D.R. Horton Decision on Class Action Waivers in Mandatory Arbitration Agreements Draws Decidedly Negative Reaction from Federal Courts

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[authors: Amy Zdravecky and Josh Meeuwse]

In January, we reported on the National Labor Relations Board’s (NLRB) controversial decision in D.R. Horton, Inc. and the broad implications that it had for both union and non-unionized workforces. The NLRB’s decision in D.R. Horton is pending before the U.S. Court of Appeals for the Fifth Circuit. Meanwhile, a majority of federal district courts who have addressed the issue have disagreed with the NLRB and have refused to follow its holding, creating a “perfect storm” which could lead to a Circuit Court split (and perhaps a Supreme Court decision) or a reversal of the NLRB’s holding.

In D.R. Horton, the Board held that a mandatory arbitration agreement that waives employees’ rights to participate in class or collective actions is unlawful under the National Labor Relations Act (NLRA). The NLRB reasoned that the broad language in Section 7 of the NLRA, which gives employees the right to “engage in . . . concerted activities for the purpose of collective bargaining or other mutual aid or protection,” includes the right to file a class or collective action over wages, hours, or working conditions, whether in court or before an arbitrator. Because the mandatory arbitration agreement in D.R. Horton barred employees from doing so, (and thus in the NLRB’s opinion, prevented them from exercising their Section 7 rights), the NLRB held that the agreement violated the NLRA. The NLRB also held that there was no conflict between its decision and the Federal Arbitration Act (FAA), despite the fact that FAA manifests a “liberal federal policy favoring arbitration agreements.”

A majority of federal district courts disagree with the NLRB’s D.R. Horton decision. Over the past nine months, district courts in Arkansas, California, Florida, Kansas, Pennsylvania (Eastern and Middle Districts), and New York have expressly declined to follow D.R. Horton in similar cases involving arbitration agreements and class action waivers. The district courts have repeatedly observed that the NLRB’s ruling conflicts with U.S. Supreme Court precedent, and that the Court’s recent decision in AT&T Mobility v. Concepcion held that collective arbitration is contrary to the purposes of the FAA, and thus, the FAA requires not only compelling arbitration, but compelling arbitration on an individual basis.

Several courts have taken the NLRB to task for its flawed analysis. For example, last month Judge D. P. Marshall, Jr., an Arkansas district court judge recently appointed by President Obama, determined that the NLRB “stumbled on the statutory history” by incorrectly concluding that the FAA “had to give way” to the NLRA. In fact, as Judge Marshall observed, although the FAA was first enacted in 1925, Congress reenacted it in 1947 after passing the NLRA and its companion, the Norris-LaGuardia Act. Thus, under principles of statutory interpretation, if there is a conflict between the statutes, the NLRA should “give way” to the FAA and the federal policy in favor of arbitration. Delock v. Securitas Security Services USA, Inc., No. 4:11-cv-520-DPM, 2012 WL 3150391 (E.D. Ark. Aug. 1, 2012).

Not all of the district courts, however, disagree with the NLRB. Two district courts, one in Missouri and one in Wisconsin, applied D.R. Horton to strike down class action waivers in arbitration agreements because they violated the NLRA, and in doing so, they distinguished the Supreme Court’s ruling in Concepcion as not controlling.

Given the disagreement between the courts, the substantial number of cases addressing the issue, and the pending Fifth Circuit appeal, there is a significant likelihood that one of the Circuit Courts of Appeal will issue a decision rejecting the NLRB’s holding in D.R. Horton. Alternatively, there may be a split between Circuit Courts which may lead to Supreme Court review. In the meantime, although the NLRB (and the NLRB’s Administrative Law Judges and Regional Directors) continue to apply the holding in D.R. Horton, based on the recent court decisions, employers face a better chance of successfully enforcing arbitration agreements that waive collective action claims when litigating in federal district court.