In one of its last rulings before Member Becker’s recess appointment ended, the National Labor Relations Board (“NLRB”) has held that individual agreements between an employer and an employee covered by the National Labor Relations Act (“NLRA”), which require the arbitration of employment-related claims arising under other federal and state statutes, but do not allow class actions, are illegal.  D.R. Horton, Inc., 357 NLRB No. 184 (January 3, 2012).

The case involved D.R. Horton’s Mandatory Arbitration Agreement (“MAA”).  Under the MAA all employees were individually prohibited, as a condition of employment, from pursuing class or collective actions in any forum, judicial or arbitral. The Board held that this violated the employee’s right “to engage in  . . . concerted activities for . . . mutual aid or protection” under Section 7 of the NLRA, 29 U.S.C. § 157.

The decision hinged on four principle factors.  First, the Board recognized that participating in a class action employment related suit is protected under Section 7 of the NLRA.

Second, the Board held that the maintenance of the MAA is unlawful under the test set out in Lutheran Heritage Village-Livonia, 343 NLRB 646 (2004), because the MAA explicitly restricts activities protected by Section 7.

Third, the Board cited Supreme Court cases – notably National Licorice Co. v. NLRB, 309 U.S. 350 (1940) and J.I. Case Co. v. NLRB, 321 U.S. 332 (1944) – for the proposition that individual employment contracts cannot waive rights guaranteed by the NLRA.

Fourth, the Board cited the Norris-LaGuardia Act, 29 U.S.C. §101 et seq. (“N-LG Act”), public policy against interference with “concerted activities for the purpose of  . . . mutual aid or protection” (N-LG Act §102) and its provision that “any . . . undertaking or promise in conflict with [that] public policy . . . shall not be enforceable in any court of the United States” (N-LG Act §103).  This public policy informed the Board’s view that the MAA was illegal.

Notably, the Board distinguished the ruling in 14 Penn Plaza LLC v. Pyett, 356 U.S. 247 (2009), in which a union, in a collective bargaining agreement, agreed to individual arbitration in lieu of judicial or arbitral class actions for covered employees.  The Board recognized it was well settled that a union may waive certain Section 7 rights of the employees it represents in exchange for concessions from the employer.

The Board also averred that its decision did not bring the NLRA into conflict with the Federal Arbitration Act (“FAA”) as interpreted and applied in the U.S. Supreme Court’s holding in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) and its progeny.  In Gilmer, the Supreme Court held that an individual arbitration agreement may not lawfully require that a party forgo substantive rights afforded by statute.

Here, the Board held, its ruling was consistent with Gilmer and the FAA, because the MAA required employees to forego the NLRA Section 7 substantive right to engage in the concerted activity of filing a class action.  (The Board distinguished the right to file a class action from the right to maintain it under Rule 23 of the Federal Rules of Civil Procedure.)  The Board noted that if there were a conflict between the FAA and the NLRA, then the FAA would also conflict with the N-LG Act. In such a circumstance, the Board stated that the FAA would have to yield, because the N-LG Act was enacted seven years after the FAA, and Section 15 of the N-LG Act repealed all acts and parts of acts in conflict with the N-LG Act.

Finally, the Board side stepped the Supreme Court’s recent decisions in AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011) and Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758 (2010), distinguishing them principally because neither case involved employment agreements or a waiver of rights protected by the NLRA.

Because Member Hayes was recused in this case there was no dissent.

In the interests of full disclosure . . . .

I was the General Counsel who issued GC Memorandum 10-06 (June 16, 2010), which the Board specifically rejected in its decision.  In that memorandum I attempted to do what the Board claimed to be doing – i.e., strike the appropriate balance between the NLRA and the FAA.  The difference is, I paid more heed to the other federal, state and local statutes at issue, and thus I struck a very different balance.

It is important to keep in mind that the claims at issue in these dispute resolution systems do not arise under the NLRA, but under other federal, state and local employment laws, such as Title VII or state human rights laws.  I began with the notion that it was not the Board’s province to decide what was necessary to vindicate rights under those other federal and state employment law statutes.  The legislatures which enacted them and the officials who enforce them should do that.

To that end, I felt that the Board as an institution should defer to the well established judicial procedures for determining whether an employer’s employment dispute arbitration system was fair and allowed employees to vindicate their rights under those other statutes.  Courts routinely make these judgments and can decide whether or not class actions are necessary — if they are not, then an employer’s system should be allowed to stand; if so, then the employer would have to reform its system to account for that.  These challenges should be decided on a case by case basis by the courts, as they are now, and not by the decisional fiat of the NLRB.

It was my view that the only guarantee of a class action under the NLRA in these circumstances should be for the purpose of bringing a challenge to an employers system, not for vindicating underlying employment claims.  I felt this was the proper balance and so stated in GC Memorandum 10-06, and it was on this basis that the complaint in this case was first issued.  As this case and others like it are litigated through the federal court system, I hope this balancing test, or something much like it, emerges from the process.

It remains to be seen how this will ultimately play out.  I think this issue will likely require the Supreme Court to once again step in and resolve a conflict involving the terms of an arbitration agreement and the requirements of federal law, this time under the FAA, the NLRA, and the N-LG Act – as well as the myriad other federal, state and local statutes involved.  In the meantime, the many employers who have these types of agreements have had the legal rug pulled out from beneath them, and are once again exposed to the possibility of class action law suits over employment claims.