Delaware Bankruptcy Court Strikes Down Arbitration Clause That Prohibited Employee Class Action

By Peter D. DeChiara

pdechiara@cwsny.com

Posted October 2016

The National Labor Relations Board touched off a furious legal controversy in 2012 when it held in D.R. Horton, Inc., 357 N.L.R.B. 2277, that employer-imposed arbitration clauses violate federal law if they prohibit employees from bringing class-action claims.  Four years on, the controversy still rages, splitting courts  internally, see, e.g., Morris v. Ernst & Young, LLP, 2016 WL 4433080 (9th Cir. 2016) (2-1 split on the issue, with dissenter charging majority with “breathtaking” error), and also splitting courts one from another, with some courts rejecting the NLRB’s position, see, e.g., D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013); Cellular Sales v. NLRB, 824 F.3d 772 (8th Cir. 2016); Bekele v. Lyft, Inc., 2016 WL 4203412 (D. Mass. 2016), and others accepting it, see, e.g., Morris, 2016 WL 4433080 (9th Cir. 2016); Lewis v. Epic Sys. Corp., 823 F.3d 1147 (7th Cir. 2016).  Some bankruptcy judges might shrink from such a charged, non-bankruptcy controversy.  But Chief Judge Brendan L. Shannon of the United States Bankruptcy Court for the District of Delaware, faced recently with a class-action waiver case, strode into the fray, and with some deft strokes of legal reasoning produced an admirable decision, striking down an arbitration clause that a bankrupt employer raised as a defense to an employee class action.  See In re Fresh & Easy, LLC, Case No. 15-12220 (Bankr. D. Del. Oct. 11, 2016).

In Fresh & Easy, LLC, an employee of a grocery store chain signed an arbitration agreement that prohibited her from bringing a class-action suit against the company.  The agreement gave her 30 days to opt out of the agreement after signing it, but she didn’t opt out.  After Fresh & Easy filed for Chapter 11 protection, the employee brought a class-action adversary proceeding against it in the bankruptcy court, claiming that the company failed to give her and other employees the advanced notice of termination required by federal and state law.  Fresh & Easy moved to stay the adversary proceeding, arguing that the arbitration clause the employee signed barred the class-action claim.

Judge Shannon first tackled the question whether the arbitration agreement’s prohibition on class claims violated the National Labor Relations Act (NLRA).  With a touch of understatement, he observed that “[t]here is little consensus on this issue.”  Despite the swirl of controversy, and some federal appeals courts lined up on the other side, Judge Shannon concluded that the NLRA “unambiguously protects the right of employees to bring a collective action.”  The NLRA gives employees the right to engage in “concerted activities” for their “mutual aid or protection” and prohibits employers from interfering with that right.  According to the bankruptcy court’s analysis, the collective pursuit of claims constitutes a form of concerted activity, so arbitration agreements that prohibit class actions interfere with employees’ NLRA rights.

But does the employer dodge an NLRA violation by inserting an opt-out clause in the arbitration agreement? On that issue, Judge Shannon concluded, the NLRA provided no clear guidance.  The only appeals court decision on point, Johnmohammadi v. Bloomingdale’s, Inc., 755 F.3d 1072 (9th Cir. 2014), held that the opt-out washed the class-action waiver free of any unlawful taint.  Nonetheless, displaying an appropriate appreciation for NLRB expertise on labor matters, the bankruptcy court endorsed the agency’s position on the issue, see On Assignment Staffing Servs., Inc., 362 N.L.R.B. No. 189 (2015), rev’d, 2016 WL 3685206 (5th Cir. 2016), and held the arbitration clause unlawful despite the opt-out clause.

Finally, the court held that, with the class-action waiver at the heart of the arbitration agreement stricken, the arbitration agreement itself could not stand.  The court thus denied the company’s motion to stay the class-action proceeding.

It is decisions like Fresh & Easy that restore one’s confidence that bankruptcy courts, though focused on bankruptcy issues, can successfully and surely navigate difficult labor questions.