Arbitration and Class Action Waivers After Concepcion and D.R. Horton: Courts and the NLRB Reach Divergent Conclusions

Since the U.S. Supreme Court came down with its landmark decision in AT&T Mobility v. Concepcion in April 2011, the legality of individual arbitration agreements has been a hot topic in the employment realm. In Concepcion, the Court upheld an arbitration agreement that required all consumer complaints to be arbitrated individually, instead of on a class-wide or collective basis. In reaching its decision, the Court held that California state contract law deeming such agreements unenforceable was preempted by the Federal Arbitration Act (“FAA”). Although the case was decided in the context of a consumer class action, its holding has prompted employers nationwide to consider implementing similar arbitration agreements in the workplace.

Shortly after Concepcion was decided, however, the National Labor Relations Board (“NLRB” or the “Board”) issued a decision that caused many employers take a step back. In D.R. Horton v. Cuda, the NLRB invalidated a mandatory agreement that required employees to individually arbitrate their employment claims. The Board found the agreement ran afoul of the National Labor Relations Act (“NLRA”) because it unlawfully restricted protected activity by precluding employees from bringing claims on a collective or class basis. The opinion side-stepped Concepcion, reasoning that it was inapplicable in the employment context because the Court did not address whether the arbitration agreement at issue violated the NLRA.

Post-D.R. Horton, employers have questioned the validity of the NLRB’s position on individual arbitration agreements as contrary to Supreme Court precedent. But the agency has held firmly to its position, and in fact, recently issued an Administrative Law Judge (“ALJ”) opinion broadening the ban on such agreements. On November 6, 2012, an ALJ struck down a policy contained in 24 Hour Fitness’s employee handbook requiring employees to individually arbitrate claims, even though the policy allowed employees to opt out by signing a separate acknowledgment within 30 days of receipt of the handbook. The ALJ reasoned that the opt out provision did not eliminate the chilling effect on protected activity, and therefore, did not save the agreement from violating the NLRA. The ALJ also rejected the notion that the U.S. Supreme Court’s pro-arbitration decision in Concepcion meant the policy should be permitted, saying that ruling had little to do with arbitration in the employment context. The 24 Hour Fitness USA, Inc. v. Sanders decision reinforces the NLRB’s position against individual arbitration agreements, and assuming it is not overruled on appeal, could rule out the opt out exception employers were hoping for.

Implications for Employers

How much weight should employers place on the D.R. Horton and 24 Hour Fitness decisions? The answer is still not clear. Many (but not all) lower courts have been unwilling to adopt the NLRB’s position with regard to individual arbitration agreements. However, it remains to be seen how the law will settle on this issue until it works its way through the appellate system.

Luckily, D.R. Horton is up on appeal before the Fifth Circuit, and 24 Hour Fitness will likely follow a similar trajectory. Among other issues, the Fifth Circuit will decide whether the Board’s decision in D.R. Horton creates a conflict with the FAA. Because the NLRB has held that it is only bound by Supreme Court precedent (and prior NLRB decisions), an appellate decision may not be the final word, but it should still offer useful guidance to employers.

In addition to monitoring appellate decisions, employers should also follow two cases before the California Supreme Court: Iskanian v. CLS Transportation and Sanchez v. Valencia Holding Co.. The Supreme Court will resolve a split among lower California courts regarding the continued viability of state case law that undermines class arbitration waivers post-Concepcion. While employers look forward to receiving guidance from the California Supreme Court, the grant of review in Iskanian also means that the employer-friendly decision is no longer citable authority, pending final decision by the state’s Supreme Court.

American Express Co. v. Italian Color Restaurant, which is up for review by the U.S. Supreme Court, is another class arbitration case that should be monitored. In American Express, the Court will decide whether the FAA permits courts to invoke “federal substantive law of arbitrability” to invalidate arbitration agreements on the ground that that they do not permit class arbitration of federal law claims – a similar issue to the one raised in Concepcion with regard to the use of state contract law to invalidate arbitration agreements.

The bottom line is that the law on arbitration and class action waivers is still murky. While several decisions work their way through the courts, and employers await and hope for the reversal of D.R. Horton, employers should continue to seek counsel as they weigh the risks and benefits of class action waivers.