Tag Archives: arbitration agreement

June 22, 2017

U.S. DOJ Files Brief Supporting Arbitration Agreements That Bar Employee Class Actions

Last September, the U.S. Office of the Solicitor General urged the U.S. Supreme Court to rule that arbitration agreements that prohibit employees from pursuing work-related claims on a class action basis are unlawful because they violate the National Labor Relations Act (NLRA). On June 16, 2017, however, the federal government filed a brief taking the exact opposite position, namely that class-action waivers in arbitration agreements should be enforced. This flip-flop in position is quite extraordinary, even with the change in administrations, making this important case one to watch next term. Here are the issues at stake for employers.

NLRB Appeal of Murphy Oil Case

With its controversial 2012 decision in the D.R. Horton case, the National Labor Relations Board (NLRB) has advocated that arbitration agreements between an employer and its employees that ban employees from pursuing work-related claims as a class or group are unenforceable as they violate employees’ rights to engage in concerted activities for their mutual aid and protection under the NLRA. In 2013, the Fifth Circuit Court of Appeals overturned the NLRB’s ruling in D.R. Horton, holding that the use of class action procedures is not a “substantive right” of employees under the NLRA and therefore, arbitration agreements with class-action waivers should be enforced under the Federal Arbitration Act (FAA).

The Fifth Circuit rejected the NLRB’s view on class-action waivers a second time when it ruled that Murphy Oil, which operates more than 1,000 gas stations in 21 states, did not commit an unfair labor practice when enforcing its arbitration agreements that required employees to resolve work-related claims on an individual basis. Two other appellate circuits – the Second and Eighth – have agreed with the Fifth Circuit’s position that class-action waivers are enforceable. Other circuits, however, including the Ninth and Seventh, have ruled in favor of the NLRB on this issue, creating inconsistencies concerning whether such agreements are lawful.

In the closing days of the Obama administration in September 2016, the Office of the Solicitor General (which is tasked with conducting government litigation before the Supreme Court) filed a petition with the Supreme Court asking it to decide the validity of class-action waivers in arbitration agreements through appeal of the Murphy Oil case. The government argued on behalf of the NLRB that such agreements were unlawful. Employers Ernst & Young and Epic Systems also sought Supreme Court review of their adverse decisions from other circuits on this same issue. In January 2017, just days before President Trump’s inauguration, the high court agreed to hear all three consolidated cases in its next term.

The NLRB Left To Go It Alone

When the United States filed its brief with the Supreme Court last week changing positions, it did so as a “friend of the court.” The June 16th brief is signed by lawyers from the Solicitor General’s office but not by any NLRB lawyers – although both offices were signatories to the original petition seeking review.

Under the Court’s briefing schedule, briefs from the NLRB and the employee-petitioners are due on August 9, 2017. According to a short statement on the NLRB’s website, the Solicitor General’s Office “authorized the National Labor Relations Board to represent itself” in the Murphy Oil case before the Supreme Court. This sets up a unique situation for oral arguments this fall when a lawyer from the Solicitor General’s office may argue against a lawyer for another federal agency, the NLRB.

What It Means For Employers

The change in position by the Solicitor General’s Office could lend additional weight to the employers’ arguments in favor of upholding class-action waivers in arbitration agreements. It is a business-friendly position that reins in the extensive reach of the NLRB in recent years. If the Supreme Court rules in favor of employers and against the NLRB, businesses will be able to enforce arbitration agreements containing class action waivers nationwide. We will keep you posted as this case proceeds to a ruling, which could be published about this time next year. Stay tuned!

November 10, 2014

NLRB Unwilling to Give Up on Workers’ Right to Class Actions

By Brian Mumaugh

Reaffirming its controversial D.R. Horton decision, the National Labor Relations Board (NLRB or Board) recently ruled that an employer who required its employees to agree to resolve all employment-related claims through individual arbitration, waiving their right to pursue class actions, violated the National Labor Relations Act (NLRA). Though two members of the Board dissented, the three member majority pointed to the core objective of the NLRA, namely the protection of workers acting in concert, to find that mandatory arbitration agreements waiving an employee’s right to file a class or collective action is unlawful. Murphy Oil USA, Inc., 361 NLRB No. 72 (Oct. 28, 2014).

Employees Filed FLSA Collective Action

Four employees of Murphy Oil USA, Inc., which operates over 1,000 retail fueling stations across 21 states, filed a lawsuit in federal court in Alabama alleging that the company violated the Fair Labor Standards Act (FLSA) by failing to pay overtime and requiring employees to perform work-related activities off-the-clock. They brought the case as a collective action under the FLSA which allows them to sue on behalf of themselves and all other similarly situated Murphy Oil employees. The company asked the court to dismiss the collective action, seeking to enforce arbitration agreements signed by the employees that require that all claims be arbitrated on an individual basis. One of the plaintiff-employees then filed an unfair labor charge with the NLRB alleging that the company was violating Section 8(a)(1) of the NLRA by using and enforcing mandatory arbitration agreements that prohibited employees from engaging in protected, concerted activities.

Board Asserts D.R. Horton Was Correctly Decided

In deciding this NLRA violation issue, the Board believes the rationale articulated in its 2012 D.R. Horton case is correct, asserting that “[m]andatory arbitration agreements that bar employees from bringing joint, class, or collective workplace claims in any forum restrict the exercise of the substantive right to act concertedly for mutual aid or protection that is central to the National Labor Relations Act.” The Board states that the basic premise of federal labor law – protecting the right of workers to engage in collective action – makes the NLRA different from other labor and employment statutes. The Board points to earlier Supreme Court decisions that made clear that the NLRA protects employees “when they seek to improve working conditions through resort to administrative and judicial forums . . .” Other court decisions cited by the Board held that individual agreements between employees and an employer (as opposed to collective bargaining agreements) cannot restrict employees’ Section 7 rights. Relying on these cases and the majority’s interpretation of the core objective of federal labor law, the Board adheres to its position that protecting workers’ right to pursue collective actions to improve working conditions is a substantive right under the NLRA that cannot be waived by employees through a mandatory arbitration agreement.

Fifth Circuit Got D.R. Horton Decision Wrong, According to the Majority Opinion of Board

In December 2013, a divided Fifth Circuit Court of Appeals held that the NLRA did not override the Federal Arbitration Act (FAA), thereby allowing an employer’s arbitration agreement to be enforced according to its terms, including the agreement’s waiver of class claims. D.R. Horton, Inc. v. NLRB, ___ F.3d ___, 2013 WL 6231617 (5th Cir. Dec. 3, 2013). Rather than settling the issue for the NLRB and employers nationwide, the Fifth Circuit’s decision did little to quell the NLRB’s belief that class action waivers violate the NLRA. In the Murphy Oil case, the Board attempts to explain why it believes the Fifth Circuit got it wrong.

First, the Board asserts that the Fifth Circuit simply followed other FAA cases that did not involve a substantive right under Section 7 of the NLRA. The Board argues that both the NLRA and the FAA must be accommodated and the Fifth Circuit’s decision gave too little weight to the NLRA and its underlying labor policy. Second, the Board states that the Fifth Circuit’s decision forces workers into more costly and disruptive forms of concerted activity than bringing a collective action in court. The Board believes that there is no basis for carving out concerted legal activity as entitled to less protection than other concerted activities, such as picketing, strikes and boycotts. Third, the Board notes that the Supreme Court, while favoring arbitration, prohibits a prospective waiver of a party’s right to pursue statutory remedies and an arbitration agreement that precludes employees from filing joint, class or collective claims regarding working conditions in any forum amounts to a prospective waiver of a right guaranteed by the NLRA.

Analysis By Other Circuits Rejected by Board

The Board pays little attention to and dismisses decisions by three other circuit courts of appeal that rejected the Board’s D.R. Horton rationale. In essence, the Board states that the Second and Eighth Circuits purportedly did not conduct a thorough analysis of the legal issues and the Ninth Circuit amended its decision to refrain from deciding the issue. Consequently, the Board found those decisions to be unpersuasive.

Two Board Members Dissent

Two of the five board members dissented, rejecting the majority’s D.R. Horton rationale. Member Miscimarra stated that the NLRA “cannot reasonably be interpreted as giving employees a broad-based right to “class” treatment under other Federal, State, and local laws.” Member Johnson stated that the Board’s “interpretation of the FAA – which otherwise requires an agreement to be enforced exactly according to its terms – would allow Section 7 to swallow up the FAA itself.” The dissenters also noted that the majority essentially ignored numerous clear decisions of the Supreme Court. In citing the Supreme Court’s 2011 AT&T Mobility, LLC v. Concepcion case, member Johnson stated “Notably, the Court forbade [the majority’s] interpretation [of the FAA] when it decided that the FAA’s savings clause could not be construed to include a right that would be “absolutely inconsistent” with the FAA’s provisions.” He went on to write:

The governing law could not be plainer. Provisions in arbitration agreements precluding class actions may not be condemned simply because they restrict an employee’s ability to use litigation procedures established under other statutes in litigating those employment-related claims. This is especially so where the governing statutes clearly describe the litigation procedures as procedural rights.

The dissenting members believe that employees and employers may enter into agreements that waive class procedures in litigation or arbitration.

What’s Next For Arbitration Agreements That Waive Class Actions?

The current majority of the Board appears unpersuaded by federal court decisions—not to mention the Supreme Court of the United States–holding that its position in D.R. Horton is simply wrong. It appears that, absent a further Supreme Court decision on the issue, the NLRB General Counsel likely will continue to issue complaints against employers who require employees to sign arbitration agreements that include a waiver of joint, class and collective actions. If and when the makeup of the Board changes, the dissenting opinion may become the majority opinion for future cases. In the meantime, employers who mandate such agreements should continue to enforce them. In other words, if faced with a class or collective action by an employee or employees who signed an agreement waiving class claims, the employer should ask the court to compel individual arbitration, dismissing the class/collective action. Despite the Board’s current position, a court is likely to grant that request. Employers should review their arbitration agreements, however, to ensure that any disputes arising under the NLRA are not subject to the mandatory arbitration provision and that employees are not prohibited from participating in proceedings before the Board.

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December 3, 2013

Divided Fifth Circuit Overturns D.R. Horton on Enforceability of Employer’s Arbitration Agreement Prohibiting Class Claims

By Jeffrey T. Johnson

In a much-anticipated decision, the Fifth Circuit Court of Appeals rejected the National Labor Relations Board’s controversial D.R. Horton decision, which held that an arbitration agreement requiring an employee to waive his or her right to bring class claims violated the National Labor Relations Act (NLRA). Agreeing with its sister circuit courts, the Fifth Circuit held that the NLRA did not override the Federal Arbitration Act (FAA) meaning the employer’s arbitration agreement must be enforced according to its terms, including the agreement’s preclusion of class claims. D.R. Horton, Inc. v. NLRB, No. 12-60031 (5th Cir. Dec. 3, 2013). The Court upheld, however, the NLRB’s finding that the arbitration agreement could be misconstrued by employees as precluding the filing of unfair labor practice charges which violates Section 8(a)(1) of the NLRA.

Arbitration Agreement Prohibiting Class Claims Does Not Violate NLRA

The Fifth Circuit’s ruling puts to rest a thorny issue for employers who have struggled with the Board’s D.R. Horton decision. The controversy arose in early 2012 when the NLRB concluded that home builder D.R. Horton violated Sections 7 and 8(a)(1) of the NLRA by requiring employees to sign a Mutual Arbitration Agreement that precluded employees from filing class or collective claims related to their wages, hours or other working conditions. In re D.R. Horton, Inc., 357 NLRB No. 184 (Jan. 3, 2012). The Board found that the agreement interfered with the exercise of employees’ substantive rights under Section 7 of the NLRA which allows employees to act in concert with each other for their mutual aid or protection.

Two of the three judges on the Fifth Circuit panel disagreed. First, the majority found that the use of class action procedures is not a substantive right but is instead a procedural device. Then, the judges analyzed whether there is a conflict between the NLRA and the FAA that would preclude application of the FAA to enforce the arbitration agreement according to its terms. Relying on the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), the Fifth Circuit determined that requiring a class mechanism is an impediment to arbitration and violates the FAA so the Board’s attempt to fit its rationale into the FAA’s “savings clause” failed. The Court then concluded that neither the NLRA’s statutory text nor its legislative history contains a congressional command to override the FAA. Failing to find an inherent conflict between the NLRA and the FAA, the Court ruled that the arbitration agreement must be enforced according to its terms under the FAA.

The Fifth Circuit pointed out that every one of its sister circuits to consider this issue had refused to defer to the NLRB’s rationale in D.R. Horton, and had held arbitration agreements containing class waivers enforceable. The two judges in the majority stated, “we are loath to create a circuit split.” Judge Graves dissented, stating that he agreed with the Board that the arbitration agreement interfered with the exercise of employees’ substantive rights under Section 7 of the NLRA.

Agreement Violates NLRA Because Employees Might Believe it Prohibits Filing Unfair Labor Practice Charges

The arbitration agreement used by D.R. Horton required that employees agree to arbitrate “without limitation[:] claims for discrimination or harassment; wages, benefits, or other compensation; breach of any express or implied contract; [and] violation of public policy.” Although the agreement provided four exceptions to arbitration, none of the exclusions referred to unfair labor practice charges. All three judges found that this could create a reasonable belief that employees were waiving their administrative rights, including the right to file unfair labor practice charges under Section 8(a)(1) of the NLRA. Therefore, the Court enforced the Board’s order that D.R. Horton violated Section 8(a)(1) because an employee would reasonably interpret the arbitration agreement as prohibiting the filing of a claim with the Board, validating the need for D.R. Horton to take the ordered corrective action.

Challenges to Composition of the Board Rejected

While this case was on appeal to the Fifth Circuit, the D.C. Circuit issued its Noel Canning decision which vacated an order of the three-member panel of the Board by ruling that recess appointments of the panel members were invalid. Noel Canning v. NLRB, 705 F.3d 490 (D.C.Cir. 2013) cert. granted 133 S.Ct. 2861 (U.S. June 24, 2013)(No. 12-1281). Because the panel that decided the D.R. Horton case included a member appointed by recess appointment, the Fifth Circuit asked the parties to submit briefs on whether it must consider the constitutionality of the recess appointments. The Court ultimately decided it need not consider the issue, finding that it retained jurisdiction to resolve the dispute at hand and leaving it to the U.S. Supreme Court to decide the constitutionality of the Board’s recess appointments. The Fifth Circuit also rejected D.R. Horton’s challenges that Board Member Becker’s recess appointment expired before the Board issued its decision, and that the Board had not been delegated authority to act as a three-member panel.

Favorable Result for Employers

Although there are pros and cons to using arbitration agreements in the employment context, today’s ruling by the Fifth Circuit (absent review by the Supreme Court) removes the impediment to incorporating class action waivers in employment arbitration agreements. The decision reinforces, however, that certain language within an arbitration agreement may violate the NLRA if it is reasonably seen as limiting an employee’s right to file an unfair labor practice charge. Employers should consult with employment counsel to review whether arbitration agreements are appropriate for their workforce, and if so, to ensure the wording of the agreement is enforceable.

Disclaimer: This article is designed to provide general information on pertinent legal topics. The statements made are provided for educational purposes only. They do not constitute legal advice and are not intended to create an attorney-client relationship between you and Holland & Hart LLP. If you have specific questions as to the application of the law to your activities, you should seek the advice of your legal counsel.

August 26, 2013

Ninth Circuit Joins Growing Trend – Declines to Follow D.R. Horton and Upholds Arbitration Agreement Prohibiting Class Claims

By Jeffrey T. Johnson

On August 21, 2013, the Ninth Circuit Court of Appeals, in Richards v. Ernst & Young, LLP, Case No. 11-17530, became the third federal Circuit – together with the Second and Eighth – to reject the National Labor Relations Board’s (NLRB’s) controversial D.R. Horton decision, which held that an arbitration agreement requiring an employee to waive his or her right to bring class claims violated the National Labor Relations Act. The Richards Court also rejected the plaintiff’s argument that Ernst &Young had waived its right to arbitrate her claims by waiting to seek arbitration until after discovery and several rulings by the court. Therefore, the Court held that the arbitration agreement between Richards and Ernst &Young was enforceable, even though it precluded class arbitration.

Federal Courts of Appeal Reject NLRB’s D.R. Horton Decision

Decided in January 2012, the NLRB’s D.R. Horton ruling attempted to thwart efforts by employers to reduce their risk of class action claims through the use of arbitration agreements containing a class/collective action waiver. In re D.R. Horton, Inc., 357 NLRB No. 184 (Jan. 3, 2012). Despite D.R. Horton, employers have continued to argue for the enforceability of such agreements, and like Ernst & Young, have often prevailed in court. In fact, the overwhelming majority of courts that have considered the enforceability of mandatory arbitration agreements with class waivers subsequent to the D.R. Horton decision have rejected the NLRB’s reasoning and refused to follow its holding.

In addition to numerous district courts so ruling, the Ninth Circuit becomes the third federal appellate court to reject D.R. Horton. In January 2013, the Eighth Circuit Court of Appeals held that a class arbitration waiver in the employer’s mandatory arbitration agreement did not preclude arbitration of the employee’s claims under the Fair Labor Standards Act (FLSA). Owen v. Bristol Care, Inc., 702 F.3d 1050 (8th Cir. 2013). The Eighth Circuit found that without a congressional mandate under the FLSA indicating that a right to engage in class actions overrides the mandate of the Federal Arbitration Act in favor of arbitration, the NLRB’s rationale in D.R. Horton must be rejected.

Earlier this month, the Second Circuit Court of Appeals also upheld an arbitration agreement containing a class action waiver in another FLSA case brought against Ernst & Young in New York. Sutherland v. Ernst & Young LLP, No. 12-304-cv, 2013 U.S. App. LEXIS 16513 (2d Cir. Aug. 9, 2013). Despite the employee’s argument that the class action waiver removed the financial incentive for her to pursue a claim under the FLSA, the Court ruled that the arbitration agreement must be enforced. Like the Eighth Circuit, the Second Circuit declined to follow the D.R. Horton decision.

NLRB ALJ’s Bound by D.R. Horton Precedent

Despite employer victories in court, arbitration agreements with class action waivers are still being invalidated by the NLRB and its Administrative Law Judges (ALJs). Just this week, an NLRB ALJ found that the employer violated the NLRA with its mandatory class waiver arbitration agreement of employment claims. Despite the employer’s attempt to distinguish its agreement from the one at issue in D.R. Horton and to point out how courts have rejected the D.R. Horton rationale, the ALJ stated that he was bound by the D.R. Horton decision and required to apply it unless it is overturned by the Supreme Court or reversed by the NLRB itself.

Fifth Circuit to Decide D.R. Horton Appeal

The D.R. Horton decision is currently on appeal in the Fifth Circuit. Union and non-union employers alike will be watching to see whether the Fifth Circuit will follow the other circuits that have rejected the NLRB’s rationale, and overturn the D.R. Horton ruling. If, on the other hand, the Fifth Circuit affirms the D.R. Horton decision, the split between the Circuit Courts could result in the Supreme Court taking up the issue. We will continue to monitor these cases and keep you informed.

June 21, 2013

Arbitration Agreement Waiving Class Claims Upheld – What it Means for Employers

By Jeffrey T. Johnson

Arbitration is a matter of contract between the parties and courts are not permitted to invalidate an agreed-upon provision that prohibits claims from being arbitrated on a class action basis, the U.S. Supreme Court ruled in its June 20, 2013 opinion in American Express Co. v. Italian Colors Restaurant. Employers can benefit from this ruling by crafting arbitration agreements that limit an employee’s right to pursue employment claims on behalf of a class of employees.

Cost to Pursue Individual Arbitration Not a Factor

At issue in the American Express case was an arbitration agreement between American Express and merchants who accept its charge cards that required the parties to arbitrate all disputes. The agreement further stated that “there shall be no right or authority for any Claims to be arbitrated on a class action basis.”

When numerous merchants filed a class action lawsuit against American Express alleging violations of federal antitrust laws due to American Express’ alleged high card fees, American Express moved to dismiss the lawsuit and instead force each merchant to arbitrate its claim individually, as required by the arbitration agreement. The District Court agreed with American Express and dismissed the class action lawsuit. The merchants appealed the dismissal to the Second Circuit Court of Appeals, arguing that the cost to prove the antitrust claims by each individual merchant would far exceed the amount they could recover as an individual plaintiff. The merchants submitted a declaration from an economist who estimated that the cost of expert analysis on the antitrust claims would be “at least several hundred thousand dollars, and might exceed $1 million.” The maximum amount of damages that each individual plaintiff could expect to recover was $38,549 as treble damages. The Second Circuit reversed the dismissal, ruling that because the cost for each merchant to arbitrate their claim individually was prohibitive, the class-action waiver in the arbitration agreement was unenforceable and arbitration could not proceed. American Express sought review by the Supreme Court.

In a 5-3 ruling, the Supreme Court held that the Federal Arbitration Act (FAA) does not allow courts to invalidate a contractual waiver of class actions on the ground that the plaintiffs’ cost to arbitrate a federal statutory claim individually exceeds the potential recovery. Justice Antonin Scalia, writing for the majority, rejected the merchants’ argument that cost vs. recovery should factor into the enforceability of an arbitration agreement. He wrote that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” The Court drew a distinction between contract provisions that prohibit an individual from asserting their statutory rights at all (e.g., a waiver of certain claims) and prohibiting class claims. Relying on earlier precedent, the Court reiterated that it may invalidate arbitration agreements that operate as a prospective waiver of a party’s right to pursue statutory remedies, but will not invalidate an agreement because it is not worth the expense involved in a party proving a statutory remedy. The Court also refused to create preliminary hurdles before a plaintiff could be held to contractually-agreed arbitration, such as requiring a court to evaluate the cost to prove claims as well as the damages that could be recovered if the plaintiff is successful. Justice Scalia wrote that “such a judicially created superstructure” would “undoubtedly destroy the prospect of speedy resolution that arbitration in general and bilateral arbitration in particular was meant to secure.”

Dissent: Majority’s Response to Merchants Was “Too Darn Bad”

Justice Elena Kagen, joined by Justices Ruth Bader Ginsburg and Steven Breyer (Justice Sotomayor did not take part in the decision), wrote a stinging dissent in which she characterized the case as small business owners who were forced to accept a form contract by a monopolizing credit card company that violated antitrust laws. The dissent states that if the arbitration clause is enforceable, American Express has insulated itself from antitrust liability because it used its monopoly power to insist on a contract that “effectively deprives its victims of all legal recourse.” Justice Kagen wrote: the “nutshell version of today’s opinion, admirably flaunted rather than camouflaged: Too darn bad.” The three dissenting justices believe that the FAA was never meant to produce the outcome arrived at by the majority, and that the majority decision blocks the vindication of meritorious federal claims and insulates wrongdoers from liability. The dissent instead would rely on the “effective vindication” rule, namely that an arbitration clause will not be enforced if it prevents the effective vindication of federal statutory rights, however it achieves that result, to invalidate the bar on class arbitration in the American Express agreement.

Employment Arbitration Agreements

Recent Supreme Court decisions upholding arbitration agreements, such as the American Express opinion, may bolster efforts to use arbitration agreements in the employment context. Although there are pros and cons to utilizing arbitration agreements with employees, a significant advantage is the ability to prohibit class actions by requiring employees to arbitrate their employment disputes on an individual basis. In addition, arbitration can be less costly than litigating in court, and more confidential as most arbitration filings are not public records. Perhaps most significantly, arbitration allows employment cases to be heard by arbitrators, not juries, thereby reducing the risk of runaway verdicts. Employers should consult with employment counsel to determine if arbitration agreements are warranted with their workforce and if so, what provisions will best protect the company’s interests.