FAA Trumps NLRA in D.R. Horton Class Action Waiver Challenge: Fifth Circuit | Practical Law

FAA Trumps NLRA in D.R. Horton Class Action Waiver Challenge: Fifth Circuit | Practical Law

In D.R. Horton, Inc. v. NLRB, the US Court of Appeals for the Fifth Circuit, in a 2-1 decision, granted the employer's petition to review the National Relations Board's (NLRB) order invalidating its arbitration agreement's class action waiver provision, but unanimously enforced the NLRB's order requiring that that the employer revise the arbitration agreement's language, so that employees would not reasonably understand that it precluded them from filing NLRB unfair labor practice (ULP) charges.

FAA Trumps NLRA in D.R. Horton Class Action Waiver Challenge: Fifth Circuit

Practical Law Legal Update 5-551-3318 (Approx. 12 pages)

FAA Trumps NLRA in D.R. Horton Class Action Waiver Challenge: Fifth Circuit

by Practical Law Labor & Employment
Published on 10 Dec 2013 • USA (National/Federal)
In D.R. Horton, Inc. v. NLRB, the US Court of Appeals for the Fifth Circuit, in a 2-1 decision, granted the employer's petition to review the National Relations Board's (NLRB) order invalidating its arbitration agreement's class action waiver provision, but unanimously enforced the NLRB's order requiring that that the employer revise the arbitration agreement's language, so that employees would not reasonably understand that it precluded them from filing NLRB unfair labor practice (ULP) charges.
In a December 3, 2013 opinion in D.R. Horton, Inc. v. NLRB, the US Court of Appeals for the Fifth Circuit in a 2-1 decision granted the employer's petition to review the NLRB order invalidating the agreement's waiver of class procedures, finding, contrary to the NLRB, that there is no substantive NLRA right for employees to pursue legal claims through class actions. However, the court unanimously enforced the portion of the NLRB's order requiring that the employer revise its arbitration agreements, which required arbitration of all disputes, so that employees would understand that the agreement did not preclude them from filing unfair labor practice (ULP) charges with the NLRB. The court also rejected arguments challenging the validity of the Board's decision based on the Board panel's composition when it issued the decision. (No. 12-60031, (5th Cir. Dec. 3, 2013).)

Background

As a condition of employment, D.R. Horton required all new and existing employees to sign a mutual arbitration agreement. The arbitration agreement effectively prevented employees from pursuing class or collective claims in an arbitral or judicial forum, specifically providing that:
  • Both the employer and employees voluntarily waive all rights to trial in court before a judge or jury on all claims between them.
  • All disputes and claims would be determined exclusively by final and binding arbitration, including claims for wages, benefits or other compensation.
  • The arbitrator would not have the authority to consolidate the claims of other employees and would not have the authority to fashion a proceeding as a class or collective action or to award relief to a group or class of employees in one arbitration proceeding.
The charging party in the underlying ULP proceeding was an employee who signed the arbitration agreement and sought to arbitrate a collective action alleging the employer misclassified him and other employees under the FLSA. After the employer responded that the agreement barred collective claims, the plaintiff filed a ULP charge alleging that the class-action waiver violated the NLRA.
An NLRB Administrative Law Judge (ALJ) held that the arbitration agreement violated Sections 8(a)(1) and (4) of the NLRA because its language would cause employees to reasonably believe that they were prohibited from filing ULPs with the NLRB.
The panel (Board) heading the NLRB's judicial functions issued a decision by two members (with then-Member Hayes recusing himself). The Board:
  • Affirmed the ALJ's determination that the arbitration agreement violated Sections 8(a)(1) and 8(a)(4) of the NLRA because employees could reasonably believe that they are prohibited from filing ULP charges with the NLRB.
  • Held that the arbitration agreement also violated Section 8(a)(1) of the NLRA because it required employees to waive substantive rights under NLRA Section 7 to maintain joint, class or collective employment-related actions in any forum.
  • Ordered the employer to revise the agreement to clarify that employees are not prohibited from:
    • filing charges with the Board; and
    • bringing class or collective actions for employment-related claims.
The employer filed a petition for review of the Board's decision and order and the NLRB cross-applied for enforcement. For more information about the Board's decision, see Legal Update, Mandatory Arbitration Agreement Prohibiting Class and Collective Actions Violates the NLRA: NLRB.

Outcome

Arbitration Agreements Precluding Employee Class Actions Do Not Restrict NLRA Section 7 Rights.

A 2-1 majority of a Fifth Circuit panel:
  • Acknowledged that:
    • courts ordinarily defer to Board interpretations of ambiguous provisions of the NLRA, such as determinations about whether Section 7 of the NLRA protects certain employee actions;
    • deference to the Board's interpretations of the NLRA is not absolute; courts do not defer to the Board’s remedies where they conflict with federal statutes and policies unrelated to the NLRA;
    • the Board cannot ignore other federal laws and related Congressional objectives when administering the NLRA;
    • courts, interpreting various labor and employment laws, hold that employees have no statutory right to use class actions procedures;
    • no court has held that the NLRA Section 7 rights prohibit class action waivers in arbitration agreements;
    • the Federal Arbitration Act (FAA) generally requires that arbitration agreements be enforced by their terms;
    • the FAA permits the invalidation of arbitration agreements if the agreement either falls under the FAA's "savings clause" which exempts agreements that should be revoked on the basis of law or equity or another statute's congressional command precludes application of the FAA; and
    • the Supreme Court narrowly interpreted the FAA's "savings clause" in AT&T Mobility LLC v. Concepcion There the court noted that arbitration is intended to streamline procedures for trying individual claims. A statute that requires class action procedures be available in arbitration contradicts the intent of the FAA for swift and efficient processing of individual claims. It would be illogical if a violation of a law that contradicts the intentions of the FAA fell under the FAA's savings clause. (131 S. Ct. 1740 (2011)).
  • Held that:
    • consistent with court decisions about other statutes, class actions are procedural mechanisms rather than statutory rights;
    • precluding class actions through contract is generally lawful;
    • like the violation of the California law the Supreme Court considered in Concepcion, the purported violation of the NLRA (precluding employees from engaging in protected concerted activity through pursuing class employment claims), did not trigger the FAA's savings clause; and
    • the FAA's congressional command exemption does not apply either because nothing in the NLRA's language, legislative history or purpose provides a congressional command for the NLRA to override the FAA.
  • Granted review of the employer's petition and refused to enforce the portion of the Board's order requiring that the employer rescind the class action waiver portion of the arbitration agreement as infringing on substantive NLRA Section 7 rights.

Language Providing that All Disputes Be Arbitrated Violated Section 8(a)(1) of the NLRA.

The unanimous Fifth Circuit panel:
  • Noted, consistent with the Board's findings, that the arbitration agreement provides that:
    • employees agree to arbitrate “without limitation[:] claims for discrimination or harassment; wages, benefits, or other compensation; breach of any express or implied contract; [and] violation of public policy”;
    • there are only four exceptions to what is arbitrable, none of which refer to NLRB ULP charges or complaints;
    • an arbitrator will not have the authority to order any remedy that a court "or agency" would not be authorized to order;
    • each party shall pay costs that each party would incur if the claim(s) were litigated in a court "or agency";
    • the arbitrator may award reasonable fees and costs to the same extent a court "or agency" could; and
    • the employee knowingly and voluntarily waives the right to file a lawsuit or "other civil proceeding" relating to his employment.
  • Acknowledged Board and circuit court precedents holding dispute resolution agreements that would lead employees to a reasonable belief that they were prohibited from ULP charges, such as where the agreements:
  • Concluded that the Board reasonably held that D.R. Horton's arbitration agreement violated the NLRA because employees could reasonably misconstrue it as precluding them from filing NLRB ULP charges.
  • Enforced the portion of the Board's order requiring that the employer revise the arbitration agreement, so that employees would understand that they were not waiving their rights to file ULP charges with the NLRB.

The Employer Waived Board Composition Challenges.

The Fifth Circuit evaluated whether the composition of the Board when it issued its decision invalidated the decision in three separate ways. The unanimous Fifth Circuit panel rejected each of these challenges, finding:
  • Consistent with the US Court of Appeals for the District of Columbia Circuit's decision in Noel Canning v. NLRB, challenges to recess appointments under the Constitution's Appointments Clause are not jurisdictional (705 F.3d 490 (D.C. Cir. 2013)).
  • It could exercise jurisdiction over the employer's petition for review and the NLRB's cross-application for enforcement based on the NLRB's filing of a petition to enforce, not from the validity of the underlying decision (29 U.S.C. § 160(e)). The court acknowledged that this decision expands a circuit court split on the issue. For more information on the circuit court split, see Legal Updates, Eighth Circuit Joins One Circuit Split and Creates Another, Holds Employer's Challenge to NLRB Recess Appointments Is Nonjurisdictional and Waived and Eleventh Circuit Joins Circuit Split on Recess Appointments' Effect on NLRB Quorum, Summarily Rejects Employer Argument.
  • Evaluating the constitutional issues, discussed more fully in Noel Canning, should be left for the Supreme Court (see Legal Update, US Supreme Court to Review Noel Canning, Scope of President's Recess Appointment Authority).
  • The employer waived any potential argument that Member Becker's term expired before January 3, 2012, the date that the Board issued the decision.
  • The employer's argument about the time of day that the Board issued the decision failed because either:
    • the employee offered no evidence supporting, and effectively waived the argument that Member Becker's term, which arguably ended at noon on January 3, expired before the Board issued its decision that day; or
    • under the de facto officer doctrine, the board member's decision is valid because he was acting under the color of official title, even if it were later discovered that his appointment had expired at the time the decision was issued.
  • There was a proper delegation from the three-member Board to itself to decide the matter. The court noted that:
    • there is no requirement that the board provide an express delegation of authority;
    • there was no indication that the NLRB deviated from its customary practice; and
    • the court can infer that the three-member board gave itself authority to act as three members.

Practical Implications

In light of the Fifth Circuit's decision:
  • Employers in the Fifth Circuit (Texas, Louisiana and Mississippi) should be more confident that they will be able to enforce employee arbitration agreements that include class action waivers in the Fifth Circuit, even over the NLRB's opposition. If they face adverse Board decisions about employee arbitration agreements that include class action waivers, it would be a best practice to petition for review in the Fifth Circuit rather than in the DC Circuit (or any other circuits in which they reside), as statute permits (29 U.S.C. § 160(f))
  • Employers in other federal circuits have potentially persuasive circuit court precedent to support their:
    • decisions to draft employee arbitration agreements that include class action waivers;
    • efforts to enforce these types of agreements in federal court; and
    • efforts to challenge federal agencies' interpreting other statutes as yielding to their own.
  • Employers in all jurisdictions should:
    • avoid drafting employee arbitration agreements that employees could reasonably construe as precluding them from filing ULP charges with the NLRB; and
    • recognize that the NLRB will continue to scrutinize employment practices affecting event nonunionized employees.
  • Employers that still have viable challenges to Board decisions issued when the Board was comprised of recess appointments should take necessary steps to preserve challenges to the Board's authority to decide their cases, as most circuits are finding the argument non-jurisdictional and waiveable. This consideration is largely moot because virtually all appealed decisions by recess appointees to the Board have been already before appellate courts for some time and most federal courts are avoiding conclusions about the recess appointments while the Supreme Court considers the issue in Noel Canning.
Employers should also recognize that the NLRB still has options as it responds to this decision. For example:
  • In this case, it can:
    • pursue no further appeals;
    • petition for a panel or en banc rehearing in the Fifth Circuit; or
    • file a petition with the Supreme Court for a writ of certiorari after, or without first, petitioning for rehearing in the Fifth Circuit.
  • In other ULP cases about class action waivers, it can:
    • acquiesce to the Fifth Circuit's analysis and no longer prosecute ULP charges against employers that use class action waivers or hold that class action waivers infringe on employees' NLRA Section 7 rights; or
    • continue to apply its analysis of class action waivers, hold employers that use class action waivers liable for ULPs and seek to enforce orders against those employers in other circuit courts. If the Board takes this tact, even employers that are only located in the Fifth Circuit may see the NLRB seek enforcement in the Fifth Circuit, albeit unsucessfully if this decision holds.
For insights about this case from Ron Chapman, Jr., the lead attorney representing D.R. Horton in this matter see Class Action Waivers in Employment Agreements: Expert Q&A with D.R. Horton's Counsel, Ron Chapman of Ogletree Deakins.
UPDATE: On April 16, 2014, the Fifth Circuit issued an order:
  • Treating the NLRB’s petition for rehearing en banc as a petition for panel rehearing.
  • Denying that petition.
UPDATE: The NLRB declined to petition the Supreme Court for certiorari by the July 16, 2014 deadline. The applicable law in the Fifth Circuit is set. The NLRB has not suggested that it will discontinue applying the Board's analysis in D.R. Horton or not seek enforcement of Board decisions and orders relying on that analysis in other circuit courts.

UPDATE

In Epic Systems Corp. v. Lewis, the US Supreme Court held that arbitration agreements with class and collective action waivers are not prohibited under Section 7 of the NLRA and must be enforced as written under the Federal Arbitration Act (FAA). The decision invalidates the NLRB's analysis in D.R. Horton (( (U.S. May 21, 2018); see Legal Update, SCOTUS: Arbitration Agreements with Class Action Waivers Must Be Enforced as Written, and NLRA Does Not Command Otherwise and Article, Expert Q&A on Class Action Waivers in the Employment Context.)