Court disagrees with the National Labor Relations Board’s D.R. Horton holding that arbitration agreements with a class/collective action waiver violate the National Labor Relations Act if the agreement is a condition of employment.

On December 3, the U.S. Court of Appeals for the Fifth Circuit issued its holding in D.R. Horton, Inc. v. National Labor Relations Board,1 in which it rejected the National Labor Relations Board’s (NLRB’s or Board’s) controversial and sweeping decision that the National Labor Relations Act (NLRA) prohibited employers from requiring, as a condition of employment, that employees enter into arbitration agreements that restrict them from pursuing claims in a collective or class action.2 Specifically, the Board had found that the arbitration agreement at issue “preclude[d] [employees] from filing joint, class, or collective claims addressing their wages, hours or other working conditions against the employer in any forum, arbitral or judicial.” The Board’s holding notably applied to both union and nonunion employees, as long as the employees were covered by the NLRA.

Since January 2012, dozens of federal district courts and three federal courts of appeals have rejected the NLRB’s broad application of the NLRA with respect to the enforcement of mandatory arbitration agreements governed by the Federal Arbitration Act (FAA). However, the Board’s actual decision in D.R. Horton had remained subject to review by the Fifth Circuit.

The Fifth Circuit’s Decision

The Fifth Circuit began its decision by confronting constitutional and quorum-related challenges to the D.R. Horton decision itself, and the court largely sidestepped those issues in order to directly address the substantive issue in D.R. Horton. The court first determined that it did not need to assess the constitutionality of the recess appointment of former NLRB Member Craig Becker and instead left that issue for the U.S. Supreme Court to decide in NLRB v.Noel Canning. The court also found that the Board implicitly delegated its authority to the two Board members who issued the D.R. Horton decision.3

As for the core substantive issue, the Fifth Circuit acknowledged that the Board appeared to be correct in holding that section 7 of the NLRA protects employees who seek to engage in class or collective actions to adjudicate employment-related claims. However, the Fifth Circuit explained that it could not stop its analysis with the NLRA, noting that the NLRA is not “the only relevant authority.” The court then looked to the FAA and recent Supreme Court precedent that upheld the enforceability of such arbitration agreements under the FAA, explaining that such agreements “must be enforced according to their terms.” Only when an arbitration agreement is unenforceable “upon such grounds as exist at law or in equity,” or when Congress has given a clear command in another statute to override the FAA, should an arbitration agreement not be enforced by the federal courts.

The Fifth Circuit found no clear basis in the NLRA to override the FAA, and the court recognized that the NLRA itself is silent as to arbitration agreements between employers and employees as well as whether such agreements lawfully can waive rights to class or collective actions. Moreover, the court found nothing in the NLRA’s legislative history to justify displacing the clear FAA directive to enforce arbitration agreements as written.

While the Fifth Circuit denied enforcement as related to the arbitration agreement’s ban on class or collective actions, the court upheld the Board’s finding that other language in the agreement violated section 8(a)(1) of the NLRA. Specifically, the Fifth Circuit agreed that the arbitration agreement contained ambiguous language as to whether employees still had the right to file unfair labor practice charges with the NLRB. The arbitration agreement provided that all disputes would be resolved through arbitration, and, although the agreement contained a list of four exceptions, none of these exceptions referred to unfair labor practice claims. Employees could therefore “reasonably read” the agreement as preventing their bringing charges to the Board.

Future Review Possibilities

The Fifth Circuit’s decision may possibly be reviewed in the future, either through en banc review by the Fifth Circuit or review by the U.S. Supreme Court. The NLRB may not seek such review in light of the Supreme Court’s decisions upholding the enforceability of arbitration agreements with class/collective action waivers.

Practical Implications and Conclusion

The Fifth Circuit’s D.R. Horton decision is consistent with many other federal court decisions that have rejected the NLRB’s attempt to regulate arbitration agreements with class/collective action waivers. Despite the Fifth Circuit’s decision, and the many other federal court decisions rejecting D.R. Horton, the NLRB may maintain that its position is correct and may continue to prosecute claims involving similar arbitration agreements, including agreements that are not a condition of employment. Therefore, employers should be prepared to defend against such claims, both before the Board and when raised as a defense to an action to compel arbitration of class or collective action claims. Employers should also ensure their arbitration agreements do not contain language that could be read to preclude employees from filing unfair labor practice charges with the Board.