A federal district court in California recently denied an employer’s motion to compel individual arbitration in a wage-and-hour putative class action brought by a former employee.  Totten v. Kellogg Brown & Root, LLC, ED CV 14-1766 (Jan. 22, 2016).  Relying primarily on the National Labor Relations Board’s decision in In re D. R. Horton, Inc., Judge Dolly M. Gee found that a class action waiver contained in an arbitration agreement violated employees’ substantive right to engage in protected concerted activity under the National Labor Relations Act (NLRA).  This ruling breaks with a pattern of federal courts (and the California Supreme Court) refusing to follow Horton.

KBR hired David Totten on January 16, 2012.  During the new hire orientation, Totten signed KBR’s Dispute Resolution Program as a condition of employment.  The Agreement required employees to arbitrate all claims against KBR and prohibited employees from pursuing “any Dispute on a class action, collective action, or consolidated basis.”  After KBR terminated Totten’s employment in June 2014, Totten brought suit, alleging class and representative claims for numerous violations of state and federal wage-and-hour regulations.

After first holding that the Agreement was procedurally and, in part, substantively unconscionable, Judge Gee proceeded to analyze the class action waiver.  She noted that employees “have the right to . . . engage in . . . concerted activities for the purpose of collective bargaining or other mutual aid or protection” under Section 7 of the NLRA, while Section 8(a)(1) declares that employers engage in an unfair labor practice when they interfere with, employees’ exercise of their Section 7 rights.  The Judge emphasized the definitional scope of “concerted activity,” noting that an individual acting alone can engage in concerted activity “when she acts on behalf of the workforce” and that concerted activity “encompasses concerted legal action.”

The opinion then engaged in a thorough examination of the NLRB’s reasoning in Horton, on which the Board has continued to rely to invalidate class action waivers in employment-setting arbitration agreements:

In Horton, the NLRB struck down an employer arbitration agreement containing a class action waiver because it restricted employees from engaging in the protected concerted activity of pursuing collective legal action to improve workplace conditions under Section 7 of the NLRA. . . .  It then found that the arbitration agreement at issue there violated Section 8(a)(1) of the NLRA because it ‘require[d] employees covered by the Act, as a condition of their employment, to sign an agreement that precludes them from filing joint, class, or collective claims addressing their wages, hours or other working conditions against the employer in any forum, arbitral or judicial.’

Characterizing the NLRA-protected right to concerted activity as a substantive right, the NLRB highlighted that “employers cannot demand that employees waive their substantive rights to act collectively to improve workplace conditions.”

Finally, the Board reconciled its analysis with the Federal Arbitration Act (FAA) and its § 2 savings clause, which makes arbitration agreements “enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  Judge Gee quoted Horton at length: “[T]he purpose of the FAA was to prevent courts from treating arbitration agreements less favorably than other private contracts. . . .  To find that an arbitration agreement must yield to the NLRA is to treat it no worse than any other private contract that conflicts with Federal labor law.”

Analogizing Totten’s circumstances to those of the employees in Horton, Judge Gee found Horton “not only persuasive, but at the very least ‘reasonably defensible,’” the standard under which a federal court should uphold the NLRB’s interpretations.  She further distinguished AT&T Mobility LLC v. Concepcion because that case “involved preemption of a state law ruling precluding enforcement of a class arbitration waiver in the consumer context” and because consumers could not rely on the NLRA.  American Express Co. v. Italian Colors Restaurant was also distinguishable, as that case—which involved merchants doing business with American Express—“did not implicate NLRA-covered employees entitled to the substantive right to collective action.”

Judge Gee concluded by noting her disagreement with the Fifth Circuit’s decision to overturn Horton.  She remained similarly unconvinced by other federal courts of appeal that have refused to follow Horton, but could point to only one other district court—the Western District of Wisconsin—that cited Horton to invalidate a class action waiver in an arbitration agreement.

Although the Ninth Circuit refused to follow Horton in a 2013 decision, it did so for procedural reasons.  Judge Gee’s reliance on Horton to invalidate the KBR arbitration agreement’s class action waiver thus sets the stage for the Ninth Circuit to confront the merits of the NLRB’s controversial decision.