Fifth Circuit Decides D.R. Horton, Overturns NLRB’s Ruling that Class-Action Bans are Unfair Labor Practices

by Deepak Gupta

In a much-anticipated decision, the Fifth Circuit held today that the National Labor Relations Board overstepped its authority when it ruled that an employer violated federal labor law by requiring its employees to sign an arbitration agreement containing a class-action ban. Judge Leslie Southwick, joined by Judge King, isssued the opinion for the court. Here's the court's summary:

The National Labor Relations Board held that D.R. Horton, Inc. had violated the National Labor Relations Act by requiring its employees to sign an arbitration agreement that, among other things, prohibited an employee from pursuing claims in a collective or class action. On petition for review, we disagree and conclude that the Board’s decision did not give proper weight to the Federal Arbitration Act. We uphold the Board, though, on requiring Horton to clarify with its employees that the arbitration agreement did not eliminate their rights to pursue claims of unfair labor practices with the Board. 

The court began its decision by deciding that it did not need to decide the validity of the recess appointments to the NLRB–the question now before the Supreme Court in Noel Canning. On a separate quesiton–whether one of the Board member's recess appointments had expired–the court relied to a limited extent on the "de facto officer" doctrine and concluded that no timely challenge to the appointment had been preserved.

As to the FAA question, the court analyzed the issue in terms of two exceptions to the FAA's general rule that arbitration agreements are enforced according to their terms: the Act's savings clause (which preserves generally applicable defenses to a contract) and the rule that other federal statutes may trump the FAA. "The Board clearly relied on the FAA’s saving clause," the court explained, "Less clear is whether the Board also asserted that a contrary congressional command is present." On the first point, the court held that the NLRB's ruling could not be reconciled with the Supreme Court's decision in AT&T Mobility v. Concepcion: "Like the statute in Concepcion, the Board’s interpretation prohibits class- action waivers." As to the second point, the court held that nothing in the text or legislative history of the NLRA "contains a congressional command to override the FAA."

Judge Grave dissented. He would have affirmed the NLRB's decision "in toto." Specifically, he disagreed with the majority's conclusion that the NLRB's ruling conflicts with the FAA. Tracking the NLRB's ruling, he would have reasoned as follows:

  • The purpose of the FAA was to prevent courts from treating arbitration agreements less favorably than other private contracts. 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 Supreme Court’s jurisprudence under the FAA makes clear that the agreement may not require a party to ‘forgo the substantive rights afforded by the statute. The right to engage in collective action – including collective legal action – is the core substantive right protected by the NLRA and is the foundation on which the Act and federal labor policy rest.
  • Nothing in the text of the FAA suggests that an arbitration agreement that is inconsistent with the NLRA is nevertheless enforceable. To the contrary, Section 2 of 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.'
  • Even if there were a direct conflict between the NLRA and the FAA, there are strong indications that the FAA would have to yield under the terms of the Norris-LaGuardia Act.

Judge Graves would also have agreed with the Board that D.R. Horton violated the NLRA. "The Board made it clear that it was not mandating class arbitration in order to protect employees’ rights under the NLRA," he explained, "but rather was holding that employers may not compel employees to waive their NLRA right to collectively pursue litigation of employment claims in all forums, judicial and arbitral." 

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