United States: Supreme Court Will Review NLRB's Anti-Arbitration D.R. Horton Rule

As we've noted in this space before, one of the most persistent efforts to undermine the Supreme Court's decision in AT&T Mobility LLC v. Concepcion—which held that the Federal Arbitration Act (FAA) generally requires enforcing arbitration agreements that waive class or collective proceedings—has been spearheaded by the National Labor Relations Board. In 2012, the Board concluded in the D.R. Horton case (pdf) that Section 7 of the National Labor Relations Act (NLRA), which protects the ability of employees to engage in "concerted activities" (for example, union organizing), supersedes the Supreme Court's interpretation of the FAA in Concepcion and its progeny and requires that employees be allowed to bring class actions (either in court or in arbitration).

Until recently, the D.R. Horton rule had been rejected by every appellate court to consider it—the Second Circuit, Fifth Circuit, and Eighth Circuit as well as the California and Nevada Supreme Courts—not to mention numerous federal district courts. But last year, the Seventh Circuit and Ninth Circuit parted ways with this consensus, agreeing with the Board and concluding that (at least in some circumstances) agreements between employers and employees to arbitrate their disputes on an individual basis are unenforceable.

This circuit split all but guaranteed that the Supreme Court would need to step in, and sure enough, last Friday, the Court granted certiorari in three cases involving the validity of the D.R. Horton rule. (We drafted amicus briefs for the U.S. Chamber of Commerce in each case). One case, NLRB v. Murphy Oil USA, Inc., arises out of a Board decision finding that an employer had engaged in an unfair labor practice by entering into arbitration agreements with its employees, and the other two, Epic Systems Corp. v. Lewis and Ernst & Young LLP v. Morris, are private-party disputes in which employees invoked D.R. Horton to challenge their arbitration agreements.

The cases have been consolidated for argument this Term (probably in April). Ordinarily, a decision would be expected by the end of June, although that may depend on whether the Supreme Court, which has been operating without a ninth Justice, is at full strength.

Although the issue has divided the lower courts, we think that the answer is straightforward: There are only three exceptions to the FAA's mandate that arbitration agreements be enforced according to their terms, and the D.R. Horton rule doesn't fit into any of them.

The first of these exceptions applies when another federal statute contains a "contrary congressional command" to override the FAA. But Congress expressed no such "command" in the NLRA. Nothing in the text of the NLRA mentions arbitration—and as the Court explained in CompuCredit Corp. v. Greenwood, when a statute "is silent on whether claims . . . can proceed in an arbitrable forum," the contrary congressional command test is not satisfied and the FAA controls. To be sure, Section 7 of the NLRA refers to a right to "concerted" activity, but that general phrase does not refer to litigation, let alone negate the FAA's protection of individual arbitration.

And even if Section 7 could be read, on balance, to give the NLRB the power to interpret "concerted" activity to include class- or collective-action mechanisms in court, that would not be sufficient to override the FAA: CompuCredit requires a decision by Congress to override the FAA, and a delegation of rulemaking authority to the NLRB does not satisfy that standard. Thus, the Credit Repair Organizations Act (CROA) expressly allows plaintiffs to bring actions in court, expressly specifies standards governing class actions, and prohibits the waiver of "any right * * * under this sub-chapter," but the Court held in CompuCredit that these provisions failed to "do the heavy lifting" necessary to displace the FAA. Similarly, in Gilmer v. Interstate/Johnson Lane Corp., the Court held that the provision of the Age Discrimination in Employment Act (ADEA) specifically providing for collective actions was insufficient to override the FAA.

If the provisions at issue in CompuCredit and Gilmer did not satisfy the "contrary congressional command" test, Section 7 of the NLRA surely does not either. Indeed, in defending the D.R. Horton rule in court, the Board has steadfastly avoided relying on the "contrary congressional command" exception.

The Board also has suggested that the D.R. Horton rule comes within an exception that allows invalidation of arbitration provisions that prevent the vindication of substantive federal rights. But the Supreme Court's decision in American Express Co. v. Italian Colors Restaurant confirms that this exception applies only when the arbitration provision prevents the pursuit of a federal cause of action or purports to limit the remedies for that cause of action. Indeed, given the Supreme Court's holding in Italian Colors that the vindication exception is not implicated even if a class action would be essential for pursuing an antitrust claim, it is inconceivable that the class action procedure itself could qualify for this exception. No Supreme Court decision even hints that the exception applies when an arbitration provision merely requires that federal causes of action be pursued on an individual basis.

Moreover, in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., which is the source of the so-called vindication exception, the Court explained that "[b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum." That makes it clear that parties can waive procedural rights afforded by a statute. And contrary to the Board's insistence, that is all that Section 7 of the NLRA—whether construed to include class actions or not—affords. Section 1 of the NLRA makes that plain by specifying that the right to engage in concerted activity exists in order to "encourag[e] the practice and procedure of collective bargaining." And the Supreme Court accordingly explained in Emporium Capwell Co. v. Western Addition Community Organization that "employees' substantive right[s]" under federal statutes should not be "confuse[d] . . . with the procedures available under the NLRA for securing these rights"—such as the right to engage in concerted activity. Because the right to engage in concerted activity is a procedural right used to achieve other substantive ends, waivers of the ability to participate in class actions do not implicate the vindication-of-statutory-rights exception.

The final exception, and the one primarily relied on by the Board, is the FAA's "savings clause," which allows invalidation of arbitration agreements only "upon such grounds as exist at law or in equity for the revocation of any contract." The Board contends that contracts may generally be invalidated for "illegality," and that because the NLRA (as the Board interprets it) makes agreements to arbitrate disputes on an individual basis illegal, the Board's interpretation of the NLRA is covered by the savings clause.

But that argument would prove too much: It is the same argument that the plaintiffs in Concepcion invoked in defense of California's Discover Bank rule. Like the D.R. Horton rule, the Discover Bank rule "conditioned the enforcement of arbitration on the availability of class procedure," either in court or in arbitration. See Italian Colors, 133 S. Ct. at 2312. Stated another way, the California Supreme Court had concluded that, as a matter of California law, it was "illegal" (at least in the consumer context) to agree to arbitrate on an individual basis. The Supreme Court nonetheless held in Concepcion that the Discover Bank rule, by "[r]equiring the availability of classwide arbitration[,] interfere[d] with fundamental attributes of arbitration and thus create[d] a scheme inconsistent with the FAA."

The same is true of the NLRB's rule conditioning enforcement of employment arbitration agreements on the availability of class procedures; it is the Discover Bank rule dressed up in different garb. It should meet the same fate: Concepcion compels the conclusion that the D.R. Horton rule falls outside the savings clause.

In short, the Supreme Court's FAA jurisprudence makes clear that the Board's D.R. Horton rule is incompatible with the FAA.

Originally published on January 17, 2017

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