Quirky Question # 186: Can Arbitration Agreements Ban Class Claims?

Question:

For many years, our company has required all employees to sign a contract agreeing to arbitrate any employment claims, including discrimination claims.  Last year we changed our form contract to make it clear that any arbitration only would cover the individual employee making the claim.  There would be no “class action” arbitrations or anything like that.  (We were told by another law firm that the Supreme Court had just ruled that this approach was legal.)

Now, we’ve got a terminated employee threatening to bring a class action against us.  His lawyer says our new arbitration contract violates the National Labor Relations Act and something called the Norris-Laguardia Act.  But, we aren’t even a union shop!  What’s going on here?  I thought the Supreme Court just said that we could ban class actions in our arbitration agreements.

Answer:

Unfortunately, your ex-employee’s lawyer may have a point.  A very recent decision of the National Labor Relations Board (NLRB), D.R. Horton, Inc. and Michael Cuda, Case 12-CA-25764, held that it was a violation of the National Labor Relations Act to require employees to sign an arbitration agreement preventing them from filing class, joint or collective claims.  While that decision has not yet been reviewed by the courts, the NLRB’s analysis of the legal issues was thorough and addressed the relevant statutes and cases in some detail.  In particular, the NLRB considered the recent Supreme Court case you reference (AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011)), but found that it did not apply in this context.

The NLRB’s ruling in the D.R. Horton matter was based on a provision in the National Labor Relations Act that not only protects classic union activity, such as organizing and collective bargaining, but also guarantees employees the right “to engage in … concerted activities for the purpose of … other mutual aid or protection …” 29 U.S.C. § 157.  In other words, employees have the right to work together (or “collectively”) even outside of the traditional union context, for their “mutual aid or protection.”

The NLRB determined that collective litigation, such as class actions, constitutes the type of collective activity protected by the National Labor Relations Act.  Therefore, the NLRB determined that the right to pursue employment claims collectively was protected activity.  According to the NLRB, forcing employees, as a condition of employment, to sign a contract waiving that right was a violation of the Norris-LaGuardia Act, 29 U.S.C. § 101 et seq., which prohibits contracts that force employees to surrender certain protected rights.  The NLRB distinguished this from cases allowing such contracts where the employee had the choice to sign (and receive additional benefits) or not sign but still remain employed.

The NLRB also analyzed the 2011 Supreme Court opinion in Concepcion, which upheld the validity of consumer contracts waiving rights to collective action.  Concepcion involved cell phone customers claiming that certain fees had been fraudulently imposed.  In that context, the NLRB ruled, class action rights were merely “procedural” and could be waived.  In the employment context, by contrast, the right to act collectively for mutual aid and protection is “substantive,” and the employer cannot force employees to waive that right prospectively as a condition of employment.  The NLRB also noted that if the National Labor Relations Act’s protection of collective action is in conflict with the Federal Arbitration Act’s (FAA) provision making arbitration agreements enforceable, the National Labor Relations Act, as the later statute, would control over the earlier FAA.

As noted above, this issue has not been litigated in court yet, so it may be that the NLRB’s ruling in D.R. Horton will be overruled, but it is a thorough and thoughtful opinion and represents the most recent statement on this issue.

As a practical matter, there are a number of issues your company should address going forward:

• Consider dropping the requirement that the waiver of class or collective action rights be a condition of employment.  Instead, you could offer your employees additional consideration if they choose to sign a contract waiving those rights;

• If you can’t absolutely bar class or collective actions by employees, make a decision as to whether you would rather have any such actions brought in court or in arbitration.  Note that some of the procedural protections in class action litigation are quite favorable to employers.  You might decide that those offer better defensive prospects than the more informal rules which often prevail in arbitration;

• Once you have made the decision as to whether class litigation or class arbitration is the lesser of two evils, make sure any agreement you require employees to sign clearly specifies whether the employee is required to litigate or to arbitrate any class claims; and

• More broadly, don’t forget to consider the implications of the National Labor Relations Act and other labor statutes, even if you are not a unionized employer.  As this situation illustrates, those laws can impact even non-union employers in some situations.

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