In a December 3, 2013 opinion in D.R. Horton, Inc. v. NLRB, the US Court of Appeals for the Fifth Circuit, in a 2-1 decision, rejected the National Labor Relations Board's (Board) conclusion that the employer violated the National Labor Relations Act (NLRA) by requiring an employee to sign an arbitration agreement waiving the employee's rights to pursue class or collective actions. The Fifth Circuit found that the NLRA, which protects employees' rights to engage in certain concerted activities, does not create a substantive right for employees to use class or collective action proceedings to resolve disputes with their employers. The court also found, among other things, that the Board did not give proper weight to the Federal Arbitration Act (FAA). However, the court enforced the Board's order that the company revise the arbitration agreement, so that employees would understand that they were not waiving their rights to file unfair labor practice (ULP) charges with the NLRB. (D.R. Horton, Inc. v. NLRB, No. 12-60031, (5th Cir. Dec. 3, 2013).)

Practical Law asked Ron Chapman, Jr., the lead attorney representing D.R. Horton in this matter and a shareholder at Ogletree, Deakins, Nash, Smoak & Stewart P.C., to discuss the decision's implications.

There are three. First, there is no substantive right to class or collective actions and therefore no conflict between the NLRA and the FAA. Second, the NLRA does not contain a congressional command exempting it from the FAA. Therefore, arbitration agreements must be enforced according to their terms even if they contain class action waivers. Third, the Board cannot interpret the NLRA in a way that it ignores other statutes. The same principle applies to other agencies that are aggressively pursuing novel agendas.

For more information about the Board's and the Fifth Circuit's decisions in this case, see Legal Updates, Mandatory Arbitration Agreement Prohibiting Class and Collective Actions Violates the NLRA: NLRB and FAA Trumps NLRA in D.R. Horton Class Action Waiver Challenge: Fifth Circuit.

For more information about NLRA-covered employees' Section 7 rights, see Practice Note, Employee Rights and Unfair Labor Practices under the National Labor Relations Act.

The number of class and collective actions filed against employers has skyrocketed in the last decade. The risks associated with these actions can be so high that employers are forced to settle them regardless of their merits. Class action waivers in arbitration agreements can eliminate those risks from the outset and focus arbitration on the merits of an individual claim, rather than the procedural morass associated with class and collective actions.

Absolutely. Arbitration agreements with class action waivers are enforceable in the Fifth Circuit (Texas, Louisiana and Mississippi). Furthermore, as a result of the Fifth Circuit's ruling, courts outside of the Fifth Circuit are more likely to enforce these agreements.

The NLRB may choose not to acquiesce to the Fifth Circuit's analysis. Instead, the NLRB may continue to issue and prosecute ULP complaints against employers that require employees covered by the NLRA to waive class or collective actions. Employers can be confident that any enforcement efforts by the NLRB in the Fifth Circuit will ultimately fail, at least under the current law. Furthermore, courts across the country have overwhelmingly rejected the NLRB's rationale when granting motions to compel arbitration even when the arbitration agreement at issue contained a class action waiver (for example, see Legal Updates, Ninth Circuit Enforces Class Action Waiver in Arbitration Agreement and Eighth Circuit holds that class action waiver provisions are enforceable in Fair Labor Standard Act claims). Therefore, although there is some risk that the Board will find a ULP, class action waivers are useful tools for employers regardless of location.

For information on NLRB ULP litigation procedures, see National Labor Relations Board Unfair Labor Practice Case Flowchart.

We have to wait and see. The NLRB's options include pursuing no further appeals, filing a petition for panel or en banc rehearing and filing a petition with the Supreme Court for a writ of certiorari. The Fifth Circuit will issue its judgment around the end of December. The NLRB has 45 days after the entry of judgment to petition for rehearing and, if it chooses not to do so, 90 days after the entry of judgment to file a petition with the Supreme Court.

The precise wording is important. Employers need to make sure they comply with the latest nuances in this evolving area of the law, including the need to specify that employees have the right to file ULP charges with the NLRB irrespective of the arbitration agreement. Similarly, employers that currently have arbitration agreements should update them to ensure their language is compliant.

If another US Court of Appeals sides with the NLRB and rules class action waivers violate the NLRA and that an arbitration agreement containing a class action waiver is unlawful, employers in that jurisdiction still could use arbitration agreements containing class action waivers but only with those employees not covered by the NLRA. For example, the NLRA does not apply to "supervisors" or "independent contractors," as defined in the NLRA, meaning those individuals do not have the right to engage in concerted activities. Even if pursuing a class action is a concerted activity protected by the NLRA, supervisors and independent contractors do not have that right.

Of course, many class and collective actions filed against employers concern whether workers are misclassified as exempt from overtime under the Fair Labor Standards Act (FLSA) or independent contractors not covered by this law. These issues are similar to the question of supervisory or independent contractor status under the NLRA. Interestingly, in these situations, the determination by the NLRB or a court about NLRA coverage would be probative of the enforceability of the class action waiver.

For information about employees and employers covered by the NLRA, see NLRB Jurisdictional Limits and Standards Chart. For more information about independent contractors and FLSA exemptions, see Practice Note, Conducting an Internal Wage and Hour Audit: Common Wage and Hour Issues to Evaluate.