United States: The Board Vs. The Courts: Will 2016 Mark The Final Showdown For Class Action Waivers In Arbitration Agreements?

Arbitration agreements are practical tools that help employers protect confidential information and avoid the costs associated with traditional litigation. They can also be an extremely effective mechanism for employers to reduce exposure to risky employment litigation and potentially abusive collective action claims under the Fair Labor Standards Act ("FLSA"). We've written extensively on the courts' treatment of such agreements on several  occasions.

Nevertheless, since its 2012 decision in D.R. Horton, Inc., 357 NLRB 184, the National Labor Relations Board ("NLRB") has consistently maintained that the National Labor Relations Act ("NLRA") prohibits arbitration agreements that require employees to waive the right to pursue labor-related class and collective actions – despite provisions allowing workers to opt out of, or into, the waivers.

Since D.R. Horton, state and federal courts have repeatedly rejected the Board's stance and upheld class and collective action waivers on the basis that the NLRA or FLSA fails to contain a congressional mandate for an employee's right to engage in collective actions; therefore, the clear mandate of the Federal Arbitration Act in favor of arbitration prevails. In 2013, the Fifth Circuit outright overturned the Board's precedent-setting D.R. Horton decision on appeal ( D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013). The Second, Eighth, Ninth, and Eleventh Circuits likewise found D.R. Horton unpersuasive (Sutherland v. Ernst & Young, LLP, 726 F.3d 290 (2d Cir. 2013); Owen v. Bristol Care, Inc., 702 F.3d 1050 (8th Cir. 2013); Richards v. Ernst & Young, LLP, 734 F.3d 871 (9th Cir. 2013);  Walthour v. Chipio Windshield Repair, 745 F.3d 1326 (11th Cir. 2014)).

Instead of the Board seeking review with the U.S. Supreme Court, it circumvented the Circuits and issued a second decision in Murphy Oil USA, Inc., 361 NLRB 72 (2014), to rehabilitate its D.R. Horton standards. On October 26, 2015, the Fifth Circuit reversed Murphy Oil on appeal (Murphy Oil USA, Inc. v. NLRB, No. 14-60800 (5th Cir. Oct. 26, 2015)) (and the NLRB's en banc petition was denied without recorded dissent). The Board now has 90 days from that decision to petition the U.S. Supreme Court for review.

In the meantime, the NLRB has held firm despite the Fifth Circuit's recent reversal. In 2015, the Board issued 35 published decisions that found arbitration agreements unlawful based on the D.R. Horton and Murphy Oil principles. The Board issued 15 of those rulings in the second half of December alone. The Board's decisions have implicated national franchisors, such as Citigroup, 24 Hour Fitness, and Domino's Pizza.

In 2016, the Fifth Circuit will again tackle the issue for a third (and fourth) time. On January 4, 24 Hour Fitness USA Inc. asked the appeals court to review the Board's December 24 decision that held its class action waivers violated employees' rights, despite containing a clause that allowed employees to opt out (24 Hour Fitness USA Inc. v. NLRB, No. 16-60005 (5th Cir.)). On January 13, Employers Resource filed a petition requesting the Fifth Circuit to overturn the NLRB's December 17 ruling that the company's arbitration agreement flouted federal labor law, although the arbitration agreement did not expressly ban class or collective action arbitration proceedings (Employers Resource v. NLRB, No. 16-60034 (5th Cir.)).

While the Fifth Circuit is likely to rule as it previously did, the Board has shown no immediate interest in petitioning for Supreme Court review. Short of all the circuit courts rejecting the Board's stance, only the nation's highest court can fully resolve the matter. And it appears more than likely that the Supreme Court will uphold class action waivers if (or when) given the chance. The High Court has traditionally favored arbitration and held that the Federal Arbitration Act provides broad authority to enter into and enforce arbitration agreements. Most recently, at the end of 2015, the U.S. Supreme Court released an opinion reaffirming federal policy enforcing arbitration agreements – DirecTV Inc. v. Imburgia, No. 14-462, 136 S. Ct. 463 (2015) – in which the Court held state law was preempted by the Federal Arbitration Act.

That being said, the NLRB will likely continue to ratchet up its aggressive stance against any arbitration agreement that limits class or collective actions for employment-related claims; however, to date, the only federal courts of appeals to consider the issue have rejected the NLRB's view. 2016 may very well be the year that marks that final showdown, as the Board's continued attacks create ample opportunity for the issue to soon appear before the nation's highest court.

Bottom Line: For the foreseeable future, employers still should weigh the cost-benefit analysis of including class or collective action waivers in their arbitration agreements with employees against the possibility of one day needing to seek judicial review – at least until the U.S. Supreme Court takes a stand.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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