By Dave Strausfeld, J.D. In a major win for the NLRB on the issue of concerted or class action waivers, the Ninth Circuit became the second federal court of appeals to hold that the Board got it right in D.R. Horton. Under the unambiguous language of the NLRA, the appeals court found, it is unlawful to require employees to sign agreements precluding them from bringing, in any forum, concerted legal claims regarding wages, hours, or other terms and conditions of employment. Nor did the FAA mandate a contrary result because it recognizes a general contract defense of illegality. The appeals court thus joined the Seventh Circuit, which handed down a similar ruling a few months ago. Judge Ikuta dissented (Morris v. Ernst & Young, LLP, August 22, 2016, Thomas, S.). Employee brought collective suit for unpaid overtime. As a condition of his employment, an employee at the accounting firm Ernst & Young was required to sign an agreement not to join with other employees in bringing legal claims against the company. This "concerted action waiver" said he must (1) pursue legal claims against the company exclusively through arbitration, and (2) arbitrate only as an individual and in "separate proceedings." The effect of the two provisions was to bar him from bringing a concerted legal claim against the company in any forum—in a court, arbitral forum, or elsewhere. Nonetheless, he filed a class and collective action alleging that the company had misclassified him and similarly situated employees for overtime purposes in violation of the FLSA and California labor laws. When the company moved to compel arbitration pursuant to the arbitration agreement he had signed, the district court enforced the concerted action waiver and ordered individual arbitration. The employee appealed, arguing that the NLRA protected his right to bring a collective wage-hour lawsuit. Congress’ intent in Section 7 clear. "This case turns on a well-established principle: employees have the right to pursue work-related legal claims together," the Seventh Circuit began. Concerted activity—the right of employees to act together—is the "essential, substantive right established by the NLRA." Because the company had interfered with that right, "the concerted action waiver violates the NLRA and cannot be enforced." First, there was no doubt about Congress’ intent in Section 7 of the Act. The pursuit of a concerted work-related legal claim clearly falls within the literal wording of Section 7 that "[e]mployees shall have the right . . . to engage in . . . concerted activities for the purpose of . . . mutual aid or protection." And as the Supreme Court noted in NLRB v. City Disposal Sys. Inc., there is "no indication that Congress intended to limit [Section 7’s] protection to situations in which an employee’s activity and that of his fellow employees combine with one another in any particular way." Further bolstering the view that Section 7 safeguards collective litigation procedures was the Supreme Court’s decision in Eastex, Inc. v. NLRB, which made reference to the right to "seek to improve working conditions through resort to administrative and judicial forums." Section 8 unambiguous too. Furthermore, employers may not circumvent Section 7’s protection for concerted activity by requiring employees to agree to individual activity in its place. The Supreme Court recognized as much in Nat’l Licorice Co. v. NLRB, a 1940 decision finding the NLRA was violated by a contract clause discouraging workers from redressing grievances with the employer "in any way except personally." "In sum, the Board’s interpretation of § 7 and § 8 is correct." And because "[t]he NLRA is unambiguous," there was no need to discuss or consider the reasonableness of the Board’s interpretation. The meaning was readily apparent from the statute itself. Applied to the facts of this case, these principles meant the arbitration agreement, which imposed a "total waiver" on concerted legal activity in any forum, was unlawful under the NLRA. FAA did not change result. However, the NLRA was not the only statute implicated here; the next question was whether the FAA dictated a contrary result. It did not, reasoned the Seventh Circuit, because the FAA recognizes a general contract defense of illegality. That is, the FAA’s "saving clause" prevented a conflict between the statutes by causing the FAA’s enforcement mandate to yield. The distinction between "substantive" rights and "procedural" rights was crucial, the appeals court underscored. The rights established in Section 7 of the NLRA—including the right of employees to pursue legal claims together—are substantive. "They are the central, fundamental protections of the Act, so the FAA does not mandate the enforcement of a contract that alleges their waiver." Many of the cases cited by the dissenting judge, the court said, involved procedural rights and so were inapplicable. A party may not "simply incant the acronym ‘FAA’ and receive protection for illegal contract terms anytime the party suggests it will enjoy arbitration less without those illegal terms," the court declared, finding nothing in the Supreme Court’s recent arbitration case law supporting this notion. "Core right" to concerted activity. In sum, "the right to concerted employee activity cannot be waived in an arbitration agreement." The NLRA establishes a "core right" to concerted activity. "Irrespective of the forum in which disputes are resolved, employees must be able to act in the forum together." In this case, the arbitration agreement prevented that from happening because it was structured "so as to exclude all concerted employee legal claims" in any forum. Dissent. Judge Ikuta, dissenting, characterized the majority’s decision as "breathtaking in its scope and in its error." In her view, it was "directly contrary to Supreme Court precedent and joins the wrong side of a circuit split." In a lengthy opinion, she argued that the majority’s ruling ignored the FAA’s command to enforce arbitration agreements according to their terms. Because she would "follow the Supreme Court precedent" and join the Second, Fifth, and Eight Circuits in concluding the NLRA does not invalidate collective action waivers in arbitration agreements, she would hold that the arbitration agreement in this case must be enforced according to its terms.
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