Split Circuit Court Decisions Create Uncertainty on Class Action Waivers and likely Supreme Court Review

By Vik Jaitly

Last week the 7th Circuit U.S. Circuit Court of Appeals, in Lewis v. Epic-Systems Corp., held that a company’s arbitration agreement, which prohibits employees from participating in “any class, collective or representative proceeding,” violated an employees’ right to engage in concerted activity under the National Labor Relations Act (NLRA).  The ruling creates a circuit split on the enforceability of class action waivers because the 2nd, 5th, and 8th Circuits each have held that class action waivers do not violate an employee’s rights under the NLRA.  Because of this circuit split, it is likely that the Supreme Court will visit this issue in the near future.

Background on Enforceability of Class Action Waivers

In recent years, federal courts have largely upheld arbitration pacts with class or collective action waiver language that provides that not only must an employee bring his or her claim exclusively in arbitration, but also that he or she must do so on an individual, and not on a class-wide basis. Specifically, in AT&T Mobility v. Concepcion (2011), the Supreme Court ordered the enforcement of arbitration agreements in a dispute involving an arbitration provision in cellphone contracts.  In the process, Concepcion generally held that the Federal Arbitration Act (FAA) preempts state bans on class action arbitration waivers.  The case however, did not directly address the viability of class action waivers in the employment context.

Shortly thereafter, in January 2012, the National Labor Relations Board (NLRB) ruled that an employer could not force its employees to sign arbitration agreements with class waiver provisions because such agreements were unlawful under the NLRA. See D.R. Horton, Inc., 357 NLRB 184 (2012).  On appeal, the 5th Circuit rejected the NLRB’s holding that class waivers in mandatory arbitration agreements are unlawful, joining the 2nd and 8th Circuits, which had issued similar rejections.

Seventh Circuit Opinion

In Lewis v. Epic-Systems Corp., the plaintiff had entered into an arbitration agreement with his employer in which he had waived his “right to participate in or receive money or any other relief from any class, collective, or representative proceeding.”  Lewis later filed a suit in federal court on behalf of himself and other employees alleging that the company had violated the Fair Labor Standards Act (FLSA) by misclassifying the employees and depriving them of overtime.

The employer moved to dismiss plaintiff’s claims and compel arbitration on an individual claim basis. The plaintiff argued that the agreement’s class and collective action waiver was unenforceable because it interfered with his right to engage in concerted activity under Section 7 of the NLRA.  The district court agreed with plaintiff and denied employer’s motion to dismiss, relying primarily on a prior decision the district court had issued adhering to the D.R. Horton’s decision.  The district court believed the 5th Circuit’s majority opinion “never persuasively rebutted the board’s conclusion that a collective litigation waiver violates the NLRA and never explained why, if there is tension between the NLRA and the FAA, it is the FAA that should trump the NLRA, rather than the reverse.”  The employer subsequently appealed the district court’s decision to the 7th Circuit.

In its analysis, the 7th Circuit adopted the NLRB’s reasoning (as stated in D.R. Horton) that engaging in class, collective or representative proceedings is “concerted activity” and a protected right under Section 7 of the NLRA.  Therefore, the court concluded, it would be an unfair labor practice under Section 8 of the NLRA for an employer “to interfere with, restrain, or coerce employees in the exercise” of this right.

Surprisingly, the 7th Circuit rejected the argument that the arbitration agreement must be enforced under the FAA—an argument adopted by all the other circuits that have ruled on this matter. In its ruling, the court focused on the FAA’s savings clause, which provides that arbitration agreements are enforceable except if the agreements themselves are unlawful.  Thus, the court found that Epic’s arbitration agreement is illegal under the NLRA, and because an illegal agreement is not enforceable under the FAA’s savings clause, there is no conflict between the FAA and the NLRA.

General Takeaways for Employers

The Lewis decision leaves employers with several takeaways:  First, employer need to know that class and collective action waivers will not be enforced in federal courts sitting in Illinois, Indiana and Wisconsin, which are the states within the Seventh Circuit’s jurisdiction.

Second, these same agreements will likely continue to be enforced in federal courts sitting in the circuits that have rejected the NLRB’s reasoning in D.R. Horton (for now, 2nd, 5th, and 8th Circuits).

Third, this circuit split will likely involve the input of the Supreme Court in the future but perhaps not between the Presidential election, and the appointment of a ninth Justice, given the desire to avoid a 4-4 split. If the case is brought before the Supreme Court before a new Justice is confirmed by the Senate, and the Supreme Court decision is split 4-4, each of the Circuit’s decisions will remain in effect.

NLRB Rules That Policy Requiring Employees to Individually Arbitrate Employment Disputes Violates the National Labor Relations Act

By: Gregory W. Homer and Dennis Mulgrew

On June 3, 2013 an National Labor Relations Board (NLRB) Administrative Law Judge (ALJ) reached a decision in which it found that MasTec Services’ Company’s policy that required employees to individually arbitrate employment disputes violated Section 8(a)(1) of the National Labor Relations Act (NLRA).  In so holding, the ALJ radically expanded the NLRB’s previous decision in D. R. Horton, Inc. (1/3/12).  As D.R. Horton itself has been rejected by almost all federal courts which have considered it, the MasTec decision is bound to create a firestorm of criticism.

In D.R. Horton, the NLRB ruled that requiring employees to sign a blanket waiver of rights to pursue their employment claims through class actions violated Section 8(a)(1) of the NLRA.  The specific agreement at issue in D.R. Horton (1) contained a mandatory arbitration provision, and (2) required employees to bring all employment-related claims to an arbitrator on an individual basis, as opposed to as a potential class action.  The D.R. Horton decision generated significant criticism, and many commentators noted that it appeared to conflict with U.S. Supreme Court precedent, specifically AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011)Concepcion held that the Federal Arbitration Act preempts state laws that prohibit contracts from disallowing class-wide arbitration, and that companies can enforce contract provisions that require customers to arbitrate their disputes individually.  Concepcion, which involved a consumer contract, was thought to make it much harder for individuals – not only consumers, but also employees who had signed arbitration agreements – to file class action lawsuits.

Although D.R. Horton initially caused great concern among employers, as it seemed to eliminate the possibility of preventing class suits through mandatory arbitration agreements, this concern has been tempered by the fact that an overwhelming number of federal courts that have considered the issue have refused to follow the decision, including the Eighth Circuit Court of Appeals.  See e.g., Owen v. Bristol Care, Inc., 702 F.3d 1050 (8th Cir. 2013); Delock v. Securitas Security Servs. USA, Inc., 883 F. Supp. 2d 784 (E.D. Ark. 2012); Morvant v P F Chang’s China Bistro Inc., 2012 WL 1604851 (N.D. Cal. 2012); De Oliveira v. Citicorp North America, Inc. (M.D. Fla. 2012); Tenet Healthsystem Philadelphia, Inc. v. Rooney (E.D. Pa. 2012); Lavoice v. UBS Wealth Management Americas (S.D.N.Y. 2011); Johnmohammadi v. Bloomingdales, Inc. (C.D. Cal. 2012); Sanders v. Swift Transp. Co. of Ariz., 843 F Supp. 2d 1033, (N.D. Cal. 2012); Palmer v. Convergys Corp., 2012 WL 425256 (M.D. Ga. 2012).

MasTec is sure to be controversial because, despite the courts’ hostile reaction to D.R. Horton, MasTec expands its holding.  The arbitration provision at issue in MasTech was less restrictive than that in D.R. Horton, in that it (1) permitted the employee to opt out within 30 days, and (2) explicitly authorized employees to bring claims to administrative agencies.  Nonetheless, even with these safeguards in place, the ALJ found the provision to violate Section 8(a)(1).  The ALJ gave three independent reasons for reaching this conclusion.  First, given that the NLRA grants employees the right to engage in protected concerted activities without interference, an employer may not require its employees to affirmatively act (through the opt-out) in order to obtain or maintain those rights.  Second, employees who opt out still would be unable to engage in and cooperate in concerted activities with those who did not opt out, disadvantaging them in their attempts at concerted action.  Third, some employees may be reluctant to exercise the opt-out option for fear of angering their employers.  Under the reasoning of the Mas Tec opinion, it would be virtually impossible for any employer to include a class action waiver in arbitration agreements with individual employees.

D.R. Horton itself is currently on appeal before the U.S. Court of Appeals for the Fifth Circuit.  Should the NLRB and Federal Court decisions continue to diverge, the stage may be set for a reversal of D.R. Horton (or perhaps a Supreme Court decision).  We will continue to monitor D.R. Horton and its progeny, given the case’s broad implications for employers potentially subject to employee class actions.

California Court of Appeal Finds Employment Arbitration Agreement Barring Class Claims Unconscionable

By: Fey Epling

In Compton v. Superior Court of Los Angeles County, No. B236669 (2d Dist. Mar. 19, 2013), a divided panel of the Second District Court of Appeal reversed the Los Angeles Superior Court’s order compelling arbitration of her wage-and-hour class action complaint.

The Compton majority found the arbitration provision was substantively unconscionable because it was “unfairly one-sided” for four reasons.  First, the agreement exempted the employer from arbitration for injunctive relief on claims related to confidential information and trade secrets.  The majority did not find the carve-out of plaintiff’s claims for workers compensation, unemployment and disability claims sufficient to create parity.  Second, the majority found the imposition of a one-year time limit to arbitrate employee claims impermissibly shortened the applicable statutes of limitations; for a separate, but related reason, the court found this limitation was unfairly one-sided when compared with the three- and four-year statutes of limitation applicable to the unfair competition and trade secret claims preserved by the employer.  Finally, the majority found that the attorneys’ fees language undermined the employee-favorable statutory fee provisions.  Of some concern, the court declined to sever the offensive terms, finding the agreement to be “permeated by unconscionability.”

In an apparent effort to distance its opinion from AT&T Mobility, LLC v. Concepcion (2011) 131 S.Ct. 1740 and its progeny, the Compton majority emphasized that the Concepcion opinion arose out of a consumer arbitration agreement.  The court specifically found that Concepcion “did not abrogate the Armendariz one-sidedness rule,” i.e., “the doctrine of unconscionability limits the extent to which a stronger party may, through a contract of adhesion, impose the arbitration forum on the weaker party without accepting that forum for itself.”  Armendariz v. Foundation Health Psychcare Servs. (2000) 24 Cal.4th 83, 118.

The Compton court found that the agreement was also procedurally unconscionable because, regardless of “how conspicuous the arbitration agreement’s terms and advisements,” the employer’s reported conduct (hurried presentation and signature requested) “rendered them nearly meaningless” and demonstrated oppression.  The court also found that the information provided was one-sided because it did not sufficiently set forth the rights that were being waived, and because the rules of the applicable arbitration bodies were not provided to the employees in toto.

As a procedural side note, the panel was divided even on the basis for consideration of the appeal.  The dissent found that the appeal was appropriate pursuant to the “death knell” doctrine, and the majority side-stepped the issue by addressing the issue as a petition for writ of mandate.

The dissent raises a host of issues and highlights the unsettled conflicts between the Concepcion line of cases and California’s unconscionability principles, which have arisen primarily in the context of employee and consumer lawsuits.

Given the strong language in Compton and the court’s refusal to strike out the offensive terms, California employers may wish to engage in a review of their arbitration agreements in light of the Compton majority’s opinion.

Editor’s Update:

On June 12, 2013, the Supreme Court granted defendant’s petition for review, but deferred all briefing and further action in the matter pending its disposition of Sanchez v. Valencia Holding Co., S199119, the leading case on the related issue of whether the Federal Arbitration Act, as interpreted in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. ___, 131 S.Ct. 1740, preempt state laws invalidating mandatory arbitration provisions in a consumer contract on grounds of procedural and substantive unconscionability.

William Horwitz Authors Articles for New Jersey Law Journal and BNA’s Corporate Counsel Weekly

William Horwtiz, counsel in the Labor & Employment practice group, recently authored articles for both the New Jersey Law Journal and BNA’s Corporate Counsel Weekly.

William’s article for the New Jersey Law Journal titled, “Third Circuit Rides the Class-Action Arbitration Waive”, discusses the case of Quilloin v. Tenet HealthSystem Philadelphia, in which the Third Circuit, following the U.S. Supreme Court’s lead and its own precedent, endorsed the validity of class-action waivers in predispute employment arbitration agreements.  Bill outlines the facts of the case and the court’s reasoning and says that the case offers helpful guidance for employers rolling out new arbitration agreements and employers with existing agreements.  He also notes that Quilloin holds that class-action waivers are en­forceable and employers should consider including them in arbitration agree­ments, adding that employers should also “include a provision requiring the parties to submit arbitrability issues to the arbitrator.”

William’s article for BNA’s Corporate Counsel Weekly, “In Case Involving Employer’s Poor Handling of Sexual Harassment Allegation, Second Circuit Resolves Two Novel Issues”, William discusses the case of Townsend v. Benjamin Enterprises, Inc., in which the U.S. Court of Appeals for the Second Circuit resolved two issues of first impression.  In outlining the facts of the case and the court’s observations, William notes that the most important takeaway from the decision may be the important guidance for employers of how not to address sexual harassment in the workplace.

To read the complete article, “Third Circuit Rides the Class-Action Arbitration Waive”, click here.

To read the complete article,  “In Case Involving Employer’s Poor Handling of Sexual Harassment Allegation, Second Circuit Resolves Two Novel Issues”, click here.

New Jersey’s Appellate Court Denies Employer’s Attempt to Dismiss Claims on Eve of Trial Based on Employee Agreement to Arbitrate

By: Lynne Anne Anderson and Jerrold Wohlgemuth

Can an employer litigate employment claims in court and then enforce an arbitration agreement against the plaintiff-employee on the eve of trial to avoid presenting the case to a jury?  The New Jersey Appellate Division just said, “No.”

Plaintiff Karen Cole was a nurse anesthetist employed by Liberty Anesthesia Associates, LLC to work at Jersey City Medical Center.  When her privileges were revoked by the Hospital, Liberty terminated her employment and she filed suit against both Liberty and the Hospital for retaliatory discharge under the New Jersey Conscientious Employee Protection Act (“CEPA”), and for discriminatory discharge based on her disability under the New Jersey Law Against Discrimination (“LAD”).

Cole settled her claims against the Hospital at the hearing on the Hospital’s motion for summary judgment.  Liberty did not settle with plaintiff at that time.  Instead, after defending the action for almost two years in litigation, Liberty moved to dismiss the claims against it one month later in a motion in limine filed three days before trial based on the arbitration agreement Cole had entered into in her employment agreement with Liberty.  The trial court enforced the arbitration agreement and dismissed the case on the eve of trial, and Cole appealed.

In a March 29, 2012 opinion, the New Jersey Appellate Division reversed and remanded the action for trial.  The court found that Liberty’s counsel had pursued the litigation – instead of seeking to enforce the arbitration agreement – as a deliberate trial strategy, and determined that Liberty was equitably estopped from enforcing the arbitration provision at the last minute before trial where it had failed to mention arbitration among the thirty-five affirmative defenses asserted in its Answer; failed to identify the arbitration agreement in discovery; and failed to raise the agreement in its motion for summary judgment on the merits.  The court observed that Liberty’s deliberate course of conduct was prejudicial to Cole where it had caused her not only to participate in extensive discovery, but also to prepare to try her case before a jury, which the court noted required a great deal more preparation than presenting a case in arbitration.

To read the published opinion in Cole click hereCole is reported at 425 N.J. Super 48 (App. Div. 2012).

$100 Million Pattern-or-Practice Gender Discrimination Suit Doomed By Company’s Arbitration Agreement

A federal district court in Massachusetts effectively gutted a prominent plaintiff’s class action firm’s attempt to avoid arbitration agreements and litigate on a class-wide basis in federal court in Boston. This ruling comes on the heels of a series of class and collective actions filed in federal courts against major U.S.-based and international employers by the Sanford Wittels & Heisler law firm.

In Karp v. CIGNA Healthcare, Inc., the plaintiff-employee was a senior contract manager at CIGNA who asserted discrimination claims in a proposed $100 million putative class action alleging systemic gender discrimination in violation of Title VII of the Civil Rights Act of 1964. Karp’s efforts to represent a class of potentially thousands of current and former female employees were halted when, the district court effectively foreclosed her from proceeding on a class-wide basis either in federal court or in arbitration.

To read the full alert authored by John Ridley and Larry Del Rossi click here.