D.R. Horton: National Labor Relations Board Holds that Class Action Waivers Violate National Labor Relations Act

On January 3, 2012, the National Labor Relations Board announced its decision in In re DR Horton, Inc., 357 NLRB 184 - 2012. Many of us have been watching this case closely since the SCOTUS decision in AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011), which held that the Federal Arbitration Act (FAA) preempts the California Supreme Court's decision in Discover Bank v. Superior Court (2005) 36 Cal.4th 148 regarding unconscionability analysis of class action waivers in arbitration agreements. My posts on Concepcion are here and here.

In D.R. Horton, the NLRB considered whether an employer violates Section 8(a)(1) of the National Labor Relations Act when it requires employees covered by the Act, as a condition of their employment, to sign an agreement that precludes them from filing joint, class, or collective claims addressing their wages, hours, or other working conditions against the employer in any forum, whether arbitral or judicial. The Board found that such an agreement violates section 7 of the Act, which gives employees the right to engage in concerted activities for mutual aid or protection, notwithstanding the FAA, which generally makes employment-related arbitration agreements judicially enforceable. The Board found that under the circumstances presented, there was no conflict between Federal labor law and policy, on the one hand, and the FAA and its policies, on the other. Slip op. at 1. 

The Board began by discussing section 7 of the Act, which preserves the right of employees to engage in concerted activity for their mutual benefit. Slip op. at 2. The Board and the courts have long held that section 7 protects the right of employees to bring legal action addressing their wages, hours, and working conditions. Ibid. This includes the right to bring "employment-related claims on a classwide or collective basis in court or before an arbitrator." Slip. op at 3. 

The Board held that the employer's Mutual Arbitration Agreement (MAA) violated section 7 because it required employees, as a condition of their employment, to refrain from bringing collective or class claims in any forum at all. "They cannot proceed in court, because the MAA waives their right to a judicial forum; and they cannot proceed in arbitration, because the MAA prohibits the arbitrator from consolidating claims or awarding collective relief. The MAA thus clearly and expressly bars employees from exercising substantive rights that have long been held protected by Section 7 of the NLRA." Slip op at 4.

Because the MAA "expressly restricts protected activity," the employer violated section 8(a)(1) of the Act by imposing it on employees as a condition of employment. Slip op. at 4. Further, even if "entered into without coercion," any agreement that obligates an employee to bargain individually constitutes a restraint upon collective action. Slip op. at 5. The prohibition on such agreements "lies at the core of the prohibitions contained in Section 8" and implicates Federal labor policy that predates the Act. Slip op. at 5-6.

The Board next rejected the defendant's argument that finding a violation of the Act would conflict with the FAA. Slip op. at 7.

Enacted in 1925, the FAA sought to "reverse the longstanding judicial hostility to arbitration agreements" and to place private arbitration agreements "upon the same footing as other contracts." Slip op. at 8, citing Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991). Agreements to arbitrate remain subject to the same defenses against enforcement to which other contracts are subject. Slip op. at 8.

The Board held that its finding that the MAA violated the NLRA does not conflict with the FAA for several reasons. First: 

To find that an arbitration agreement must yield to the NLRA is to treat it no worse than any other private contract that conflicts with Federal labor law. The MAA would equally violate the NLRA if it said nothing about arbitration, but merely required employees, as a condition of employment, to agree to pursue any claims in court against [their employer] solely on an individual basis.

Slip op. at 9.

Second, an agreement to arbitrate statutory claims may not require a party to forego its substantive statutory rights. Ibid. The MAA's "categorical prohibition" of joint, class, or collective claims in any forum - either judicial or arbitral - violates section 7's right to engage in concerted activity. Ibid. That right is substantive, not merely procedural. It is "the core substantive right protected by the NLRA and is the foundation on which the Act and Federal labor policy rest." Slip op. at 10. 

Third, "nothing in the text of the FAA suggests that an arbitration agreement that is inconsistent with the NLRA is nevertheless enforceable." Slip op. at 11. To the contrary, the FAA provides that arbitration agreements may be invalidated in whole or in part upon any "grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. section 2. The generally applicable defense here is that the MAA violates the NLRA. Ibid. 

The Board then discussed Concepcion and the concern expressed by the Supreme Court that the "switch from bilateral to class arbitration sacrifices the principal advantage of arbitration—its informality." Concepcion, 131 S.Ct. at 1750. The Board reasoned that "the weight of this countervailing consideration was considerably greater in the context of AT&T Mobility than it is here" because the employment agreement at issue here differs substantially from the consumer contract at issue in Concepcion. Slip op. at 11. Employment class actions represent only a subset of all class actions and tend to be more limited than consumer class actions, so any intrusion on the policies underlying the FAA is similarly limited. Slip op. at 11-12. 

The Board thus held that its holding accommodates "to the greatest extent possible" the policies underlying both the NRLA and the FAA. Slip op. at 12. 

The Board then reasoned that, even if there were a direct conflict between the NLRA and the FAA, it is the FAA that must yield:

As explained above, under the Norris-LaGuardia Act, a private agreement that seeks to prohibit a "lawful means [of] aiding any person participating or interested in" a lawsuit arising out of a labor dispute (as broadly defined) is unenforceable, as contrary to the public policy protecting employees' "concerted activities for . . . mutual aid or protection." To the extent that the FAA requires giving effect to such an agreement, it would conflict with the Norris-LaGuardia Act. The Norris-LaGuardia Act, in turn—passed 7 years after the FAA,—repealed "[a]ll acts and parts of act in conflict" with the later statute (Section 15).

Slip op. at 12.

Finally, the Board held that its decision does not implicate the Supreme Court's restriction on compelling class arbitration, as expressed in Concepcion and Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758, 1775–1776 (2010). Slip op. at 12. Neither Concepcion nor Stolt-Nielsen involved the waiver of rights protected by the NLRA. Further, Concepcion involved a conflict between the FAA and state law, which implicated the Constitution's Supremacy Clause, while this case arguably involves a conflict between two federal statutes. Finally, the Board's decision does not require any employer to submit any employment dispute to class arbitration: 

We need not and do not mandate class arbitration in order to protect employees' rights under the NLRA. Rather, we hold only that employers may not compel employees to waive their NLRA right to collectively pursue litigation of employment claims in all forums, arbitral and judicial. So long as the employer leaves open a judicial forum for class and collective claims, employees’ NLRA rights are preserved without requiring the availability of classwide arbitration. Employers remain free to insist that arbitral proceedings be conducted on an individual basis.

Slip op. at 12.

The Board's opinion is available here.