Class action waivers combined with arbitration provisions continue to be a hot-button issue both in the courts and before federal administrative agencies. Most recently, with its ruling in DirecTV, Inc. v. Imburgia, et al., on Monday, December 14, 2015, the United States Supreme Court again held that the Federal Arbitration Act (“FAA”) trumps state laws prohibiting arbitration. This bolstered its previous ruling in AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), in which the Supreme Court found that, under the FAA, businesses could use standard-form contracts containing arbitration agreements with class action waivers to forbid consumers from banding together in a single arbitration. The Concepcion decision also held that the FAA trumped state law that forbid mandatory arbitration and class action waivers as unconscionable.
The Supreme Court’s ruling in DirecTV reiterates the prominence of the FAA, used by employers to funnel employee disputes into arbitration on an individual, non-class basis. It also provides additional fodder for a possible appeal of a recent decision against Hobby Lobby Stores, Inc., JD(SF)–36–15 (September 8, 2015), by the National Labor Relations Board (“NLRB”).
In the Hobby Lobby ruling, the NLRB applied the National Labor Relations Act (“NLRA”), which protects “concerted activity” for employees, to undercut employers’ ability to use class action waivers in arbitration of employment disputes. In the past, employers attempted to have employees sign employment contracts including an arbitration agreement with a class action waiver. The NLRB found that such arbitration agreements were a violation of the employees’ right to join for mutual aid or protection insofar as they prevented employees from asserting class or collective claims.
The issue in the Hobby Lobby opinion arose from the employer’s attempt to avoid board rulings prohibiting class action waives in employment agreements. Hobby Lobby’s arbitration agreements specifically stated that they were not part of an employment agreement. Instead, Hobby Lobby relied on the authority of the FAA to require mandatory arbitration with a class action waiver for employment disputes. The FAA allows agreements that waive rights in favor of arbitration. But the Administrative Law Judges found that without an employment agreement there was no “transaction that affects commerce,” a requirement for FAA coverage.
The ALJs reasoned that, if an arbitration agreement is included within an employment agreement, the employment agreement itself constitutes economic activity, which subjects the employment agreement to the FAA thereby permitting arbitration instead of litigation. But, because Hobby Lobby’s arbitration agreements were not part of a larger employment agreement, the arbitration agreements did not involve economic activity and thus were not subject to the FAA. Accordingly, the employer could not force the employees to arbitrate on an individual basis, instead of as a class, or to arbitrate at all.
The DirecTV and Hobby Lobby rulings are an interesting development in a long battle over the reach of NLRA and the FAA. In previous rulings, D.R. Horton, 357 NLRB No. 184 (2012), and Murphy Oil USA, Inc., 361 NLRB No.72 (2014), the NLRB found that employers could not use class action waivers in arbitration agreements to prevent workers from filing work-related group or class actions in any forum. Any arbitration agreement must offer employees a way to assert a class or collective claim.
The NLRB distinguished its rulings from Concepcion by claiming that the FAA did not trump the NLRA because the NLRA’s protection of employees’ ability to pursue concerted activity for employment grievances includes litigation. Employers counter that the NLRB has relied upon an overly broad reading of concerted activity without regard for other laws or the courts. Numerous courts, including the 2nd, 5th , and 8th Circuits, have disagreed with and refused to enforce the D.R. Horton ruling, reasoning that the right to file a class or collective action is not a substantive right under the NLRA but a procedural right subject to other applicable laws, such as the FAA. It has been pointed out that the NLRA does not supersede all other laws and is not a super-class-action statute. Employers have struggled between the NLRB, which enforces Horton, and the courts, which have consistently rejected Horton.
DirecTV sets the stage for a possible appeal that could resolve the question of which statute trumps: the FAA or the NLRA. Unlike the battle in DirecTV, an appeal of the Hobby Lobby ruling will not be whether a federal statute overrides a state statute but the interplay of two federal statutes with potentially conflicting applications. The DirecTV ruling suggests that the Supreme Court heavily favors the FAA. Could the Supreme Court find that the fact of employment, without a formal employment agreement, is sufficient to show a “transaction that affects commerce?” Or does the NLRA’s protection of concerted activity limit the application of the FAA in employment disputes?
Critical for employers in the Hobby Lobby ruling is the ALJ’s recommendation that Hobby Lobby notify the federal district courts where it had previously enforced its arbitration agreement that it would be rescinding or revising its unlawful mandatory arbitration agreement. The ALJ also ordered Hobby Lobby to reimburse the plaintiffs’ attorneys’ fees and litigation expenses.
The Hobby Lobby ruling is widely expected to be appealed to the full board and then on to federal court. It should make for an interesting and different argument than that posed in AT&T because it pits two federal statutes against each other, whereas AT&T involved a federal statute and a state statute. It may also result in a critical ruling in the employment world that will affect how employers handle and resolve employee disputes.
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