January 18, 2012

How Will Courts Review the NLRB Employment Class Action Decision?

By Paul Kirgis

Jean Sternlight’s post on the NLRB’s decision in D.R. Horton, Inc. and Michael Cuda cogently summarizes the NLRB’s rationale for treating class waivers differently in the employment context governed by the NLRA than in other FAA contexts. As she points out, this decision is controversial. Because it runs counter to a steady current of Supreme Court decisions upholding arbitral class waivers in other contexts, it is likely to end up in litigation before the federal courts, and perhaps before the Supreme Court. I want to add a couple of additional thoughts in anticipation of that eventuality.

The fulcrum of the NLRB’s decision is its construction of NLRA Section 7, which guarantees employees the right to engage in collective action to enforce labor laws such as the Fair Labor Standards Act (the basis for the claim here). The NLRB equated class action litigation and class action arbitration to other forms of concerted labor activity, such as the pursuit of collective grievances within a collective bargaining relationship and strikes. It further interpreted the Norris-LaGuardia Act to “protect[] concerted employment-related litigation by employees against federal judicial restraint based upon agreements between employees and their employer.” It then concluded that “an arbitration agreement imposed upon individual employees as a condition of employment cannot be held to prohibit employees from pursuing an employment-related class, collective, or joint action in a Federal or State court.”

That rationale may prove difficult for the federal courts to brush aside, despite the Supreme Court’s growing catalog of pro-arbitration and anti-class action decisions. The NLRB did not reproach D.R. Horton for pushing its employees into arbitration–it focused only on the provision in the employment agreement prohibiting collective action, whether through arbitration or litigation. It invalidated the provision to the extent it prohibited class action litigation without allowing class arbitration in its place, on the grounds that the labor laws guarantee collective action of some kind in their enforcement. The decision is thus an interpretation of federal labor laws.

The NLRB’s interpretations of federal labor laws are entitled to significant judicial deference under Chevron‘s two-step analysis. A federal court reviewing the NLRB’s decision thus faces a conflict between the agency’s interpretation of statutory language, which is entitled to deference, and the federal policy favoring arbitration that the Supreme Court has found in the FAA. More specifically, a court challenge would pit the NLRB’s Chevron-protected determination that the labor laws guarantee a right to collective action against Supreme Court precedents validating adhesory contracts that strip the right to collective action by way of arbitration.

In a case raising similar issues, the Ninth Circuit recently held that a mandatory arbitration agreement in an auto sales contract was invalid because the FTC’s interpretation of the Magnuson-Moss Warranty Act prohibits mandatory arbitration. Gary Born has a good analysis of the case (which he criticizes) on his blog, so I won’t go into the details here. Because that decision creates a circuit split, it may reach the Supreme Court before the NLRB’s decision does. Even so, it may not control because D.R. Horton is a formal adjudication by the agency, rather than an interpretation of an ambiguous agency rule by a court, and because the NLRB was careful not to single out arbitration, focusing on the class waiver instead. D.R. Horton thus stands on much firmer ground.

Nancy Welsh has noted the parallel evolution of Supreme Court doctrine with respect to arbitration and administrative decisionmaking. As I noted here, in Stolt-Nielsen, the Supreme Court simply ignored deeply entrenched doctrines of judicial deference in arbitration to overrule an arbitral panel’s interpretation of contractual meaning. If the D.R. Horton decision reaches the Supreme Court, we will see whether the Court is equally willing to cast aside established standards of administrative review in the service of its pro-business arbitration agenda.

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