Arbitration is generally supposed to be faster, cheaper and more
predictable than litigation. Homebuilder D.R. Horton, like many
other employers, certainly believed this when, in 2006, it began
requiring employees to sign arbitration agreements that prevent
them from suing in court or bringing class action claims in
arbitration. But when employee Michael Cuda and a class of
similarly situated employees sought to pursue collective
arbitration of their claims against D.R. Horton for alleged unpaid
overtime wages in 2008, none of those expectations held true.
Background: D.R. Horton refused to
arbitrate the claimants' claims on a collective basis. This, of
course, was not an unreasonable position, given that the employees
had all signed arbitration agreements expressly acknowledging that
they would never pursue claims against the company collectively.
Cuda, however, believed that the agreement he and others signed
wasn't worth the paper it was written on. And he reached out to
the historically employee-friendly National Labor Relations Board
(the board) to back him up.
The Board's Decision: Although it took
more than three years to get a ruling on his unfair labor practice
charge challenging the validity of D.R. Horton's mandatory
arbitration agreement, the board did not disappoint Cuda. On
January 3, 2012, it issued a decision holding that D.R.
Horton's agreement was unlawful because (1) it prevented
employees from filing class action claims in court or in
arbitration and (2) it could reasonably be read as prohibiting
employees from filing unfair labor practice charges.
The Fifth Circuit Appeal: On appeal to the
Fifth Circuit Court of Appeals, D.R. Horton argued that the
board's decision should be rejected on procedural grounds
because the board lacked a valid quorum at the time it was issued,
and on substantive grounds primarily because it conflicted with the
Federal Arbitration Act (FAA), which generally requires that
arbitration agreements be enforced as written. The Fifth Circuit
rejected D.R. Horton's procedural challenges, concluding that
the arguments were either not timely raised or otherwise failed on
the merits. The court, however, agreed with D.R. Horton's
substantive challenges, but only in part.
The court agreed with D.R. Horton that the FAA trumps the National
Labor Relations Act (NLRA) to the extent that the NLRA renders
unlawful an arbitration agreement that prevents employees from
pursuing class action claims. The court explained that its
conclusion was consistent with a long line of Supreme Court cases
holding that the use of class action procedures is not a
substantive right and that parties should not be compelled to
arbitrate as a class unless they agreed to do so. The court also
pointed out that every one of its "sister circuits" to
have considered the issue has indicated that they would not defer
to the NLRB's rationale and held arbitration agreements
containing class waivers enforceable.
The court sided with the board in finding that D.R. Horton's
agreement could reasonably be read as prohibiting employees from
filing unfair labor practice charges. The court explained that an
arbitration agreement violates the NLRA if it prohibits employees
from filing charges because, unlike the use of class action
procedures, the filing of a charge with the board is a substantive
right. Given that D.R. Horton's agreement expressly mandated
arbitration of "all disputes and claims relating to the
employee's employment," without listing any exception for
unfair labor practice charges, the board's conclusion was
reasonable, the court held.
What Happens Next: The Fifth Circuit's
opinion is not necessarily the final chapter in the D.R. Horton
saga. The board and/or D.R. Horton could petition the entire Fifth
Circuit Court of Appeals for a rehearing of their respective losing
positions, or they could petition the Supreme Court for review.
Moreover, the board is not precluded from advancing the same
arguments against other employers, should it choose to do so.
Only if and when the Supreme Court rejects the board's
position will it be legally bound to change it in other cases.
Regardless of how the board elects to proceed from here, however,
the Fifth Circuit's decision is undeniably the most devastating
blow yet to the board's novel theory that seems to fly in the
face of Supreme Court precedent.
Takeaway for Employers: Unfortunately for
D.R. Horton, requiring employees like Cuda to arbitrate their
claims individually has not, thus far, proven to be faster, more
predictable or likely cheaper than litigation. But the Fifth
Circuit's decision goes a long way toward protecting those
fundamental attributes for D.R. Horton and other employers in the
future. Employers also can learn from the Fifth Circuit's
explanation of why D.R. Horton's arbitration agreement was, in
part, unlawful – it failed to make clear that not all claims
were truly subject to mandatory arbitration. Had the agreement
expressly provided that unfair labor practice charges were not
covered by the agreement and that nothing in the agreement should
be construed as prohibiting employees from exercising their right
to file unfair labor practice charges, the agreement likely would
not have been invalidated on those grounds.
Employers should consider consulting with an experienced attorney
to draft or revise mandatory arbitration agreements including class
action waivers, in order to ensure compliance with this evolving
area of the law.
This article by Reyburn Lominack was also featured on the Corporate Compliance Insights website.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
