Fifth Circuit Overrules NLRB On D.R. Horton Mandatory Arbitration Case

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As we previously reported, in D.R. Horton, the NLRB 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).  As recently as last month, the NLRB and its ALJs have continued to rely on D.R. Horton to find unlawful both mandatory and non-mandatory arbitration agreements, and even expanded the case’s holding to further restrict the rights of employers to invoke arbitration agreements, even if such agreements contain opt-out clauses.

This week, the Fifth Circuit issued its long-awaited decision reviewing the NLRB’s original D.R. Horton ruling, and joined every federal court that has addressed the issue previously by concluding in a split, 2-1 decision that the NLRB had misinterpreted the Federal Arbitration Act (FAA), though it nonetheless upheld part of the NLRB’s decision. 

In D.R. Horton, the NLRB held that a mandatory arbitration agreement that waives employees’ rights to participate in class or collective actions is unlawful under the 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 FAA, despite the fact that FAA manifests a “liberal federal policy favoring arbitration agreements.”

The Fifth Circuit sidestepped some of the recess appointment and delegation of authority questions presented by the company and instead reached the merits of the NLRB’s decision.  The court disagreed with one of the two grounds offered by the NLRB.  The Fifth Circuit acknowledged “some support” for the “NLRB’s analysis that collective or class claims, whether in lawsuits or in arbitration” are protected concerted activity under the NLRA, but ultimately concluded that the NLRB had not taken the FAA into account, and stressed the “barrier any statute faces before it displaces the FAA.”  The court observed that “[r]equiring a class mechanism is an actual impediment to arbitration and violates the FAA.”  The majority found nothing to indicate that Congress intended the NLRA to override the FAA.

At the same time, the NLRB did not suffer a complete loss.  The court did uphold the NLRB’s second finding that D.R. Horton had violated the NLRA by requiring employees to sign the agreement since there was nothing in it that which specifically indicated that employees could still file NLRB charges.  The court agreed with the NLRB that employees would reasonably interpret the mandatory arbitration agreement as prohibiting them from filing claims with the NLRB.