What Does D.R. Horton Mean For Class And Collective Action Waivers?

By Jennifer Liu

UPDATE – 1/21/2012 – D.R. Horton filed a notice of appeal of the NLRB order in the U.S. Court of Appeals for the Fifth Circuit.

The National Labor Relations Board’s (“NLRB’s”) recent January 3 decision in D.R. Horton is a significant ruling that, if affirmed, will have wide-reaching implications for employee rights. In the order, the Board held that arbitration clauses that prohibit employees from pursuing class or collective actions violate employees’ right under Section 7 of the National Labor Relations Act (“NLRA”) to engage in protected concerted activity and are unlawful. 

The decision potentially gives employees a powerful counterweight to the Supreme Court’s recent decisions in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010), and AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). Stolt-Nielsen held that parties to an arbitration agreement that is silent on class arbitration cannot be compelled to submit to class arbitration. The following year, the Supreme Court dealt an even greater blow to the class action bar in Concepcion, which held that the Federal Arbitration Act (“FAA”) preempted California’s state law finding exculpatory class waivers to be unenforceable. Together, these two decisions appeared to spell the end of class actions. Any plaintiff who had signed an arbitration agreement, even one that did not mention class or collective arbitration, seemed to have no avenue to seek redress other than to file an individual arbitration. The D.R. Horton decision, however, may breathe new life into employment class and collective actions.

Factual Background

The employee who filed the initial unfair labor practice charge against D.R. Horton, Michael Cuda, had worked for the homebuilding company as a superintendent. As a condition to continuing to employ him, D.R. Horton required Cuda to sign an arbitration agreement, which he signed. In 2008, Cuda brought a collective action against D.R. Horton for allegedly misclassifying him and other superintendents as exempt from the overtime protections of the FLSA. When D.R. Horton informed Cuda’s attorney of its position that the arbitration agreement barred Cuda from arbitrating his FLSA claims as a collective action, Cuda filed his charge.

The Decision

The NLRB began its analysis by reaffirming the long-standing principle that Section 7 of the NLRA, which protects employees’ right to engage in “concerted activities,” extends to employees’ right to join together to improve working conditions through litigation. The right to pursue a class or collective action regarding wages, the Board observed, is “at the core of what Congress intended to protect by adopting the broad language of Section 7 . . .” and is “central to the Act’s purposes.” Because D.R. Horton’s arbitration agreement prohibited Cuda from filing a collective action for unpaid wages, the Board found that it violated Section 7 and was unlawful.

The NLRB further concluded that the NLRA does not conflict with the FAA, since any class or collective action waiver would violate Section 7, not just an arbitration agreement containing such a waiver. Moreover, the Board observed, the FAA only protects arbitration agreements to the extent that they do not require a party to forgo substantive statutory rights. The Board, however, did not address whether employees can effectively vindicate their statutory rights under the FLSA in arbitration. Instead, the Board held that D.R. Horton’s arbitration agreement interfered with Cuda’s Section 7 right to bring a class or collective action, which it emphasized was “a core substantive right protected by the NLRA” and not merely a procedural right.

Significantly, the NLRB read Concepcion narrowly to apply only to conflicts between the FAA and state law, such as the California judicial rule that was at issue in Concepcion. The issue in D.R. Horton differs in that it involves a conflict between two federal statutes – the FAA and the NLRA. In this respect, the Board joined several other recent courts that have held relied upon a “vindication of statutory rights” analysis to find class and collective arbitration waivers that frustrate the vindication of important statutory rights unenforceable, such as Sutherland v. Ernst & Young LLP, 768 F. Supp. 2d 547 (S.D.N.Y. 2011), reconsideration denied, No. 10 Civ. 3332, Dkt. No. 98 (S.D.N.Y. Jan. 17, 2012); In re American Express Merchants Litigation, 634 F.3d 187 (2d Cir. 2011); Chen-Oster v. Goldman, Sachs & Co., No. 10 Civ. 6950, 2011 WL 2671813 (S.D.N.Y. July 7, 2011); and Raniere v. Citigroup Inc., No. 11 Civ. 2448, 2011 WL 5881926 (S.D.N.Y. Nov. 22, 2011). The Board further noted that Concepcion did not involve a waiver of Section 7 rights or even employment agreements, perhaps suggesting that employment cases differ from Concepcion, which was a consumer rights case.

The Implications of D.R. Horton on Class and Collective Action Waivers

The next stop for the D.R. Horton decision will likely be the Court of Appeals for the D.C. Circuit – D.R. Horton will almost certainly appeal the decision. As a party aggrieved by the Board’s decision, it can seek review by the D.C. Circuit or by the Court of Appeals for the Circuit in which the unfair labor practice allegedly occurred, or where the company resides or transacts business.  In any event, NLRB orders are not “self-executing” in that the Board must seek court enforcement in order to compel a party to comply with its orders.

If the Board’s decision is affirmed, and the Supreme Court does not intervene, the ramifications of D.R. Horton are potentially wide-reaching. In the wake of Concepcion, a flurry of employers rushed to have their employees sign arbitration agreements containing class and collective waivers, seeking to take advantage of a seemingly foolproof way to insulate themselves from liability on a class or collective basis. D.R. Horton declares these efforts unlawful.

Except for supervisory and managerial employees, who are not covered by Section 7 of the NLRA, employees now have a formidable tool in their arsenal for combatting class and collective arbitration waivers.  D.R. Horton establishes that employees who have signed class or collective waivers but who want to file or participate in a wage and hour class or collective action may file an unfair labor practice charge against their employer.  Plaintiffs who are facing motions to compel individual arbitration can also borrow a page from the NLRB and argue that enforcing a class or collective arbitration waiver frustrates the exercise of their substantive right to engage in collective litigation under Section 7. 

Please visit the professional bio of Jennifer Liuat the Outten & Golden LLP website.