Class Action Waivers in Employment Arbitration Agreements? Not as 'Fresh & Easy' as You Think

Many companies require their employees to sign employment agreements in which the employees agree that any claims they have against the company, including class action claims, will be decided only through private arbitration and not by a judge or jury.  In a recent decision, Diana Chan v. Fresh & Easy, LLC et al., a federal judge presiding over an adversary proceeding in Chapter 11 bankruptcy ruled that an employment arbitration agreement containing a class action waiver violated the National Labor Relations Act.  In doing so, the U.S. Bankruptcy Court invalidated the employer’s arbitration agreement in its entirety and permitted the employee’s claims to remain in federal court.   

Among other things, the National Labor Relations Act (“NLRA”) gives employees the right to self-organize, to form, join, or assist labor organizations, to bargain collectively, and to engage in other “concerted activities” for the purpose of collective bargaining.  In enacting the NLRA, Congress aimed to equalize the bargaining power of employees with that of their employers by allowing employees to engage in collective bargaining.  Accordingly, the primary goal of the NLRA is to protect the right of employees to act collectively.

In Fresh & Easy, Diana Chan filed a lawsuit against her former employer, Fresh & Easy, LLC, alleging that the company violated the U.S. Worker Adjustment and Retraining Notification Act (“WARN Act”) by failing to give the required sixty (60) days advance notice of plant closures and mass layoffs before the company closed its grocery store chain.  While employed by Fresh & Easy, Ms. Chan signed an employment agreement that required her to arbitrate all employment-related disputes with her employer and that specifically prohibited her from bringing a class action lawsuit against the company in court.  After Ms. Chan filed a class action WARN Act lawsuit against Fresh & Easy in U.S. Bankruptcy Court on behalf of herself and other similarly situated former employees, the company moved to dismiss the complaint and asked the court to compel Ms. Chan to pursue arbitration instead.  Ms. Chan opposed her former employer’s bid for arbitration on the grounds that the contractual requirement for Fresh & Easy employees to waive their rights to bring class action claims against their employer violated the NLRA.

The Court agreed with Ms. Chan and found that Fresh & Easy’s arbitration agreement violated the NLRA because the provision barring Ms. Chan’s right to file a class action lawsuit infringed on her ability to engage in collective bargaining activities.  The Court ruled that the right of an employee to file a class action is a substantive right protected by Section 7 of the NLRA, and not a procedural tool, as Fresh & Easy had argued.  The Court also found that the class waiver provision fell under the Federal Arbitration Act’s (“FAA”) savings clause.  While the FAA requires courts to “rigorously enforce” arbitration agreements, the FAA’s savings clause excludes from the Act’s coverage all contracts that are subject to common law contract defenses, including illegality.  Here, the Court found that the FAA did not mandate enforcement of the arbitration agreement because the agreement contained an illegal provision -- the class action waiver. 

The Court went on to find that the employment agreement as a whole was void and invalid.  The Court refused to sever the class action waiver provision from the arbitration agreement and enforce the remainder of the agreement because it found that the waiver provision was an essential component of the contract.  Notably, the Court reached such a conclusion notwithstanding the presence of a severability clause in the arbitration agreement, which provided that the remaining agreement would remain in force even if a portion of the agreement was found to be unenforceable.

The Court’s decision in Fresh & Easy highlights a developing split between the U.S. Circuit Courts on the issue of whether class actions are procedural or substantive tools and, thus, whether class action waiver provisions in employment arbitration agreements violate the NLRA.  The Third, Seventh, and Ninth Circuits, as well as the National Labor Relations Board, seem to take the approach that class actions are substantive elements of a lawsuit, and thus that waivers thereof violate the NLRA, while the Second, Fifth, and Eighth Circuits view such collective litigation as a procedural mechanism.  The Fourth Circuit Court of Appeals, the federal court covering Virginia, North Carolina, South Carolina, Maryland, and West Virginia, has yet to take a stand on this issue.  Given the federal Circuit Court split, it is likely that this issue will eventually make its way to the U.S. Supreme Court.  For now, the implications of the Fresh & Easy Court’s ruling, as well as others like it which call into question the legality of class action waivers in arbitration agreements, may prompt employers to reconsider their use of arbitration agreements with class action waivers.