In D.R. Horton, Inc. v. NLRB, No. 12-60031 (5th Cir. Dec. 3, 2013), the United States Court of Appeals for the Fifth Circuit overturned a controversial National Labor Relations Board (NLRB or Board) decision regarding class- and collective-action waivers, and in doing so strengthened the right of employers to require that employees resolve employment disputes through binding individual arbitration rather than through class or collective actions. The court, however, upheld a limit on this right, which employers must keep in mind as they update their dispute resolution policies.

Early last year, in D.R. Horton, Inc., 357 NLRB No. 184 (Jan. 3, 2012), the NLRB declared it unlawful for D.R. Horton to require its employees, as a condition of employment, to sign an arbitration agreement that waived the right to bring class or collective actions — in both arbitral and judicial forums — against D.R. Horton regarding the terms and conditions of their employment. The Board reasoned that filing a class or collective action on behalf of employees is activity protected by section 7 of the National Labor Relations Act (NLRA or Act), which gives non-supervisory employees — even those who are not unionized — the right to engage in “concerted activities for the purpose of . . . mutual aid or protection.” Therefore, the Board found that precluding employees from bringing such actions violates the Act. D.R. Horton petitioned the Fifth Circuit to review the decision, arguing that the Board’s analysis ignored the Supreme Court’s numerous recent cases favoring the broad reach of the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (FAA). See, e.g., AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011). The Board argued, however, that its decision was a defensible interpretation of the NLRA and did not conflict with the FAA.

The Fifth Circuit agreed with D.R. Horton and overturned the Board decision. It explained that while the Board deserves deference in interpreting the NLRA, it cannot ignore other federal statutes, such as the FAA, in doing so. The Board had contended that it did not ignore the FAA — rather, it argued that D.R. Horton fell within the FAA’s “savings clause.” The savings clause allows an arbitration agreement to be invalidated “upon such grounds as exist at law or in equity for the revocation of any contract,” so long as the circumstances of such invalidation do not disfavor arbitration. 9 U.S.C. § 2. The Fifth Circuit rejected this argument, concluding that the Board’s decision, which required leaving open either an arbitral or a judicial forum for class or collective actions, effectively disfavored arbitration. For example, the court explained that “‘there is little incentive for lawyers to arbitrate on behalf of individuals when they may do so for a class and reap far higher fees in the process. And faced with inevitable class arbitration, companies would have less incentive to continue resolving potentially duplicative claims on an individual basis.’” Slip Op. at 20 (quotingConcepcion, 131 S. Ct. at 1750).

The Board had also argued that the NLRA overrode the FAA. But after considering congressional text, legislative history, and statutory purpose, the court disagreed. The court did, however, uphold one important part of the Board’s decision. The Board had held that D.R. Horton’s arbitration agreement violated the NLRA because it could reasonably have been interpreted to prohibit employees from filing unfair labor practice charges with the Board. The Fifth Circuit agreed, reasoning that — separate from the class- and collective-action waiver of the arbitration agreement — the agreement as a whole, by requiring all employment-related disputes to proceed through arbitration, could reasonably be construed by employees as a waiver of their right to file unfair labor practice charges with the Board. Therefore, the court affirmed the Board’s order requiring D.R. Horton to clarify with its employees that the arbitration agreement did not eliminate their right to pursue such charges against D.R. Horton before the Board. Notably, the court declined to address the constitutionality of the NLRB’s recess appointments, an issue that the Supreme Court will take up this term. See Noel Canning v. NLRB, 705 F.3d 490 (D.C. Cir. 2013), cert. granted, 133 S. Ct. 2861 (U.S. June 24, 2013). While one of the members of the Board that decided D.R. Horton, Craig Becker, would be considered an unlawful recess appointee under the D.C. Circuit’s analysis in Noel Canning, the court reasoned that because D.R. Horton never challenged the constitutionality of Becker’s appointment before the Board or in the initial briefing, such issue was not properly before the court. At this time, the Fifth Circuit’s decision is technically only binding precedent in the Fifth Circuit, though it is possible the Board will decide to follow it nationwide. It is unclear whether the Board will attempt to petition the Supreme Court for certiorari. Employers should take this opportunity to confirm that their dispute resolution policies cannot be reasonably interpreted by employees to prohibit the filing of unfair labor practice charges and should consider including a disclaimer to that effect. We will continue to monitor NLRB and court activity in this area of the law. For more information about the D.R. Horton decision, other labor law developments, or other legal issues in the workplace, contact the authors of this Employment Alert or the Hogan Lovells lawyer with whom you work.