Foiled Again: DR Horton Overturned (But Be Careful How You Phrase Your Arbitration Agreement)

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Earlier this week, a three judge panel of the Fifth Circuit Court of Appeals issued its long-awaited decision in DR Horton Inc. v. NLRB. As expected by most labor lawyers, including us, the Fifth Circuit (with one judge dissenting) overruled the National Labor Relations Board’s dramatic extension of the law, that employers could not require employees to enter into agreements to individually arbitrate employment disputes, precluding collective or class action litigation. In DR Horton the NLRB had concluded that such agreements conflicted with employees’ rights to engage in concerted activity under the National Labor Relations Act (the “NLRA”) -- a conclusion that had since been rejected by almost every court to face the issue. The Fifth Circuit’s decision does contain a cautionary note for employers: an arbitration agreement may not appear to bar an employee from filing charges with the NLRB.

DR Horton

DR Horton is a home builder with operations throughout the United States. Beginning in 2006, DR Horton required all its employees to enter into a “Mutual Arbitration Agreement.” The agreement precluded civil litigation between the parties, requiring that all disputes be submitted to arbitration. Most critically, the agreement also barred any form of collective or class action proceeding. In 2008 the underlying plaintiff filed a putative class action lawsuit, contending that he had been misclassified as an exempt managerial employee in violation of the Fair Labor Standards Act. When DR Horton responded by insisting on individual arbitration pursuant to the agreement’s bar of collective actions, the plaintiff filed unfair labor practice charges with the Board.

The Board is charged with enforcing the NLRA, which protects “concerted activity” by employees. The Administrative Law Judge who initially heard the case concluded that DR Horton’s policy was unlawful, because a reasonable employee might read it as preventing an employee from filing charges of unfair labor practices with the Board. The Board went beyond the ALJ’s conclusion, and determined that the arbitration agreement in its entirety violated the NLRA. The Board reasoned that class or collective actions are themselves forms of concerted activity, and an attempt to preclude class litigation is thus a restrain on concerted activity which violates the NLRA.

Enter The FAA

 

However, while the Board is responsible for enforcing the NLRA, it is not charged with enforcing a different federal statute, the Federal Arbitration Act. The FAA declares federal policy favoring the arbitration of disputes, and generally directs that agreements to arbitrate be enforced, unless the agreement may be revoked for the same reasons other contracts may be revoked. As we have reported here, in recent years the US Supreme Court and other federal courts have interpreted the FAA broadly, including expressly upholding waivers of class action litigation in an arbitration agreement. Any doubt that agreements to individually arbitrate claims should be given full effect has been resolved by the US Supreme Court’s latest pronouncement on the subject, American Express v. Italian Colors Restaurant.  There, the Court upheld an arbitration agreement barring class claims, even though it was conceded that costs of litigating any individual claim would be greater than any potential recovery for the individual litigant.

 

Even while the Fifth Circuit considered the direct appeal of DR Horton, that case’s rationale has been considered by numerous courts. Plaintiffs attempting to avoid arbitration of various employment claims asserted the Board’s decision as a defense to the employer’s attempt to compel arbitration. In virtually every case, DR Horton’s rationale was rejected -- including every circuit court to consider the issue, including the Ninth Circuit in Richards v. Ernst & Young.

 

The Fifth Circuit’s decision rejecting the Board’s analysis was thus no surprise. After rejecting or side-stepping a number of challenges to the composition of the Board when it issued DR Horton (including belated complaints about the unconstitutionality of the recess appointed Board members who decided the case) the Fifth Circuit reached the central issue: the Board’s claim that the NLRA provided a basis to avoid the FAA.

 

The Fifth Circuit analyzed two different grounds offered by the Board as to why the NLRA trumps the pro-arbitration policy expressed by the FAA.   The first was the FAA’s “savings clause,” which permits an arbitration agreement to be avoided on the same basis as any other contract could be revoked.   The Fifth Circuit had no difficulty in disposing of this argument because the Board’s rationale, rather than being neutral, uniquely disadvantages arbitration.   The second argument -- that the NLRA expresses a congressional intent to override the FAA -- came up equally short. Simply stated, there is nothing in the text or history of the NLRA to suggest Congress meant to elevate the NLRA over the FAA. DR Horton thus cannot stand.

 

Caution: Access to the Board

 

The Fifth Circuit did uphold the Board in one regard: its determination that the arbitration agreement could be read as barring an employee’s ability to file unfair labor practice charges with the Board. In this regard, it is not just a question whether the arbitration expressly bars access to the Board; rather, it is an unfair labor practice if a reasonable employee could read the arbitration agreement to preclude the filing of charges.

 

Next Steps

 

The Board could, of course, seek further review by the full Fifth Circuit, or try to obtain review by the U.S. Supreme court. Observers are doubtful of the latter course, because of the strong pro-arbitration trend displayed by the current Court. Moreover, the Board may see no particular need to seek review by the Supreme Court, because of its doctrine of “non-acquiesence.” The Board regularly treats circuit court decisions with which it disagrees as non-binding in any other case. Employers have already had a taste of the Board’s approach, as several ALJ’s have expressed their opinion that they are bound by DR Horton, notwithstanding the strong contrary holding by the U.S. Supreme Court upholding bans on class proceedings in the Italian Colors case, which post-dated DR Horton.

 

Employers nonetheless now have more confidence that their mandatory arbitration agreements will ultimately withstand a challenge under the NLRA.   Such agreements should be carefully reviewed to be sure that they cannot be interpreted to bar access to the Board (or, as under Stoel Rives’ routine advice, other administrative agencies such as the EEOC).