Fifth Circuit Rejects NLRB's D.R. Horton Decision - Too Soon For Champagne?

by BakerHostetler

Arbitration is quickly becoming a major vehicle to resolve individual employee disputes. Now another obstacle to enforcing those arbitration agreements and class action waivers may have been removed.

The Fifth Circuit issued a 2-1 decision on Tuesday in which the court largely denied enforcement of the National Labor Relations Board’s controversial D.R. Horton decision. D.R. Horton, Inc. v. NLRB, Case No. 12-60031 (5th Cir. Dec. 3, 2013). As explained in prior postings, the NLRB held in D.R. Horton that employee class waivers violate Section 7 of the National Labor Relations Act, 29 U.S.C. § 157, which protects concerted employee activities. See 357 N.L.R.B. No. 184 (2012). The NLRB rejected the notion of Federal Arbitration Act preemption on the basis that the NLRA is also a federal statute.

The Appellate Analysis

The Fifth Circuit disagreed. The court began its analysis of the NLRB's reasoning with an observation that the FAA requires arbitration agreements to be enforced as written unless one of two exceptions applies. First, arbitration agreements can be voided on any grounds that would be sufficient to void any other contract, e.g., where the agreement lacks mutuality or is unconscionable. Second, arbitration agreements are unenforceable in cases where Congress has issued a "contrary command," such as explicit statutory language to supplant the FAA, the NLRA’s legislative history or from the necessary “thrust of the NLRA.” The court specified that the NLRB, as the party opposing arbitration, had the burden to establish the applicability of the exceptions.

Regarding the first exception, the NLRB argued that mandatory arbitration agreements with class waivers have an unlawful objective. Specifically, the NLRB argued, such agreements deny employees their right under the NLRA to act collectively in regard to their terms and conditions of employment. The Fifth Circuit rejected this argument based on the Supreme Court's decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). Noting that the California statute at issue in Concepcion had expressly prohibited class action waivers, the court held that the Board's interpretation of the NLRA would have the same effect.  Because the "effect of this interpretation is to disfavor arbitration," the Fifth Circuit held that it was precluded by Concepcion. (Slip Op. at 20).

Turning to the "contrary command" exception, the Fifth Circuit explained that such a command must be established in a statute's text or legislative history, or by a showing of an "inherent conflict" with the FAA. Quoting from the Supreme Court's decision in Gilmer v. Interstate/Lane Corp., 500 U.S. 20 (1991), the court further noted that the analysis of whether such a command exists must be conducted "with a healthy regard for the federal policy favoring arbitration." (Slip Op. at 21).

The court quickly dismissed any reliance on the NLRA's text and legislative history, finding that neither established that Congress intended the FAA to be supplanted by the NLRA in the employment area. The court similarly rejected the NLRB's argument that an inherent conflict existed, noting that the Board itself has previously recognized that arbitration is a "central pillar of Federal labor relations policy." (Slip Op. at 23). In addition, the Fifth Circuit questioned the NLRB's "inherent conflict" argument based on the fact that modern class action practice was not established until 1966. In this regard, the court noted that it found "limited force to the argument that there is an inherent conflict between the FAA and NLRA when the NLRA would have to be protecting a right of access to a procedure that did not exist" at the time of the NLRA's adoption.

On another issue, the appellate court did require the company to clarify that employees retained their right to file unfair labor practice charges with the NLRB. The court concluded that, in this limited respect, the Board’s finding was reasonable and “the need for Horton to take the ordered corrective action was valid.”

Time to Celebrate?

So, is D.R. Horton just a bad memory for employers at this point?

Unfortunately, the final outcome is tied up in a bundle of issues that only a Constitutional Law professor could love. First, the 800-pound gorilla named Noel Canning remains in the room. See National Labor Relations Board v. Noel Canning (Case No. 12-1281). The Supreme Court has scheduled oral argument in that case for January 13, 2014, and an opinion likely will be issued in June. If the Supreme Court rules that the NLRB was not properly constituted at the time D.R. Horton was issued, this could potentially wipe the entire case away. And while it may initially sound attractive, it might only mean that the current Board could take up the issue again and try a different rationale.

Another potential variable is whether the NLRB will appeal the decision to the Supreme Court. But, if we had to bet, our guess is that the NLRB will not appeal. The current Supreme Court (or at least five members of the Court) has expressed an unfailing affection of arbitration. The NLRB may be inclined to defer seeking Supreme Court review until it believes that it has a more favorable majority.

This possibility seems more likely when one considers that the Board is apt to take the position that the Fifth Circuit's rejection of D.R. Horton applies only to cases arising in the Fifth Circuit. In fact, the NLRB may simply ignore the court's decision entirely, regardless of the jurisdiction in which a case arises. The Board tends to view itself as bound only by Supreme Court decisions, and (on some occasions) views the circuit courts as simply an interesting distraction. For example, the NLRB refused for several years to follow Sixth Circuit precedent concerning the supervisory status of registered nurses even in cases that arose in that Circuit. Kentucky River Community Care, Inc. v. NLRB, 193 F.3d 444, 453 (6th Cir. 1998) ("Unfortunately, the NLRB has continuously interpreted 'independent judgment' in a manner that is inconsistent with this circuit's precedent."). The Sixth Circuit even expressed frustration with the Board's refusal to respect its precedent:

This court has continued to overturn NLRB decisions finding that nurses are not supervisors even though the nurses direct others in providing patient care, address scheduling shortages, and have some evaluative role with respect to other employees. This court, not the NLRB, is the ultimate interpreter of this statutory provision, and we again reject the NLRB's wooden and narrow definition of the term "independent judgment.

Id. at 454.  It was not until the Supreme Court decided the issue in Kentucky River that the NLRB finally relented. 532 U.S. 706 (2001).

The Bottom Line: While the Fifth Circuit's rejection of D.R. Horton is encouraging, the Board may very well ignore the Fifth Circuit (and the Second, Eighth and Ninth Circuits, which have also rejected D.R. Horton) and continue to prohibit the use of class waivers in mandatory arbitration agreements. This leaves the potential for further appellate consideration and eventual Supreme Court review.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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