Horton Hears a Reversal

On Tuesday, December 3rd, the Fifth Circuit Court of Appeals upheld the enforcement of mandatory arbitration provisions that include a class waiver.  In D.R. Horton, Inc. v. NLRB, 2013 U.S. App. LEXIS 24073 24073 (5th Cir. Dec. 3, 2013), the Fifth Circuit overturned a National Labor Relations Board (“NLRB”) decision which held that such provisions violated the National Labor Relations Act, 29 U.S.C. §§ 151-69 (“NLRA”).  See 357 N.L.R.B. No. 184 (2012).  The Fifth Circuit’s ruling is consistent with recent U.S. Supreme Court and other federal court decisions that upheld arbitration agreements in employment contracts that waive class actions.

Like most cases involving disputes over class action arbitration waivers in the employment context, Horton involves a class action under the Fair Labor Standards Act, 29 U.S.C. 201, et seq.  Horton arose out of an overtime dispute between D.R. Horton and a former superintendent.  The superintendent had agreed to arbitrate any disputes individually, without any class or collective arbitration.  Regardless, the superintendent notified D.R. Horton that he intended to arbitrate on behalf of a nationwide class of similarly situated superintendents.  D.R. Horton refused to participate in the class arbitration, and the superintendent filed a charge with the NLRB.  The NLRB determined the class waiver provision to be a violation of the NLRA, which it held gave employees a federal right to collective action.

The NLRB’s Horton decision drew controversy, as many felt that it conflicted with recent U.S. Supreme Court jurisprudence.  In 2011, the U.S. Supreme Court held in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), that a California law that banned class action arbitration waivers in certain consumer contracts conflicted with the Federal Arbitration Act (“FAA”).  In that decision, the Court emphasized the FAA’s mandate that arbitration agreements must be enforced, except in very limited circumstances.  In June of 2013, the Court affirmed its position that a contractual waiver of class arbitration is enforceable under the FAA “even when a plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery” in American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304, 2307 (2013).  Since the NLRB’s decision in Horton, the Second, Eighth, and Ninth Circuits have upheld the enforcement of class action arbitration waivers in the employment context, rejecting the NLRB’s reasoning.  Despite these federal court rulings, NLRB Administrative Law Judges (“ALJ”) have continued to find provisions barring class action arbitrations unenforceable.

In the Fifth Circuit’s decision to reverse on Horton, the Fifth Circuit held that the NLRB had erred in interpreting the NLRA to override the FAA.  The Fifth Circuit found that the right to file collective actions is not a substantive right, and therefore can’t take precedence over the FAA’s requirement of enforcing arbitration agreements.  In its decision, the Fifth Circuit cited AT&T Mobility and other federal law precedent.

Although this decision was heavily anticipated, employers should still be cautious in drafting their arbitration agreements to ensure that they will likely be enforced.  The NLRB could take the position that the Fifth Circuit’s decision only applies to cases arising in the Fifth Circuit, or may appeal the decision to the U.S. Supreme Court.  Additionally, NLRB ALJs could continue to invalidate class action waiver provisions, requiring employers to appeal to friendlier federal courts.  Employers should have their arbitration agreements reviewed by an attorney to avoid expensive and time-consuming litigation over the validity of such agreements.

To ensure your policies and practices comply with federal law, please contact Dena B. Calo, Esq., Director of the Human Resources Practice Group and Partner in the Employment Law & Litigation Group, at dcalo@genovaburns.com or Harris S. Freier, Esq., Associate in the Employment Law & Litigation Group at hfreier@genovaburns.com.