Fifth Circuit Rejects NLRB’s D.R. Horton Decision

In a major win for employers, the Fifth Circuit Court of Appeals, on December 3, 2013, rejected the highly controversial D.R. Horton, Inc. decision from the National Labor Relations Board (NLRB).

In D.R. Horton, the NLRB ruled for the first time that the National Labor Relations Act (NLRA) bans employers from including class action waivers in their employment arbitration agreements. The NLRB’s decision, if left to stand, would have nearly guaranteed that the costs of litigating employment-related claims would only continue to increase.

D.R. Horton, which was represented by Ogletree Deakins, appealed the NLRB’s decision to the Fifth Circuit. In its opinion, that court flatly rejected the NLRB’s radical interpretation of the NLRA as giving employees a non-waivable right to pursue class actions against their employers.

This is an enormous victory for employers. The Fifth Circuit’s decision means that employers will continue to be able to enter agreements with their employees to arbitrate any dispute on an individual basis.

Background

The last decade has seen a tremendous increase in class and collective actions asserted against employers, including wage and hour, discrimination, and other claims. In these lawsuits, the claims can cover all current and former employees who worked for a company over a three-year period or longer, making the potential total recovery quite large, and, as a result, an enormous risk for companies. In addition, the huge costs employers must incur to defend these class and collective action lawsuits can provide plaintiffs’ attorneys leverage to obtain substantial settlements even when the employees’ claims have no merit.

To help try to avoid the costs of these class and collective actions, many employers have adopted arbitration agreements that include class action waivers. Under these agreements, employees agree that any dispute with their employer will be resolved through arbitration, rather than in court, and they also agree that their claims will be heard only on an individual basis and not in a class or collective action.

The Supreme Court of the United States and the federal courts of appeals have issued numerous decisions endorsing the use of arbitration agreements and class action waivers. However, in January 2012, in a case against national homebuilder D.R. Horton, the NLRB ruled for the first time that a class action waiver in an employment arbitration agreement violates employees’ right under the NLRA to engage in concerted action. In essence, the NLRB decided that employees have a non-waivable statutory right under the NLRA to band together and pursue a class action against their employer.

D.R. Horton appealed the NLRB’s decision to the Fifth Circuit. Over 40 pro-employer and pro-employee organizations filed amicus or “friend of the court” briefs, exemplifying the high level of interest in the case. The Fifth Circuit heard oral argument on February 5, 2013.

The Fifth Circuit’s Decision

On December 3, 2013, the Fifth Circuit held that the NLRB’s decision in D.R. Horton violated the Federal Arbitration Act (FAA). That statute generally requires courts to enforce arbitration agreements according to their terms, subject to limited exceptions. The court held that no exceptions applied in this case.

First, the court held that the FAA’s “savings clause” did not cover the NLRB’s decision. That “savings clause” allows courts to refuse to enforce arbitration agreements on the same grounds that apply to any other contract. The NLRB argued that its decision fell within this “savings clause” because it banned class action waivers in all employment agreements, not only arbitration agreements.

The Fifth Circuit rejected the NLRB’s argument based on the Supreme Court’s landmark decision in AT&T Mobility LLC v. Concepcion. In that case, the Supreme Court struck down a California state rule that banned class action waivers in consumer arbitration contracts. The high court explained that the FAA’s purpose is to require that arbitration agreements be enforced according to their terms so as “to facilitate streamlined proceedings.” The state rule requiring that class actions be allowed in consumer arbitration agreements would prevent arbitration from providing a streamlined proceeding. Therefore, the state rule impermissibly conflicted with the FAA.

The Fifth Circuit held that the NLRB’s new rule banning class action waivers in employment arbitration agreements had the same effect: even though it appeared “neutral,” it would actually discourage the use of individual arbitration agreements to provide streamlined proceedings. “Requiring a class mechanism is an actual impediment to arbitration and violates the FAA.” Therefore, the FAA’s savings clause did not apply.

In addition, the Fifth Circuit held that the NLRA did not contain any congressional command overriding the FAA. The court noted as a general rule that a claim under another federal statute may be subject to arbitration unless Congress has overridden the FAA’s general mandate that arbitration agreements be enforced. To determine whether the FAA’s mandate has been overridden, a court must find a congressional intent to do so in the other federal statute’s text or in its history and purpose, or a court must find an inherent conflict between that statute and the FAA.

The Fifth Circuit held that the NLRA’s text does not include any express command overriding the FAA and that the NLRA’s legislative history contains no hint of any such command. The Fifth Circuit also rejected the NLRB’s contention that there was an “inherent conflict” between the FAA and NLRA that could suggest that Congress intended to override the FAA. The court was not persuaded by the NLRB’s claim that the NLRA granted employees a substantive right to file class actions because courts have long held that litigants do not have a substantive right to file class or collective actions under the Federal Rules of Civil Procedure or other federal statutes such as the Fair Labor Standards Act. In addition, the Fifth Circuit noted that the NLRA was enacted long before modern class action rules even existed.

Finally, the Fifth Circuit also noted that three other federal courts of appeal have rejected the argument that class action waivers in employment arbitration agreements violate the NLRA and have stated that they would not defer to the NLRB’s decision in D.R. Horton.

On a separate issue, the Fifth Circuit found that D.R. Horton’s arbitration agreement did not make sufficiently clear that employees retained a right to file unfair labor practice charges with the NLRB. The court noted that an arbitration agreement may not prohibit employees from filing unfair labor practice charges. It further observed that even if an agreement does not expressly ban the filing of such charges, it may nevertheless violate the NLRA if “employees would reasonably construe the language” of the agreement as doing so. In this case, the court concluded that D.R. Horton’s arbitration agreement, even though it referred to employees’ waiving the right to bring “court actions,” could be misconstrued by employees as also waiving the right to file administrative charges, specifically, unfair labor practice charges with the NLRB. For this reason, the court affirmed the NLRB’s order only to the extent it required D.R. Horton to modify its arbitration agreement to make clearer that it does not affect employees’ ability to file such charges.

Practical Impact

Ron Chapman, Jr., a shareholder in the Dallas office of Ogletree Deakins who was lead counsel for D.R. Horton in the appeal, commented: “Thanks to the Fifth Circuit’s decision today, employers can enter into arbitration agreements with their employees that waive class and collective actions, thereby avoiding the significant costs of defending employment class and collective action claims. Individual arbitration allows an employer and employee to focus on the merits of the employee’s alleged claim rather than get bogged down in the procedural morass of a class action that more often than not prevents the merits from ever being reached.”

According to Christopher C. Murray, a shareholder in the Indianapolis office of Ogletree Deakins and key contributor to D.R. Horton’s appellate team: “In terms of a practical impact of the Fifth Circuit’s decision, there are two key take-aways. First, every employer that doesn’t have an arbitration agreement with a class action waiver should reevaluate whether to adopt one, given the court’s validation of that practice. There are pros and cons to having arbitration agreements, but today’s ruling affects the balancing of those factors. Second, every employer with an arbitration agreement needs to tweak the wording to make sure it complies with the evolving law on the enforceability of such agreements.”