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Rule Against Class|Arbitration Gutted

SAN FRANCISCO (CN) — The Ninth Circuit ruled Monday that federal labor-relations law doesn't allow an accounting firm to force its employees to arbitrate their issues individually rather than collectively, namely through a class action.

Stephen Morris and Kelly McDaniel, former employees of the accounting firm Ernst & Young, filed a class and collective action in federal court in New York, claiming their former employer misclassified them and denied them overtime wages.

After the case was transferred to the Northern District of California, Ernst & Young pointed to a clause in Morris and McDaniel's employment contracts that said they could only pursue legal claims through arbitration and only as individuals in "separate proceedings." A federal judge accordingly ordered arbitration.

But Ninth Circuit Chief Judge Sidney Thomas, who delivered the panel's 2-1 decision, wrote Monday that the U.S. Supreme Court has held that the National Labor Relations Board's interpretation of the National Labor Relations Act remains the standard: employees have to be allowed to work together to address claims related to wages, hours or other working conditions.

"Applied to the Ernst & Young contract, sections 7 and 8 [of the act] make the terms of the concerted action waiver unenforceable," Thomas wrote. "The 'separate proceedings' clause prevents concerted activity by employees in arbitration proceedings, and the requirement that employees only use arbitration prevents the initiation of concerted legal action anywhere else."

And while the Federal Arbitration Act says that legal arbitration clauses in employment contracts must be enforced, arbitration itself is not the issue in this case, Thomas wrote.

"It would equally violate the National Labor Relations Act for Ernst & Young to require its employees to sign a contract requiring the resolution of all work-related disputes in court and in 'separate proceedings,'" he wrote. "The same infirmity would exist if the contract required disputes to be resolved through casting lots, coin toss, duel, trial by ordeal, or any other dispute resolution mechanism, if the contract (1) limited resolution to that mechanism and (2) required separate individual proceedings. The problem with the contract at issue is not that it requires arbitration; it is that the contract term defeats a substantive federal right to pursue concerted work-related legal claims."

But Circuit Judge Sandra Segal Ikuta wrote in her dissent that the clause is enforceable and the majority opinion runs contrary to the very nature of arbitration.

"As the Supreme Court has explained, such a waiver of class actions is typical in the arbitration context because the class procedural mechanism 'interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the Federal Arbitration Act,'" she wrote.

"The majority's attempt to equate a substantive right to concerted action with a legal procedural mechanism for resolving disputes has no basis in history or Supreme Court precedent."

Max Folkenflik of Folkenflik & McGerity in New York represented Morris and McDaniel.

Rex Heinke of Akin Gump Strauss Hauer & Feld in Los Angeles represented Ernst & Young.

"I think it's a very strong decision," Folkenflik said, adding that he would not be surprised to see the case reach the Supreme Court.

"I think at the Supreme Court, the Ninth Circuit's opinion would be affirmed because it's a much better reading of the [National Labor Relations Act and the Federal Arbitration Act] than the dissent's argument."

Daniel Nash, who also represented Ernst & Young and who is affiliated with Akin Gump Strauss Hauer & Feld's Washington office, declined to comment. The National Labor Relations Board, which had filed a friend-of-the-court brief, also declined to comment.

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