A New Reason to Consider Mandatory Arbitration Agreements
The benefits of mandatory arbitration in the employment context are many and generally well known to employment lawyers and human resource professionals alike. Arbitration is generally more efficient and cheaper than court litigation. Employers generally have better win rates in arbitration and, even when they lose, the amounts awarded by arbitrators are generally lower than the amounts awarded by juries. And, of course, arbitrators are much less likely to be swayed by emotional arguments and therefore the risk of a ruinous runaway jury award of either general or punitive damages is less in arbitration than it is in a lawsuit.
However, within the last year the United States Supreme Court enshrined into law yet another important benefit to arbitration: arbitration agreements may be used by employers as a means to avoid class or collective actions. Thus, in American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), the Court held that provisions in mandatory arbitration agreements which specify that the plaintiff may not adjudicate claims on a class or collective action basis are fully enforceable under the Federal Arbitration Act (FAA). According to the Court, such provisions are only unenforceable if Congress has expressly stated in another statute that the ability to pursue a class or collective action is so essential to adjudication of the statutory claim at issue that the FAA policy of enforcing arbitration agreements as written is overridden. This creates a nearly impossible burden for those seeking to invalidate class action waivers.
The Italian Colors case is extremely important because class or collective action cases, particularly in the wage and hour context, are, regardless of their merit, enormously expensive to litigate and place great pressure on employers to settle to avoid both the resulting defense costs and the risk of a large jury verdict applicable to hundreds or even thousands of employees. Although Italian Colors was a consumer case and not an employment case, the Court's holding has been followed in several employment cases and gives employers a powerful tool to ensure that only individual claims may be litigated in those cases.
However, the National Labor Relations Board (NLRB) has attempted to throw up a roadblock to the enforcement of class action waivers in the employment context. In January of 2012, the NLRB ruled in D.R. Horton Inc., 357 NLRB No. 184 (2012), that a mandatory arbitration agreement between D.R. Horton and its employees violated the National Labor Relations Act (NLRA). Specifically, the NLRB ruled that an arbitration agreement requiring employees to waive their right to bring a joint, collective or class action as a condition of employment violated Section 8(a)(1) of the NLRA, which protects employees' right to engage in concerted activity.
The D.R. Horton decision engendered an almost universally negative reaction in the courts. First, D.R. Horton, a national homebuilder, promptly petitioned the 5th U.S. Circuit Court of Appeals for review of the NLRB's order. The NLRB argued that, unlike the federal law at issue in Italian Colors, the NLRA was specifically designed to protect the "substantive right" of employees to engage in collective action. The 5th Circuit rejected the NLRB's argument and upheld D.R. Horton's arbitration agreement from this attack. In its opinion, the 5th Circuit held that the use of class action procedures is not a "substantive right" and that the NLRA does not contain a congressional command overriding the FAA (D.R. Horton Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013)).
Three other circuit courts of appeals initially agreed with the 5th Circuit that class action waiver provisions in arbitration agreements are fully enforceable under the FAA and that the NLRA did not override that important federal statute (Owen v. Bristol Care, 702 F.3d 1050 (8th Cir. 2013); Sutherland v. Ernst & Young LLP, 726 F.3d 290 (2nd Cir. 2013); Richards v. Ernst & Young LLP, 734 F.3d 871 (9th Cir. 2013)). Each of those cases involved class and/or collective wage and hour claims. In addition to declining to follow the D.R. Horton decision, each court concluded that there also was nothing in the Fair Labor Standards Act, the federal law governing overtime compensation, that indicated a congressional intent to override the FAA's strong presumption in favor of the strict enforcement of arbitration agreements. On March 24, 2014, the U.S. Circuit Court of Appeals for the 11th Circuit was added to the roster when it issued an opinion agreeing with the reasoning of its sister circuits (Walthour v. Chipio Windshield Repair LLC, 2014 U.S. App. LEXIS 5315 (11th Cir. 2014)). With five circuit courts of appeals now firmly of the opinion that class action waiver provisions in arbitration agreements are fully enforceable under the FAA and no contrary opinions, it would appear that the debate engendered by the NLRB in D.R. Horton has been put to rest.
Unfortunately, however, not all NLRB administrative law judges have applied Italian Colors or recognized the unanimous conclusions of the various circuit courts of appeals. Some administrative law judges have reasoned that, until the NLRB itself overrules D.R. Horton or the Supreme Court does so, they must follow D.R. Horton and its holding that an arbitration agreement with the practical effect of barring workers from bringing class or collective actions violates the NLRA. (See, e.g., Domino's Pizza LLC, 2014 NLRB LEXIS 227 (March 27, 2014); The Pep Boys of Manny Moe & Jack of California, 2014 NLRB LEXIS 185 (March 7, 2014)).
However, in another decision, a different NLRB judge concluded that the Supreme Court's decision in Italian Colors, considered in the context of the Court's earlier decisions, left no doubt that the D.R. Horton decision lacked continued vitality (Haynes Building Services LLP, 2014 NLRB LEXIS 94 (Feb. 7, 2014)).
Benefits of Arbitration Program
As explained at the outset, there are several excellent reasons for employers to require employees to arbitrate employment disputes particularly when, as a result, the prospect of class or collective litigation may be avoided. In light of the Supreme Court's decision in Italian Colors and ensuing decisions by the various courts of appeals, it appears to be simply a matter of time before the D.R. Horton decision is finally and definitively laid to rest. In advance of that date, however, employers wishing to avoid class action litigation should consider implementing, with the advice of counsel, an arbitration program if they have not already done so. And if they do have an existing program, employers should consider reviewing their existing agreements to make sure that they are up-to-date and in compliance with recent legal developments. In any event, employers should not turn their backs on the benefits of an arbitration program, which include a class action waiver, without careful consideration.
Michael Garone practices labor and employment law at Northwest law firm Schwabe, Williamson & Wyatt in Portland, Ore. He's been recognized by Chambers USA as one of the country's top attorneys in his field. He can be reached at email@example.com.
Reprinted with the permission of the Society for Human Resource Management (www.shrm.org), Alexandria, VA, publisher of HR Magazine.