Arbitration and Labor Law: Where the Fifth Circuit Went Wrong in Horton
As Jesse reports, the Fifth Circuit this week declined to enforce the NLRB’s decision in D.R. Horton. In Horton, the Board held that an employer commits an unfair labor practice if it requires employees to pursue all employment-related disputes through individual (i.e., not collective or class) arbitration. By prohibiting employees from pursuing collective legal action on claims related to their employment, the Board held, such an arbitration clause interferes with employees’ NLRA section 7 right to “engage in  concerted activities for the purpose of . . . mutual aid or protection.” The Board’s decision in Horton is among the most well-reasoned and well-crafted NLRB decisions in recent memory, and is worth a complete read. But the basic idea of Horton is straightforward and also, as I will explain, correct. As I will also explain, the Fifth Circuit’s reasoning on this core argument in Horton is just as clearly incorrect. [As Jesse’s Explainer details, the Board’s holding in Horton had several bases. Here, I highlight one.]
In recent years, the Supreme Court has issued a series of decisions that make a wide range of arbitration clauses – in both consumer and employment contracts – enforceable. This includes, as a general matter, arbitration clauses that preclude arbitration on a class basis. But there is a core principle that runs through all of these staunchly pro-arbitration decisions: no arbitration clause may require a party to “forgo the substantive rights afforded by [a] statute.” Arbitration agreements can require parties to submit the resolution of statutory rights to an arbitral forum, and, in doing so, they may alter the procedural rules governing the resolution of such statutory claims. But no arbitration clause can require a party to waive a substantive statutory right.
Section 7 of the NLRA contains the core substantive rights of federal labor law. Those rights include employees’ right to “engage in  concerted activities for . . . mutual aid or protection.” Thus, a core substantive NLRA right is the right of employees to act collectively to improve the terms and conditions of their employment. Sometimes, such employee collective action takes the form of union organizing. Sometimes it takes the form of pickets and demonstrations aimed at improving working conditions. And, sometimes, it takes the form of collective legal action designed to improve those conditions. Whichever form employee collective action takes, when such collective action is directed at improving terms and conditions of employment, it is a substantive right protected by the NLRA.
The Board has long held that when employees collectively pursue legal action against their employers, they engage in Section 7 protected activity. And the Board’s rule on the protected nature of collective legal action has been, consistently, upheld by the courts of appeals. To take but one example, the Eighth Circuit concluded that “a lawsuit filed in good faith by a group of employees to achieve more favorable terms or conditions of employment is ‘concerted activity’ under § 7 of the National Labor Relations Act.” The same is true for arbitrations that employees pursue collectively against their employer: they are Section 7-protected activity.
Because, under the NLRA, employees have a substantive statutory right to pursue collective actions against their employers regarding working conditions, an arbitration clause that waives the right to pursue such collective actions is a waiver of a substantive federal right. That waiver is impermissible under the Supreme Court’s arbitration jurisprudence.
The Fifth Circuit rejects this conclusion but with flawed reasoning. The circuit court begins its analysis by noting that “[t]he use of class action procedures  is not a substantive right.” True enough in general terms, but beside the point: Horton does not hold or imply that the use of class procedures, in the abstract, is a substantive right; only that under the NLRA employees have a substantive labor law right to pursue collective legal actions against their employers when that legal action concerns working conditions. The fifth circuit in fact more or less acknowledges this point, writing that the Board’s holding in Horton is predicated on the idea that the NLRA is different from Rule 23 because the NLRA’s “fundamental precept is the right for employees to act collectively.” But then the Fifth Circuit concludes:
Even so, there are numerous decisions holding that there is no right to use class procedures under various employment-related statutory frameworks. For example, the Supreme Court has determined that there is no substantive right to class procedures under the Age Discrimination in Employment Act. Similarly, numerous courts have held that there is no substantive right to proceed collectively under the FLSA.
But the fact the courts have held that neither the ADEA nor the FLSA provides a substantive right to class procedures is immaterial to this analysis precisely because those statutes do not afford employees a right to “engage in concerted activities for the purpose of . . . mutual aid or protection.” That is, courts could well conclude that an arbitration agreement barring class actions doesn’t violate the ADEA or the FLSA because neither statute provides a substantive right to collective employee action. Only the NLRA provides that. And because the NLRA affords such a substantive right, the Board was correct to conclude that an arbitration clause waiving the right does contravene the NLRA and is impermissible for that reason, notwithstanding courts’ holdings regarding the ADEA, the FLSA, or any other federal employment statute.
This point was not lost on the Judge Graves, who dissented from the Fifth Circuit’s opinion. Judge Graves wrote quite plainly, as I have here explained, that the arbitration agreement at issue in the case “interferes with the exercise of employees’ substantive rights under Section 7 of the NLRA.”