relations Act.

In an opinion by Chief Judge Sidney Thomas, the divided panel's majority decided that the National Labor Relations Board correctly decided that class action waivers violate the National Labor Relations Act because they require employees to give up "concerted activity" - joining together in a group to address wages, hours, and other terms and conditions of employment.

The majority's rationale is that a class action waiver is a waiver of the right to act in concert - a substantive right under the NLRA. Therefore, the employee is not merely waiving the right to a class action; the employee is waiving the right to section 7 of the Act.  And that's not legal.  Because it's not legal, the arbitration provision is not enforceable, notwithstanding the Federal Arbitration Act.
The Court took special pains to emphasize that it was not holding that a class action waiver is illegal because it requires arbitration.  The opinion emphasizes that any class action waiver - even one that did not require arbitration at all - would be illegal.

So, never mind that

- Many employees who might be subject to an arbitration agreement with a class action waiver,  such as supervisors,  are not covered by the NLRA;
- Many employees who might be subject to an arbitration agreement with a class action waiver are former employees who are not engaging in protected, concerted activity to improve working conditions;
- There was no such thing as a class action in 1937 when Congress passed the NLRA;
- a class action is a procedural tool, the Supreme Court has held, not a substantive right;
- a class action is frequently asserted by one employee on behalf of a putative class, the members of which have no rights as parties and often do not even know someone filed the lawsuit;
- The Fifth, Second, and Eighth Circuits, and the California Supreme Court for that matter, have held that the NLRB got it wrong; and
- The Supreme Court has held that class action practice is incompatible with arbitration. 

None of that makes any difference. Judge Ikuta discussed some of these points and others in her dissent.

The court left open the possibility that the parties could arbitrate the class action if the employer desired.  The court also held that nothing in the decision limited arbitration of the claims asserted in the case.  The employees, however, would not be precluded from proceeding as a putative class if the district court decides to "sever" the class waiver.

So, the Supreme Court is going to have to take a look at this issue.  Until then, class action waivers are on shaky ground in the 9th Circuit.

Two things, however:

1. The California Supreme Court has held that the NLRB was wrong and the NLRA does not preclude class waivers.  So, state courts probably have to follow the California Supreme Court unless or until that Court changes its mind.

2. The Ninth Circuit held in Johnmohammadi v. Bloomingdale's, Inc. 755 F.3d 1072 (9th Cir. 2014), that an employer does not violate the NLRA when it gives employees the chance to opt-out of an arbitration agreement containing a class waiver.  Here's what the Court said:

We can quickly dismiss any notion that Bloomingdale’s coerced Johnmohammadi into waiving her right to file a class action. Bloomingdale’s did not require her to accept a class- action waiver as a condition of employment, as was true in In re D.R. Horton, Inc., 357 N.L.R.B. No. 184, 2012 WL 36274 (Jan. 3, 2012), enforcement denied in part, 737 F.3d 344 (5th Cir. 2013). Bloomingdale’s gave her the option of participating in its dispute resolution program, which would require her to arbitrate any employment-related disputes on an individual basis. As the district court found,
Johnmohammadi was fully informed about the consequences of making that election, and she did so free of any express or implied threats of termination or retaliation . . . 

Therefore, at least in the 9th Circuit, and at least for now, it is necessary to include an opt-out provision and to explain the consequences of the arbitration provision containing a class waiver.  Good drafting, therefore, can save the class waiver. 

This case is Morris v. Ernst & Young LLP and the opinion is here. 

U.S. Supremes Enforce Arbitration Agreement, Reversing California Appellate Court

The U.S. Supreme Court in Direct TV Inc. v. Imburgia (opinion here) took on the California Court of Appeal in a test of the Federal Arbitration Act's preemptive force. Guess who won?

This case involves Direct TV's attempt to include a class-action waiver in an arbitration agreement as part of its service contract with customers.  Before the U.S. Supreme Court in AT&T Mobility LLC v. Concepcion, 563 U. S. 333 (2011), ruled that such waivers were valid under the Federal Arbitration Act, state courts (like California's) could invalidate class actions waivers as "unconscionable" or invalid against public policy. See Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005).

So, Direct TV inserted a provision in its arbitration agreement that hedged against the possibility of invalidation by a state court, as explained by the Supreme Court in its opinion:

if the “law of your state” makes the waiver of class arbitration unenforceable, then the entire arbitration provision “is unenforceable.” Id., at 129. Section 10 of the contract states that §9, the arbitration provision, “shall be governed by the Federal Arbitration Act.”

This way, if California held that a class waiver is invalid, the whole case (class action and all) would be heard in court. 

Then, of course, the U.S. Supreme Court decided a case that preempted California law invalidating class-action waivers.  Even the California Supreme Court had to agree that if the Federal Arbitration Act applies, class action waivers in arbitration agreements are OK.  Therefore, one might say, the "law of the state" about class-waivers was gone.  What happened to this clause then? Well that's what this case is about.

The Court of Appeal interpreted the above language to say that the "state law" would continue to apply without regard to federal preemption.  That is, the "law of your state" would continue to prohibit class action waivers under this agreement, despite the preemption of the law by the Supreme Court.  And, despite the arbitration agreement's specific provision that the Federal Arbitration Act applies. 

6-3, the Supreme Court rejected the Court of Appeal's decision.  The Court decided that for the Court of Appeal to be correct, the term "law of your state" had to include "invalid" state law.  The Court then decided that the Court of Appeal would never have interpreted the term "law of your state" to include "invalid" state law unless this contract were an arbitration agreement. Therefore, because the Court of Appeal disfavored arbitration agreements, its decision violated the Federal Arbitration Act. 

nothing in the Court of Appeal’s reasoning suggests that a California court would reach the same interpretation of “law of your state” in any context other than arbitration. The Court of Appeal did not explain why parties might generally intend the words “law of your state” to encompass “invalid law of your state.” To the contrary, the contract refers to “state law” that makes the waiver of class arbitration “unenforceable,” while an in- valid state law would not make a contractual provision unenforceable. Assuming—as we must—that the court’s reasoning is a correct statement as to the meaning of “law of your state” in this arbitration provision, we can find nothing in that opinion (nor in any other California case) suggesting that California would generally interpret words such as “law of your state” to include state laws held invalid because they conflict with, say, federal labor statutes, federal pension statutes, federal antidiscrimination laws, the Equal Protection Clause, or the like. 

And as for disfavoring arbitration:

The view that state law retains independent force even after it has been authoritatively invalidated by this Court is one courts are unlikely to accept as a general matter and to apply in other contexts.

Justice Thomas believes the Federal Arbitration Act does not preempt any case brought in state court and would have affirmed the court of appeal. So he dissented on that special ground. 

Justices Ginsburg (writing) joined by Justice Sotomayor dissented on the merits, arguing that  Direct TV should be held to its original intent: to enforce the agreement only if state law (without regard to federal preemption) would allow the class waiver. The agreement was written before the Supreme Court ruled class action waivers were allowed and state laws to the contrary were preempted; therefore, the agreement's intent was not to include federal law in the mix.  

So, another anti-arbitration case goes by the wayside. But California's anti-arbitration case law remains on the books and strong because Armendariz and its progeny are still in force.  Therefore, it remains important to draft arbitration agreements in employment settings carefully. 

California Court of Appeal Drives a Truck Through Federal Arbitration Act's Class Action Waiver Rule

If the Federal Arbitration Act applies, and it does to most employer-employee relationships, then it's settled that arbitration agreements may be limited to individual claims only.  That is, a class action waiver is enforceable under the Federal Arbitration Act.  And a silent agreement is considered to be limited to individual claims only.

What if the Federal Arbitration Act doesn't apply?  Then California law takes over.  And when California law applies, then California courts' deep abiding love for arbitration comes into play.
I kid.

The question then, is when the Federal Arbitration Act does not apply. One example is that the Act itself exempts:  “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”  At the turn of the century, the U.S. Supreme Court held that "workers engaged in commerce" was limited to transportation-type workers, not everyone in business. 

The U.S. Supremes have not yet decided what is a transportation-type worker.  Is it anyone who drives a truck  or vehicle across state lines as part of the job?  Or is it someone who is in the trucking business like a mover, bus driver, UPS, etc.?   

Well, that's what the Court of Appeal decided in Garrido v. Air Liquide Industrial U.S. LP.  

It seems Garrido filed a class action in state court, but signed an arbitration agreement containing a class action waiver. The agreement stated that the Federal Arbitration Act applied. But the superior court refused to enforce the class action waiver, even so.  That is because the trial court decided that even under the FAA the agreement would be invalid.  Of course, the trial court was wrong. if the FAA applied, the U.S. Supreme Court and the California Supreme Court both have held that a class action waiver is valid and enforceable. 

But the Court of Appeal decided that the FAA did not apply because Garrido's arbitration agreement was not covered by the FAA, as he was a "worker engaged in interstate commerce" by virtue of his job as a truck driver.    

Garrido’ s duty as a truck driver was the transportation of goods. Air Liquide cites to no authority holding that a truck driver whose responsibility is to move products across state lines does not fall under section 1 of the FAA. The fact that Garrido transported Air Liquide’s own products (rather than those of an Air Liquide client) is of little consequence: “a trucker is a transportation worker regardless of whether he transports his employer’s goods or the goods of a third party; if he crosses state lines he is ‘actually engaged in the movement of goods in interstate commerce.’” (International Brotherhood of Teamsters Local Union No. 50 v. Kienstra Precast, LLC (7th Cir. 2012) 702 F.3d 954, 957.)

Thus, because Garrido was a transportation worker, the FAA does not apply to the ADR agreement.

Once the FAA did not apply, then the issue was whether the class waiver was enforceable.  Without FAA preemption, the California case law is anti-class action waivers. The courts will invalidate class action waivers under Gentry v. Superior Court by applying a four-factor test:

In finding the ADR agreement’s class waiver provision unenforceable, the trial court applied Gentry’s four-factor test. As noted above, these four factors are: “[1] the modest size of the potential individual recovery, [2] the potential for retaliation against members of the class, [3] the fact that absent members of the class may be ill informed about their rights, and [4] other real world obstacles to the vindication of class members’ rights to overtime pay through individual arbitration.” (Gentry, supra, 42 Cal.4th at pp. 453, 463.) Under Gentry, if the trial court “concludes, based on these factors, that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver to ensure that these employees can ‘vindicate [their] unwaivable rights in an arbitration forum.’” (Ibid.)

The Court of Appeal held that the trial court properly applied that standard to hold that Garrido could maintain his class action in court because his class action waiver was unenforceable under California law. 

In this trucking case, there's little the employer could do. But if you are drafting an arbitration agreement or compelling arbitration, do your best to make sure the FAA applies.... or this could happen to you.

This opinion in Garrido is here.