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Ninth Circuit: Employer Cannot Compel Individual Arbitration of Class and Collective Action Claims

Decision: The National Labor Relations Board (NLRB) has previously ruled in the D. R. Horton case that agreements that require employment disputes to be arbitrated on an individual basis—thereby precluding class and collective actions—violate Sections 7 and 8 of the National Labor Relations Act (NLRA). In Morris v. Ernst & Young, the Ninth Circuit deepened the split among circuit courts regarding whether the NLRB’s ruling in D.R. Horton must yield to the Federal Arbitration Act (FAA), which requires that arbitration agreements be enforced according to their terms “save upon such grounds as exist at law or in equity for the revocation of any contract.” A divided panel of the Ninth Circuit, agreeing with the Seventh Circuit and parting company with the Second, Fifth, and Eighth Circuits, dozens of federal district courts and the California Supreme Court, held that the D.R. Horton rule is not precluded by the FAA because “illegality” is a ground for the revocation of any contract. In a strongly worded dissent, Judge Ikuta questioned the majority’s decision because it was based on the erroneous assumption that the class/collective action waiver is “illegal,” which would be the case only if it were precluded by a “contrary congressional command” in the NLRA that does not exist.

Impact: The Morris decision deepens the split in the circuits and increases the likelihood that the issue will be taken up by the US Supreme Court. The NLRB has until September 9 to seek Supreme Court review of one of the Fifth Circuit decisions that have held that the D.R. Horton rule is precluded by the FAA. The employer in the contrary Seventh Circuit case sought Supreme Court review of that decision on September 2. Thus, the high court may act on that petition in time to hear argument before the end of the upcoming term.

SEC Targets Anti-Whistleblower Agreements

Decision: The Securities and Exchange Commission (SEC) fined two companies over the course of two weeks in connection with restrictions on whistleblowing activity found in the companies’ employment agreements. The SEC first fined BlueLinx Holdings Inc. because its severance agreements contained a confidentiality agreement that required former employees to waive the right to receive money for filing a complaint or charge with an administrative agency (including the SEC) and further required employees to tell BlueLinx’s legal department before disclosing any of the company’s confidential information to a regulator or other law enforcement official. The SEC noted that these provisions “raised impediments to participation by [the company’s] employees in the SEC’s whistleblower program.” BlueLinx settled the matter by paying a fine of $265,000 and by revising its severance agreements to remove the award waiver and to clarify that former employees can communicate with regulators without informing the company.

The SEC took similar action against Health Net Inc., targeting the release and waiver provisions in the company’s severance agreements, which required employees to waive any right to individual monetary recovery in any proceeding brought by the employee before any federal, state or local government agency or department. The SEC posited that this provision “directly targeted the SEC’s whistleblower program by removing the critically important financial incentives that are intended to encourage persons to communicate directly with SEC staff about possible securities law violations.” Notably, the SEC pursued its cease-and-desist action against Health Net even though there was no evidence that the company had prevented any former employees from reporting a securities law violation or that the company had sought to enforce the provisions at issue. Health Net settled by agreeing to pay a $340,000 fine and to contact all former employees who signed the agreement to inform them that the company does not prohibit them from seeking and obtaining a whistleblower award from the SEC.

Impact: The SEC’s actions serve as examples of the increasing scrutiny that many government agencies are applying to employers’ policies and employment agreements. They also underscore, for employers, the importance of reviewing all employment agreements to ensure that there is no impermissible prohibition on employees or former employees sharing information with government regulators, in particular on employees participating in the SEC’s whistleblower program.

California Supreme Court Approves Use of Percentage Fee Awards in Common Fund-Settlement Class Actions

Decision: In Laffitte v. Robert Half International, Inc., the California Supreme Court clarified the standard for awarding attorneys’ fees in class action lawsuits. In seeking approval of a $19 million class action settlement, class counsel had sought a maximum fee award of one-third of the gross settlement, or $6,333,333.33, which the trial court had approved. The trial court cross-referenced the percentage sought by class counsel with class counsels’ lodestar and concluded that the attorneys’ fees award was appropriate even though it meant awarding a multiplier of between 2.03 and 2.13 times the lodestar. An objecting class member appealed, contending that the trial court’s award of an attorney fee calculated as a percentage of the settlement amount violated the California Supreme Court’s previous holding that every fee award must be calculated on the lodestar (i.e., based on time spent by the attorney).

The California Supreme Court disagreed, holding that “the use of the percentage method to calculate a fee in a common fund case, where the award serves to spread the attorney fee among all the beneficiaries of the fund, does not in itself constitute an abuse of discretion.” The court explained that the recognized advantages of the percentage method—including relative ease of calculation, alignment of incentives between counsel and the class, a better approximation of market conditions in a contingency case and the encouragement it provides counsel to seek an early settlement and avoid unnecessarily prolonging the litigation—establish that the percentage method is a valuable tool for trial courts. The court clarified that, while trial courts have discretion to conduct a lodestar cross-check on a percentage fee, “[i]f the multiplier calculated by means of a lodestar cross-check is extraordinarily high or low, the trial court should consider whether the percentage used should be adjusted so as to bring the imputed multiplier within a justifiable range, but the court is not necessarily required to make such an adjustment.” The court explicitly declined to address whether the percentage method may be applied where there is no common fund or where there is a reversion to a third party (e.g., the state) or to the defendant of unclaimed funds.

Impact: While Lafitte allows trial courts to sometimes award larger fees than those based on the number of hours spent on the litigation multiplied by their hourly rates (the lodestar) would otherwise support, it is not clear whether the court’s decision will result in a significant increase in California class action litigation. Many trial courts already utilize this method for calculating fees. Moreover, the California Supreme Court’s opinion endorsed using a lodestar calculation to “double-check” the reasonableness of the percentage fee award thereby leaving open the possibility that trial courts will decrease the percentage recovery to avoid awarding windfalls to class counsel.

Massachusetts Enacts Expansive Equal Pay Law

Law: On August 1, Massachusetts enacted what is perhaps the nation’s most expansive equal pay law to date. The new law amends the Massachusetts Equal Pay Act (MEPA) and includes five significant changes. First, MEPA now requires employers to pay men and women equal wages for “comparable work.” The “comparable work” standard is broader than those in many existing equal pay laws, which typically require work to be “identical” to be legally protected. Second, MEPA now bans pay secrecy, a policy under which an employer would forbid their employees from discussing compensation with their coworkers. (Pay secrecy is believed to engender pay disparities between men and women, by discouraging open communication about compensation.) Third, for the first time in the United States, employers may not require job applicants to disclose their previous wages or salary. (Like pay secrecy, mandatory salary disclosure is believed to perpetuate pay disparities when employees who were paid at a lower rate at a prior job continue to be so paid at a subsequent job.) Fourth, the law will expand the statute of limitations under the equal pay statute from one to three years and will no longer require the employee to pursue an administrative claim before seeking relief in court. Fifth, the law includes a safe harbor for employers who actively institute a good faith self-evaluation of their pay practices and demonstrate progress toward eliminating gender-based pay disparities. The MEPA amendments will take effect in July 2018.

Impact: Several states, including California, New York and Maryland, have recently strengthened their laws on gender pay equality. The clear trend toward pay equality means that even employers in states that have not yet passed new laws should take note of the burgeoning national trend and consider reviewing their policies regarding salaries and hiring.

NLRB Invalidates Employer’s Noncompete and Employment At-Will Policies

Decision: The National Labor Relations Board determined in Minteq Int’l, Inc., 364 NLRB No. 63, (July 29, 2016), that Minteq’s noncompete agreement and at-will employment provisions violated the National Labor Relations Act (NLRA). The unanimous three-member panel ruled that, because Minteq was a party to a collective bargaining agreement, the noncompete agreement was a mandatory subject of bargaining, even though the union never raised the issue. The panel also held that the employment at-will and interference with business relations provisions unduly restricted employees’ ability to engage in protected concerted activity.

Impact: Striking down yet another workplace policy, the NLRB invalidated two common provisions in noncompete agreements on the grounds that they interfered with employees’ rights under Sections 7 of the NLRA. Given the NLRB’s renewed focus on expanding employees’ workplace rights, employers should review their existing policies to ensure they are consistent with any existing collective bargaining agreement and that they do not otherwise implicate protected Section 7 activity.