Horton Comes To A Head: U.S. Supreme Court Poised To Resolve Conflict Regarding Workers’ Rights To Act Collectively

By Elizabeth Colman, Paul H. Tobias Attorney Fellow

The United States Supreme Court granted three petitions for certiorari during their Friday, January 13 conference that touch on issues central to employees’ ability to vindicate their workplace rights. In Epic Systems Corp. v. Lewis, Ernst & Young, LLP v. Morris, and National Labor Relations Board v. Murphy Oil USA, Inc., the parties seek to determine whether mandatory pre-dispute class and collective action waivers contained in forced arbitration clauses that are required as a condition of employment conflict with the employees’ right to engage in “concerted activities” for the purpose of “mutual aid or protection,” as provided by the National Labor Relations Act (NLRA) and the Norris-LaGuardia Act (NLGA), such that they are deemed unenforceable under the savings clause of the Federal Arbitration Act (FAA). The appellate courts in Lewis and Morris found mandatory class and collective action waivers in forced arbitration clauses to be illegal under existing labor law, and, thereby unenforceable under the FAA. The circuit court in Murphy Oil, relying primarily on case law regarding the FAA and the nation’s policy favoring arbitration, came to the opposite conclusion.

D.R. Horton Set The Stage

The circuit split that brought the present cases before the Supreme Court arose from the Fifth Circuit Court of Appeals’ controversial ruling in D.R. Horton v. NLRB (2013). In D.R. Horton, the Fifth Circuit reviewed a National Labor Relations Board (Board) decision regarding an employer’s use of mandatory individual arbitration as the sole mechanism for resolving employment disputes. In its decision, the Board found that forced arbitration clauses barring employees from bringing joint, class, or collective workplace claims in any forum unlawfully restricts the exercise of workers’ substantive right to collective action for their own mutual aid or protection, an idea which is at the heart of federal labor law. Under NLRA section 7, “Employees shall have the right . . . to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” Section 8(a)(1) of the NLRA provides, “It shall be an unfair labor practice for an employer to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in section 7.” The Board discussed 80 years of case law that unambiguously supports the notion that employers may not condition employment on the waiver of an employee’s right to engage in collective action by seeking class certification or the equivalent. Because the terms of the arbitration agreement provided that employees were required to waive their right to any collective action in any forum, the Board deemed the waiver an unfair labor practice under the NLRA.

The Board couldn’t stop there. Since the waiver was included in a forced arbitration clause, the Board also had to consider whether the term was enforceable under the FAA, despite its finding of illegality under the NLRA. The Board started by applying the Supreme Court’s well-established rules of statutory construction, which provide that when two interacting federal statutes can co-exist, absent a clear conflict, a court must give effect to both. The FAA “savings clause” provides that “an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The Board was able to reconcile the NLRA and FAA, resolving that rendering unenforceable a forced arbitration clause under the NLRA, insofar as it precludes employees from bringing joint, class, or collective workplace claims in any forum, does not conflict with the FAA or undermine its policies. Because the class and collective action waiver was unlawful under the NLRA, and illegality is a general contract defense, concluding that the waiver was unenforceable was also consistent with the FAA.

In reaching this determination, the Board explained why harmonizing the FAA and the NLRA in this manner was appropriate. For one thing, such a finding does not treat an arbitration agreement less favorably than any other contract that conflicts with federal law. Also, under the U.S. Supreme Court’s FAA jurisprudence, while certain procedures may be altered or waived, substantive rights cannot. In the Board’s opinion, the NLRA section 7 right to engage in collective action is the central purpose and protection afforded by the Act, making it a substantive non-waivable right, not merely a procedural mechanism for enforcing rights. Additionally, the FAA does not provide that an arbitration agreement that violates the NLRA is still enforceable. On the contrary, its savings clause allows an arbitration agreement that conflicts with federal law to be invalidated. Finally, the Board argued that even if there were a direct conflict with the NLRA or NLGA, the FAA should yield to the NLGA. Under the NLGA, which was passed seven years after the FAA, agreements with employers are unenforceable if they interfere with an individual unorganized worker’s full freedom of association or right to engage in concerted activities for the purpose of collective bargaining or other mutual aid or protection, and all acts in conflict with that policy were expressly repealed. The Board found nothing in the FAA to override the unambiguous language of the NLGA.

The Fifth Circuit disagreed, finding that the Board failed to give the proper weight to the FAA. Relying on precedent from a series of employment cases that did not actually involve the NLRA, the court held that the NLRA does not provide a substantive right to engage in collective action. In so finding, the court took a very narrow view of the role and purpose of the NLRA “concerted actions” provision, viewing it as merely a procedural device.

In its analysis, the Fifth Circuit began not by applying the standard rules of statutory construction, but with the premise that the when the FAA encounters another federal statute, that statute must overcome an extremely high barrier in order to render an arbitration agreement unenforceable under the FAA. In the appellate court’s view, the FAA requires all arbitration agreements to be enforced, regardless of any other federal statute, unless one of two exceptions applies. The first exception provides that an arbitration agreement may be invalidated under the grounds recognized under the FAA savings clause. Drawing upon  the Supreme Court’s decision in AT&T Mobility v. Concepcion, 563 U.S. 333, 344 (2011) where the Court held that a California common law rule that rendered certain consumer class action waivers unenforceable was preempted by the FAA, the Fifth Circuit held that even though the Board’s interpretation and application of the savings clause was facially neutral, it had an impermissible effect of disfavoring arbitration, because “requiring a class mechanism” in some forum – be it arbitral or judicial – “is an actual impediment to arbitration.” In the Fifth Circuit’s view, that would create an impermissible conflict under the FAA, so the savings clause exception did not apply.

Under the second exception, an arbitration agreement must be “enforced according to its terms”, unless another statute’s “contrary congressional command” precludes application of the FAA. CompuCredit Corp. v. Greenwood, 132 S. Ct. 665, 665 (2012). Here, the circuit court found that the text of the NLRA did contain an express congressional intent to override the FAA. Yet, the Fifth Circuit stated that because NLRA section 7 did not have an explicit provision mentioning arbitration by name in its text, history, or purpose, the law lacked the requisite congressional command to override the FAA’s required enforcement of the class and collective action waiver. In coming to this conclusion, the court gave very little weight to national labor policy or the judicial history that has previously protected the right of workers to act collectively in a variety of forums, including courts, to improve their working conditions.

D.R. Horton’s Lasting Impact

Since D.R. Horton, the Board has reaffirmed its position in over 70 other decisions and myriad cases have reached the federal circuit courts. Among the cases pending before the Supreme Court, the Seventh and Ninth Circuits have agreed with the Board’s reasoning to strike down mandatory collective action waivers, and the Fifth has maintained its position in upholding them.

The underlying facts in the three cases the Court will consider are substantially similar: employers required their employees, as a condition of employment, to sign an arbitration agreement that provided that the workers could only resolve legal disputes in individual binding arbitration, rather than in a court of law or through class or collective means in any forum. In Lewis and Morris, the employees sought class certification in federal court alleging various wage and hour violations. In Murphy Oil, the NLRB got involved in the case when one of the Respondent’s employees filed an Unfair Labor Practice charge with the Board. At the time the charge was filed, the D.R. Horton case was still ongoing. By the time the Board issued its decision against Murphy Oil, its findings served as a re-affirmance of its position in D.R. Horton, despite the Fifth Circuit’s contrary ruling.

Workers And The NLRB Offer A Path To Harmonize NLRA Rights With The FAA

Each of the parties seeking to invalidate the forced arbitration clauses reviewed the legislative and adjudicative history of the NLRA, as well as the NLRB’s role in interpreting and applying federal labor law. They emphasized the importance of  applying statutory principles and, after reiterating all of the arguments from D.R. Horton articulating how the NLRA creates a prospective, non-waivable substantive right to collective action that includes legal action, and coming to the same conclusions, each maintained that mandatory agreements forcing employees to waive their right to engage in collective action  constituted an unfair labor practice under the NLRA and NLGA that could not be upheld under the FAA savings clause.

The Seventh and Ninth Circuits began their analysis in the same manner as the NLRB in D.R. Horton: with the NLRA. In so doing, the Seventh Circuit quipped that to search first for a “contrary congressional command,” as the Fifth Circuit did in D.R. Horton, would be to “put the cart before the horse.” Based on the text, history, and purpose of the statute, the courts found that “concerted activity” is the essential substantive right established by the NLRA. The courts distinguished between “substantive” and “procedural” rights, articulating that substantive rights—the essential, operative protections of a statute—cannot be waived in an arbitration agreement. The Board, in Murphy Oil, pointed out that the Supreme Court has never held that an arbitration agreement may waive a substantive right or be given an effect contrary to the statute that created or protected those rights, and an illegal contract term that violates a federal statute will not and should not be enforceable solely because the offensive term is ensconced in an arbitration agreement.

Because the Supreme Court has acknowledged that it is up to the NLRB to define the scope of the NLRA’s protections, both the Seventh and Ninth Circuits applied the two-step analysis from Chevron U.S.A., Inc. v. National Resources Defense Council, Inc., 467 U.S. 837 (1984) to the Board’s interpretation of the NLRA. Under Chevron, the Board is entitled to deference when a statutory term is ambiguous and its interpretation of the authorizing statute is reasonable. In Morris, the court found that since, under the first step, congressional intent with the NLRA clearly provided that the right to “concerted activity” includes legal actions, and interference with that right is unambiguously an unfair labor practice, there was no need to address step two. In Lewis, the Seventh Circuit did not find any ambiguity in the term “concerted activity,” but noted that even if there were, the Board’s finding that the term “concerted activities” includes collective judicial remedies was a reasonable reading of the statute. The court acknowledged that the Board, in D.R. Horton, held waivers that limit all class or collective actions in every forum were an unfair labor practice under NLRA section 8(a)(1), and determined that they were required to give the Board’s reasoning a high level of judicial deference. In the Murphy Oil petition, the Board also addressed the issue of judicial deference, arguing that even though the Fifth Circuit didn’t disagree with the Board’s NLRA analysis, it improperly prevented the Board’s findings from taking effect because of their misapplication of pro-arbitration policies that stem from the FAA.

After concluding the collective action waivers constituted an unfair labor practice under the NLRA, the conversation in the cases moved on to the FAA. The courts and petitioners acknowledged that the FAA savings clause applies to generally applicable defenses, but not to those defenses that specifically target arbitration. When an illegal provision does not target arbitration, the FAA treats it like any other term such that the offensive language may be struck or the entire arbitration clause may be rendered unenforceable. The courts agreed that there is no conflict between the NLRA and the FAA because the illegality at issue has nothing to do with the fact that the waivers involved happened to appear in forced arbitration clauses. Again echoing the Board’s D.R. Horton reasoning, the Seventh and Ninth Circuits found that since the collective action waivers were an illegal contract term under the NLRA, and because illegality is a generally applicable defense for which an arbitration agreement may be deemed unenforceable under the FAA savings clause, the waivers were unenforceable.

In its petition to the Supreme Court, the Murphy Oil petitioner also argued that rather than treat the two statutes on an equal footing, the Fifth Circuit wrongly relied on inapplicable case law in concluding that the FAA requires all other federal statutes to contain an express “contrary congressional command” in order to render an arbitration agreement unenforceable. The NLRB rebuked their opponent’s misuse of past FAA precedent, highlighting that the recent case law that the Fifth Circuit relied on, where the Court found the FAA took priority, addressed judge-made law or state statutory policies, not two interacting federal statutes. The Board emphasized that the need to supply a “contrary congressional command” only arises when the FAA conflicts with another statute. The Board observed that because the FAA and the NLRA can be harmonized there is no conflict, so searching for a contrary command is unnecessary. Because the Ninth Circuit reached its findings on the NLRA, it did not delve into the employee’s NLGA arguments.

Employers Argue That Judicial Interpretations Of The FAA Should Trump Statutory Rights

In their petitions for certiorari, Epic Systems and Ernst & Young, LLP echoed the reasoning of the Fifth Circuit in D.R. Horton, and organized their petitions around three main points. First, they argued that the Seventh and Ninth Circuits should have followed the Fifth Circuit and begun their analyses by looking for a “contrary congressional command” that would allow the NLRA to override the FAA. Second, they reiterated their view that the NLRA contains neither a contrary congressional command nor a substantive right to class actions. Third, after acknowledging that generally applicable defenses can invalidate arbitration clauses, petitioners argued that, in adopting the NLRB’s position in D.R. Horton, the circuit courts misapplied that rule because their rulings would lead to an outcome that disfavors arbitration. Citing Concepcion, they asserted that any defense that disfavors arbitration, even if facially neutral, cannot be generally applicable, so the FAA savings clause should not apply.

The respondents in Murphy Oil used brevity in defending their positions. In that case, the Fifth Circuit reaffirmed its decision in D.R. Horton, providing little by way of reasoning for its decision. Instead, the Fifth Circuit simply stated “our decision [in D.R. Horton] was issued not two years ago; we will not repeat its analysis here.” Then the court again ruled, without discussion, that mandatory pre-dispute class and collective action waivers in forced arbitration clauses are enforceable.

Resolution On The Horizon

The Fifth Circuit’s D.R. Horton decision in opposition to the NLRB has left an array of inconstant judgments in its wake. The Supreme Court’s resolution of the pending disputes will have a far-reaching impact on employer-employee relations. Not only will the outcome provide necessary clarity regarding workplace dispute resolution, but it has the potential to dramatically reduce the ways in which non-unionized employees are able to address working conditions from their already disadvantaged bargaining position. Additionally, the Court, in deciding these cases, will be determining not only the enforceability of mandatory pre-dispute collective and class action waivers in forced arbitration clauses, but also the approach that future courts should take when balancing their need to uphold the nation’s policy favoring arbitration agreements against the need to enforce other federal statutes crafted by Congress. It will be interesting to see whether the Court begins its analysis with its standard rules for statutory construction or whether it will first seek a “contrary congressional command” in the NLRA. The three cases have been consolidated and a total of one hour has been allotted for oral argument.

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