An Explainer on D.R. Horton and the Validity of Class Waivers in Mandatory Arbitration Agreements [UPDATED]

Published December 5th, 2013 -  - 12.05.134


On December 4, 2013, the Fifth Circuit issued its ruling in the hotly contested case of D.R. Horton, Inc. v. NLRB. In a 2-1 decision, the court overturned the National Labor Relations Board’s decision to invalidate mandatory arbitration agreements that include a class waiver.

Given the prevalence of mandatory arbitration agreements in employment contracts (one 2008 study printed in the University of Michigan’s Journal of Law Reform found that 92.9% of large public corporations utilize mandatory arbitration clauses in their employment contracts), this decision is likely to have far-reaching effects.

Below, you’ll find an overview of the Board’s decision in D.R. Horton and a chronology of subsequent developments pertaining to the case.

The Board’s Decision in D.R. Horton

D.R. Horton concerned the permissibility, under the National Labor Relations Act, of class action waivers in mandatory arbitration agreements.

In January 2006, D.R. Horton began to require all of its new and current employees to sign a mandatory arbitration agreement as a condition of employment. The agreement included a class action waiver by which employees were required to agree, as a condition of employment, to waive their right to collectively pursue employment-related claims in either a judicial or arbitral forum.

The Charging Party, an employee named Michael Cuda, nonetheless attempted to join an FLSA collective action against D.R. Horton alleging that the company had misclassified superintendents as exempt from the FLSA. When D.R. Horton replied that the collective action was prohibited under the terms of the mandatory arbitration agreement, Cuda filed an unfair labor practice charge with the National Labor Relations Board (NLRB). He alleged that the agreement was unenforceable because by prohibiting workers from filing a claim as a class, it violated their NLRA Section 7 right to act collectively for “mutual aid and protection.”

On January 3, 2012, the Board issued a decision invalidating the agreement on the ground that workers have an unwaivable “right [under Section 7 of the NLRA] to collectively pursue employment-related claims.” The Board rejected D.R. Horton’s argument that the holding conflicted with the Federal Arbitration Act (FAA)’s mandate to grant arbitration agreements the same protection given to other contracts. According to the Board, its treatment of the arbitration agreement was consistent with its treatment of contracts generally. It would have invalidated any contract that impinged on parties’ substantive (as opposed to procedural) statutory rights under federal labor law. Because the Board found that the arbitration agreement conflicted with the NLRA, its decision to invalidate the agreement did not run afoul of the FAA.

Federal Courts’ Treatment of the Board’s Decision

Since the Board’s decision, four circuit courts and numerous federal district courts have weighed in on the issue, with the majority refusing to defer to the Board’s decision. The issue, however, is by no means settled. Of the more than 23 federal district courts to consider D.R. Horton, only four found it persuasive. The most recent of those cases was decided in February 2013. No circuit court has  deferred to D.R. Horton.

The Eighth Circuit issued its decision in Owen v. Bristol Care about a year after D.R. Horton was decided. Owen, like Michael Cuda, signed, as a condition of employment, a mandatory arbitration agreement with a class action waiver. Like Cuda, he subsequently attempted to bring a collective action under the FLSA alleging wage and hour violations. Relying on D.R. Horton, Owen argued in part that the mandatory arbitration agreement he signed violated the NLRA. The Eighth Circuit rejected this argument on several grounds. First, the court distinguished the case from D.R. Horton by noting that unlike in D.R. Horton, the agreement at issue in Owen did not bar all protected concerted activity; employees were not precluded from filing a class complaint with the DOL, the EEOC, or the NLRB. The court added that even if D.R. Horton had addressed the more limited type of waiver at issue in Owen, the court did not owe the Board’s decision any deference because the Board does not have expertise in interpreting the Federal Arbitration Act. Finally, the court observed that “nearly all of the district courts to consider the [Board’s] decision [in D.R. Horton] have declined to follow it.”

The Ninth and Second Circuits also refused to defer to the Board’s decision, citing many of the same reasons offered by the Eighth Circuit in Owen. In Richards v. Ernst & Young, the Ninth Circuit declined to rely on D.R. Horton in part because “the only court of appeals, and the overwhelming majority of the district courts, to have considered the issue have determined that they should not defer to the NLRB’s decision in D.R. Horton because it conflicts with the explicit pronouncements of the Supreme Court concerning the policies undergirding the Federal Arbitration Act (FAA).” The Second Circuit, in Sutherland v. Ernst & Young, similarly echoed the Eighth Circuit’s rationale for rejecting D.R. Horton. But, the Second Circuit additionally expressed doubt about the continuing validity of D.R. Horton in light of the D.C.’s Circuit’s invalidation of President Obama’s recess appointments to the NLRB in Noel Canning v. NLRB.

The Fifth Circuit, in its recent decision overturning the Board’s ruling in D.R. Horton, expressly did not base its decision on the invalidity of the recess appointments. Instead, the court held that the Board incorrectly interpreted the NLRA to override the Federal Arbitration Act. In spite of Section 7 of the NLRA’s protection of workers’ right to act collectively for mutual aid and protection, the Fifth Circuit concluded that the right to file collective actions is not a substantive right, and the NLRA is thus not distinguishable from “all other statutes that have been found to give way to the [FAA’s] requirement of arbitration.”

To date, the Supreme Court has not weighed in on D.R. Horton, but some view the Supreme Court’s decisions in two cases involving commercial arbitration agreements, AT&T Mobility LLC v. Concepcion and American Express v. Italian Colors Restaurant, as indicative of the Court’s likely position.

In AT&T Mobility LLC v. Concepcion, a case decided before D.R. Horton, the Concepcions entered into a phone service contract with AT&T which contained a mandatory arbitration agreement with a class action waiver. After AT&T charged the Concepcions $30 in sales taxes for a phone it had advertised as free, the Concepcions sued for false advertising and fraud. Their case was subsequently consolidated with a class action, at which point AT&T moved to compel bilateral arbitration with the Concepcions pursuant to the mandatory arbitration agreement. The Concepcions argued that the class waiver provision was unconscionable and therefore unenforceable. However, the Supreme Court, rejecting this argument, upheld the class waiver. The Court wrote that state unconscionability doctrines that apply only to arbitrations are preempted by the FAA’s provision mandating enforcement of arbitration agreements “save upon such grounds as exist at law or in equity for the revocation of any contract.” The Court added that class arbitration is inconsistent with the FAA because the “switch from bilateral to class arbitration sacrifices the principal advantage[s] of arbitration” by making it more formal, more expensive, and slower.

Some have read this language to indicate that the Court would likely disagree with the Board’s analysis in D.R. Horton. However, the facts in Concepcion differ in significant ways from the facts in D.R. Horton, and these differences may well affect the Court’s analysis of the legal issues. As the Board noted in its decision in D.R. Horton, Concepcion dealt with a conflict between state law (California’s unconscionability doctrine) and federal law (the FAA). In such a case, state law clearly must yield to federal law. In D.R. Horton, by contrast, the conflict, to the extent that there is one, is between two federal laws (the FAA and the NLRA). This kind of case calls for a balancing of the federal policies in tension. The Supreme Court’s decision in Concepcion tells us nothing about how the Court would engage in such an analysis. This is particularly true because, as the Board observed, California’s unconscionability doctrine in Concepcion pertained to consumer contracts that could cover thousands of potential claimants. Disputes between employer and employee, on the other hand, are likely to involve many fewer claimants. As a result, all of the problems the Supreme Court identified in Concepcion regarding the formality, cost, and speed of class arbitrations would be diminished.

In American Express Co., v. Italian Colors Restaurant, merchants who had signed mandatory arbitration agreements with class action waivers attempted to bring a class action antitrust suit against American Express. The merchants argued that the mandatory arbitration agreement and class action waiver were not enforceable because given the nature of the allegations, pursuing individual arbitrations would have been prohibitively expensive. The Supreme Court rejected this argument, stressing that the FAA required “courts [to] rigorously enforce arbitration agreements according to their terms.” The Court added that this “holds true for claims that allege a violation of a federal statute, unless the FAA’s mandate has been overridden by a contrary congressional command.” Since the antitrust laws did not evince a “contrary congressional command,” the Court determined that the class waiver should be enforced. Finally, and importantly, the Court concluded that the class action waiver did not prevent parties from effectively vindicating their statutory rights under the antitrust laws. It reiterated its position from Concepcion that class arbitrations “interfere with the fundamental attributes of arbitration.”

Although the Supreme Court did not address whether the NLRA evinces a “contrary congressional command,” at least one court (the Ninth Circuit) has concluded that it does not. At the very least, American Express raises substantial questions about the continuing validity of D.R. Horton. Nonetheless, there is some reason to doubt the effect of American Express. Like Concepcion, American Express addressed class action waivers in commercial contracts, not employment contracts. As such, the lynchpin of the Board’s decision – the substantive right to collective action conferred by the NLRA – was not challenged.

Going Forward

In spite of the largely negative reception to D.R. Horton among the circuit and district courts and the questions raised by Concepcion, Noel Canning, and American Express, the enforceability of class waivers in mandatory arbitration agreements is still very much contested. Many NLRB ALJs continue to invalidate class action waivers on the basis of D.R. Horton.

At least eight ALJs have struck down part of all of a mandatory arbitration agreement that included a class waiver on the ground that it violated the NLRA. In Gamestop Corp., decided August 29, 2013, ALJ Gerald Etchingham struck down a mandatory arbitration agreement, finding it unlawful under D.R. Horton. The ALJ dismissed in a footnote Gamestop’s claim that D.R. Horton was void because the Board lacked a quorum when it issued the decision. He added, “I reject any claim that the D.R. Horton decision was wrongly decided as I am bound by Board precedent unless and until it is reversed by the Board itself or the Supreme Court.”

In Cellular Sales of Mo., decided August 19, 2013, ALJ Christine Dibble similarly rejected arguments about the validity of D.R. Horton. ALJ Dibble wrote that while “[it] is undeniable that increasingly the Supreme Court has shown great deference to enforcement of arbitration agreements,” the Court has not overruled D.R. Horton. Moreover, she found, the case at bar was distinguishable from cases like American Express because “the arbitration agreement precludes employees from exercising their substantive rights protected by Section 7 of the Act.”

Because of the widespread discordance about the continuing validity of D.R. Horton, many commentators expect the issue to eventually go up to the Supreme Court. Stay tuned.

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