Class Action Waivers Are Enforceable Despite NLRB’s Determination That They Are Unenforceable in the Employment Context
By Edward Berbarie
A shareholder in Littler’s Dallas office, Edward Berbarie is one of the firm’s subject matter experts in the field of employment arbitration agreements and a core member of Littler’s Alternative Dispute Resolution Practice Group. A large part of his practice is devoted to drafting and enforcing arbitration agreements, including agreements containing class-action waivers, and arbitrating labor and employment matters. He also frequently writes and speaks on these topics and the latest developments in arbitration law. He can be reached at (214) 880-8120 or at EBerbarie@littler.com.
Large scale wage and hour class and collective actions have dramatically increased over the years, and the health-care industry certainly has not been immune from these attacks.1 These expensive, high-stakes lawsuits allow a large number of employees to bring claims against their employer in the same proceeding to recover wages, overtime pay, attorneys’ fees and punitive or “liquidated” damages.
The explosion of class and collective actions now is increasingly focused on the health-care industry because many health-care employers have operations across the United States and classes of employees can be very large, leading to potentially big recoveries of damages and attorneys’ fees. The costs to defend these lawsuits alone can be extremely high, and they can be disruptive to business and even lead to adverse publicity.
Given the disruption to business caused by these types of cases and the high risks and costs involved in defending against them, many employers have been requiring employees, as a condition of employment, to sign arbitration agreements containing class action waiver provisions. These provisions state that employees will not bring or participate in any kind of class or collective action or any other type of multi-plaintiff proceeding. Instead, all disputes between the employee and the employer will be resolved through final and binding individualized arbitration. These provisions have been enforced by courts when these waivers are part of an arbitration agreement governed by the Federal Arbitration Act (FAA), the federal statute that mandates that written agreements to arbitrate be enforced according to their terms like any other contract.2 The U.S. Supreme Court has upheld class action waiver provisions in arbitration agreements governed by the FAA.3
In early 2012, despite the validation of class action waiver provisions by courts, the National Labor Relations Board (the board) determined that participating in class or collective actions qualifies as protected concerted activity under the National Labor Relations Act (NLRA) and that mandatory class action waiver provisions ran afoul of the NLRA because they prevented employees from engaging in concerted activities with other employees to improve the terms and conditions of their employment (D.R. Horton, Inc., 357 NLRB No. 184 (Jan. 3, 2012))4. The board’s holding applied to nonsupervisory employees and potentially had broad implications. Although the board’s decision did not directly address class action waivers contained in agreements that allowed employees to opt out of arbitration, in effect, the board’s reasoning–if accepted by the courts–could have meant the death knell of most mandatory class action waiver provisions in the employment context. Not surprisingly, it became a favorite argument of plaintiffs’ lawyers attempting to pursue a class or collective action despite a signed FAA-governed arbitration agreement containing a class action waiver.
However, on Dec. 3, 2013, in D.R. Horton, Inc. v. National Labor Relations Board, 2013 BL 335349 (5th Cir. Dec. 3, 2013), the U.S. Court of Appeals for the Fifth Circuit overruled the board and found that class action waiver provisions in mandatory, pre-dispute arbitration agreements governed by the FAA are enforceable, notwithstanding the right employees have to engage in concerted activities under the NLRA. On a separate but related issue, the Fifth Circuit held the employer violated the NLRA because its arbitration agreement could be reasonably interpreted to prohibit employees from filing unfair labor practice charges with the board.
Facts and Procedural History of the Fifth Circuit’s D.R. Horton Decision
In 2006, the employer in D.R. Horton began requiring all new and existing employees to sign, as a condition of employment, what it called a mutual arbitration agreement (arbitration agreement). One former superintendent worked for the company from 2005 to 2006, and he entered into the arbitration agreement with the company. The arbitration agreement provided that the superintendent and the company “voluntarily waive all rights to trial in court before a judge or jury on all claims between them” and that “all disputes and claims” would “be determined exclusively by final and binding arbitration.” The arbitration agreement also contained a class action waiver provision stating: “the arbitrator [would] not have the authority to consolidate the claims of other employees” and would “not have the authority to fashion a proceeding as a class or collective action or to award relief to a group or a class of employees in one arbitration proceeding.”
After his employment ended, the superintendent, on behalf of a purported class of similarly situated employees, attempted to initiate class-wide arbitration against the company. The employees alleged they had been misclassified as exempt from the statutory overtime provisions of the Fair Labor Standards Act (FLSA). The company responded that the arbitration agreement barred pursuit of collective action claims and invited the superintendent and the other claimants to initiate individual arbitration proceedings. The superintendent, in turn, filed an unfair labor practice charge with the board, claiming the arbitration agreement, and specifically the class waiver provision, violated the NLRA.
A complaint issued on the superintendent’s charge and, following a hearing, an administrative law judge (ALJ) found that the company’s arbitration agreement violated the NLRA because the agreement’s language would cause employees to reasonably believe they could not file an unfair labor practice charge. Upon review by the board, a two-member panel–Chairman Mark Gaston Pearce and then-member Craig Becker–issued a decision upholding the ALJ’s determination. The board also found that the company’s arbitration agreement violated Section 8(a)(1) of the NLRA because it prohibited the superintendent and other employees from exercising their Section 7 rights under the NLRA to engage in protected concerted activities, including maintaining joint, class, or collective actions.5
The company then appealed the board’s determinations by filing a petition for review with the Fifth Circuit. The company argued that the board was not properly constituted when it issued its decision and that the board’s decision and analysis were inconsistent with the FAA and U.S. Supreme Court cases interpreting it.
The Fifth Circuit’s Analysis
As an initial matter, the Fifth Circuit rejected the company’s arguments that the board was not properly constituted when the decision was issued. Specifically, it found the validity of member Becker’s recess appointment was not a matter the court had to address. It also rejected the arguments that member Becker’s appointment had expired by the time the decision was issued and that the board did not properly delegate authority to the two-member panel.
The court then turned its attention to analyzing the NLRA and the FAA. At the outset of its analysis, the court deferred to the board’s conclusion that filing class and collective actions is concerted activity protected by the NLRA. But, the court said, “To stop here, though, is to make the [NLRA] the only relevant authority.” The court then undertook an analysis of the FAA and the U.S. Supreme Court cases interpreting it.
In finding the arbitration agreement ran afoul of the NLRA, the board relied upon the FAA’s “savings clause”–the provision that states agreements to arbitrate “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Stated differently, the FAA requires that agreements to arbitrate be treated no differently from any other contract and, under the board’s reasoning, any contract provision that violated employees’ rights under the NLRA would be unenforceable. Therefore, the board argued that it had not treated the arbitration agreement differently from any other contract that violated the NLRA.
The Fifth Circuit disagreed, however. Relying on the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, it found that “the Board’s rule does not fit within the FAA’s savings clause.” In Concepcion, the Supreme Court found that the savings clause was inapplicable in a different context, holding that, although the prohibition against class action waiver provisions was facially neutral, the effect impermissibly disfavored arbitration. The Fifth Circuit recognized that, just like the Supreme Court found in Concepcion, “the effect of [the board's] interpretation is to disfavor arbitration” and “requiring a class mechanism is an actual impediment to arbitration and violates the FAA.” The Fifth Circuit found there is no substantive right to class procedures or to proceed collectively under the FLSA, and it ultimately ruled the board’s decision was inconsistent with the FAA and that the FAA does not yield to the NLRA.
The Fifth Circuit recognized that the FAA’s purpose is to ensure the enforcement of arbitration agreements according to their terms and “that is the case even when the claims at issue are federal statutory claims, unless the FAA’s mandate has been ‘overridden by a contrary congressional command.’” The Fifth Circuit found “[n]either the [NLRA's] statutory text nor its legislative history contains a congressional command against the application of the FAA,” and such a congressional command also could not be inferred. Therefore, the court found the arbitration agreement, including the class action waiver provision, should be enforced according to its terms.
The Fifth Circuit also observed that “[e]very one of our sister circuits to consider the issue has either suggested or expressly stated that they would not defer to the NLRB’s rationale, and held arbitration agreements containing class waivers enforceable.”
Although the court found that the class action waiver provision was indeed enforceable and did not violate the NLRA, the court found a violation had occurred because the arbitration agreement included language that would lead employees to reasonably believe they were prohibited from filing unfair labor practice charges with the board. The court based this finding on language in the agreement stating the employee “knowingly and voluntarily waives the right to file a lawsuit or other civil proceeding relating to Employee’s employment …” (emphasis in original). As a result, the court found that the employer should clarify in the agreement that employees retain access to the board regardless of their agreement to arbitrate disputes.
Other Courts Likewise Have Rejected the Board’s Analysis
Since the board issued its decision invalidating class action waiver provisions and while the decision was pending on appeal before the Fifth Circuit, plaintiff-side class action attorneys attempted to rely on the board’s analysis to invalidate class action waivers. However, as the Fifth Circuit noted in its opinion, almost all of the courts that have considered the argument have rejected it, including all three of the federal courts of appeal that have issued decisions addressing the argument.
First, the Eighth Circuit in Owen v. Bristol Care, Inc., 702 F.3d 1050, 1054 (8th Cir. 2013), rejected the board’s analysis in January 2013. The Eighth Circuit found it “owed no deference to [the board's] reasoning” and noted that “nearly all of the district courts to consider the decision have declined to follow it.” Likewise, on Aug. 9, 2013 in Sutherland v. Ernst & Young LLP, 2013 BL 211217 (2d Cir. Aug. 9, 2013), the Second Circuit also declined to follow the board’s analysis. And, most recently, in Richards v. Ernst & Young LLP, 2013 BL 22217 (9th Cir. Aug. 21, 2013),6 the Ninth Circuit became the latest federal appellate court to reject the board’s position. Although the Ninth Circuit found that the plaintiff failed to preserve the argument, the court nevertheless went on to reject the board’s reasoning. The court noted that “the only court of appeals, and the overwhelming majority of the district courts, to have considered the issue have determined that they should not defer to the NLRB’s decision in D.R. Horton because it conflicts with the explicit pronouncements of the Supreme Court concerning the policies undergirding the Federal Arbitration Act, 9 U.S.C. §§1-16.” The Ninth Circuit also quoted the U.S. Supreme Court’s recent decision in American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304, 2309 (2013), which reiterated that “ ’courts must rigorously enforce arbitration agreements according to their terms’ and that this ‘holds true for claims that allege a violation of a federal statute, unless the FAA’s mandate has been overridden by a contrary congressional command.’ ” The Ninth Circuit concluded its analysis by stating that Congress did not override any provision in the FAA when it enacted the NLRA.
The Fifth Circuit and the other federal appellate courts that have rejected the board’s reasoning have eliminated yet another obstacle to the enforcement of class action waiver provisions. The Fifth Circuit’s reversal of the board’s decision provides a significant victory to all employers including those in the health-care industry that wish to utilize class action waivers to reduce and/or eliminate the risk of class action litigation. The decision also further solidifies the principle most recently reiterated by the Supreme Court in Italian Colors that, absent a clear pronouncement from Congress to the contrary, a valid arbitration agreement governed by the FAA must be enforced according to its terms, “including terms that specify with whom [the parties] choose to arbitrate their disputes.”
Based on the decisions described above and the Supreme Court’s various recent opinions validating class action waiver provisions, employers in the health-care industry that are threatened by class and/or collective action litigation should feel much more confident that these waivers will be enforced according to their terms and that they can be a useful tool to prevent these tremendously costly and burdensome lawsuits. It is difficult to imagine that the board’s position can survive after it has now been overruled and rejected by virtually every court to have considered it. And, even if the board remained steadfast in its position, it seems that the courts will likely continue to overrule any board decisions based on the same reasoning.
That said, the Fifth Circuit’s pronouncement that an agreement to arbitrate cannot contain language that would lead employees to reasonably believe they were prohibited from filing a complaint with the board should not be overlooked or minimized. Employers in the health-care industry, like all employers, should review their arbitration agreements immediately to evaluate whether they could be construed to lead employees to believe they would be prohibited from filing an unfair labor practice charge with the board. If an employer finds that an agreement could be construed that way, or if it has any concerns in this regard, it should consult with counsel and take action as soon as possible to clarify that such filings are not prohibited.
1 Gregory C. Keating, Lisa A. Schreter, Robert M. Wolff, Angelo Spinola, Bradley Strawn, Allan G. King, Jennifer L. Mora, Carole F. Wilder and Anne Mellen, Wage and Hour Class Actions in the Healthcare Industry, p. 1, March 2012, http://www.littler.com/publication-press/publication/wage-and-hour-class-actions-healthcare-industry.
4 Text available at http://op.bna.com/hl.nsf/r?Open=byul-9f4nrs.
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