Ninth Circuit Holds that Arbitration Provision Prohibiting Concerted Actions Violates the National Labor Relations Act and Is Unenforceable

In Morris v. Ernst & Young, LLP (hereinafter “Morris”), the Ninth Circuit held that an arbitration provision prohibiting the filing of concerted actions, signed as a condition of employment, violated the National Labor Relations Act (hereinafter “NLRA”) and was, therefore, unenforceable.

The Morris case involved two employees of Ernst & Young, LLP (hereinafter “E&Y”) who were required, as a condition of their employment, to sign an employment agreement that required them to pursue legal claims against E&Y exclusively through arbitration and only as individuals and in “separate proceedings.” This clause of their contract, referred to by the Ninth Circuit as the “concerted action waiver,” prevented the employees from initiating concerted claims against E&Y in any forum. Despite Plaintiffs’ agreement to this provision, Plaintiff Morris brought a class and collective action against E&Y in federal court in New York that was eventually transferred to the Norther District of California where a motion to compel arbitration was granted and individual arbitrations were ordered.

On review, the Ninth Circuit addressed two legal issues that governed whether the concerted action waiver was enforceable to compel individual arbitration of the Plaintiffs’ claims, including whether: (1) the concerted action waiver violated the substantive provisions of the NLRA; and (2) the savings clause of the Federal Arbitration Act (hereinafter, “FAA”) compelled the enforcement of the concerted action waiver despite violation of the FLRA.

Beginning the with NLRA, the Ninth Circuit looked to National Labor Relation Board’s (hereinafter “NLRB”) interpretation of the NLRA, Congressional intent regarding the NLRA and Supreme Court and Circuit Court authority regarding the substantive rights guaranteed by the NLRA. Based on these authorities and the plain text of the NLRA, the Ninth Circuit determined that the key substantive right conferred on employees through the NLRA was the right to utilize concerted employee activity to improve working conditions through resort to administrative and judicial forums. Reviewing Supreme Court and Circuit Court precedent, the Ninth Circuit determined that the separate proceedings clause in the concerted action waiver obligated employees to pursue work-related claims individually – the very antithesis of the NLRA’s protection for concerted work-related legal claims. Based on the foregoing, the Ninth Circuit held that the concerted action waiver was unenforceable because it violated the NLRA.

After determining that the concerted action waiver violated the NLRA, the Ninth Circuit next addressed whether the FAA’s savings clause protected the concerted action waiver from being deemed unenforceable because it was an arbitration provision.

Reviewing Supreme Court and Circuit Court Authority, the Ninth Circuit noted that the savings clause was intended to ensure the enforcement of arbitration provisions where attacks on the enforceability of an arbitration provision would apply only to arbitration or that derive their meaning from the fact that an agreement to arbitration is at issue. In light of these guiding principles, the Ninth Circuit determined that the enforceability of the concerted action waiver did not turn on whether arbitration was the chosen forum or any defenses that apply only to arbitration. Rather, the Ninth Circuit reiterated that the infirmity of the concerted action waiver derived wholly from the requirement of “separate proceedings.” The Ninth Circuit was careful to explain that the outcome would be the same if E&Y had required its employees to agree to resolution of all work-related disputes in any other forum, highlighting the fact that the concerted action waiver was unenforceable because it prevented the E&Y employees from utilizing their right to pursue concerted work-related legal action, not because it required arbitration.

Based on the foregoing, the Ninth Circuit vacated the lower court’s decision and remanded the case for a determination of whether the concerted action waiver could be severed from the contract and still support a motion to compel arbitration.

The Ninth Circuit’s decision is significant in that it clarifies the prevailing law in this Circuit regarding separate proceedings provisions contained within arbitration clauses. More significantly, it addresses an issue relevant to all multi-state employers who require their employees to sign generally applicable employment contracts as a condition of employment. The Ninth Circuit’s decision clarifies that employment contracts that may violate federal law and/or state law, will be held unenforceable regardless of the law of the state in which they are entered. This decision serves as a significant warning to multi-state employers drafting generally applicable employment contracts to ensure that their agreements do not violate federal law or the law of the jurisdictions in which they are to be enforced.