NLRB Doubles Down: Again Holds Waivers of Class Actions in Arbitration Agreements Illegal

It's election time. So here's a short political rant:  The National Labor Relations Board is one of the administrative agencies that prove the cliche: elections have consequences.  (The President nominates the Board's members, each of whom is confirmed by the Senate to a five-year term.)  The President packed the Board with "recess appointments" after the Senate would not confirm his nominees. The Supreme Court voided those recess appointments. And then the Senate confirmed a slate of 5 nominees in a political compromise over filibusters and such.  Because advice and consent on the merits. End rant.

Whether you agree or disagree with the administration's politics, it's no secret that the NLRB has set about expanding the reach of the National Labor Relations Act, into non-union settings (like social media policies; handbook policies against insubordination, disloyalty, etc.; confidentiality agreements; and more).  It is not an exaggeration to say that non-union employers face more scrutiny by the National Labor Relations Board than they ever have in the past.

The Board also has weighed in on private agreements to arbitrate. The Board made news a couple of years ago when it held that an employer's requiring employees to waive the right to pursue class relief in mandatory arbitration agreements violated the National Labor Relations Act.  That was the "DR Horton" decision here.  The essence of DR Horton is that class action waivers violate the National Labor Relations Act by requiring employees to give up the right to act in a group (class) concerning wages, hours, or other terms and conditions of employment.

But the Fifth Circuit Court of Appeals refused to enforce DR Horton, meaning it could not be enforced against DR Horton in court, or against other employers as precedent.  Other courts also declined to follow DR Horton in part because it has nothing to do with the National Labor Relations Act, and in part because the U.S. Supreme Court has found class waivers to be fine under the Federal Arbitration Act.  Even the California courts of appeal have refused to hold class waivers unenforceable under DR Horton.

So, given that courts, which interpret the law that Congress enacts, universally rejected DR Horton, the NLRB's decision is probably relegated to the dust-bin of blips in the employment law radar, never to be heard from again, right?

Political rant redux: Nah, this is the 2014 National Labor Relations Board. They are not constrained by silly federal and state judges and stuff!  Ok, I'm done.

The Board's new decision, Murphy Oil (opinion here) gives new life to DR Horton.  Based primarily on encouraging law review articles written by law school professors, 3 of 5 members decided to re-affirm DR Horton and declare once again that class action waivers in arbitration agreements violate the NLRA, and will maintain this position until the U.S. Supreme Court says otherwise.  Given it will take the federal courts and Supreme Court a few years to take up the issue, this will be the Board's position for a while.

So, in this new case,  Sheila Hobson worked for a Murphy Oil facility and signed an arbitration agreement containing this language:

INDIVIDUAL AND COMPANY UNDERSTAND THAT, ABSENT THIS AGREEMENT, THEY WOULD HAVE THE RIGHT TO SUE EACH OTHER IN COURT, TO INITIATE OR BE A PARTY TO A GROUP OR CLASS ACTION CLAIM, AND THE RIGHT TO A JURY TRIAL, BUT, BY EXECUTING THIS AGREEMENT, BOTH PARTIES GIVE UP THOSE RIGHTS AND AGREE TO HAVE ALL EMPLOYMENT DISPUTES BETWEEN THEM RESOLVED BY MANDATORY,
FINAL AND BINDING ARBITRATION. ANY EMPLOYMENT RELATIONSHIP BETWEEN INDIVIDUAL AND COMPANY IS TERMINABLE AT-WILL, AND NO OTHER INFERENCE IS TO BE DRAWN FROM THIS AGREEMENT.

Hobson later sued Murphy under the Fair Labor Standards Act, asserting a collective action along with three other employees.  The federal district court ordered Hobson to individual arbitration.   But Hobson filed a complaint (charge) with the NLRB and the NLRB's General Counsel charged Murphy with an unfair labor practice (forcing Hobson to give up the right to collectively pursue her wage claims).

The NLRB decided 3-2 that Murphy violated the NLRA, that DR Horton was correctly decided and valid, that the circuit courts that rejected it were wrong, and that the 2 dissenting Board members were also wrong.

What is the upshot?

1. Class action waivers in arbitration agreements remain enforceable in court.

2. Employers maintaining class arbitration waivers may expect unfair labor practice charges before the NLRB, including non-union employers.

3.  NLRB orders are not enforceable by themselves, in that the NLRB has to go to a federal court of appeals to obtain a judgment. So, unless a circuit court of appeals enforces the Board's order, the legal effect of an unfair labor practice finding is limited to whatever sanctions the Administration can levy on employers who are federal contractors found to violate the NLRA, and to whatever retribution the NLRB may bring against the employer for refusing to comply with its unenforceable order.

4. If a circuit court does choose to enforce the order, it could create a circuit split, providing some incentive for the U.S. Supreme Court to take up the case.

Be careful out there.

Court of Appeal Upholds Arbitration Agreement

Nelsen v. Legacy Partners (opinion here) is the latest decision from the court of appeal to address the validity of arbitration agreements in California, after recent federal developments (Concepcion, DR Horton, etc.). 

The issues, as usual, are whether the arbitration agreement is "unconscionable," or violates public policy, and therefore is unenforceable as a contract.

The arbitration agreement was located at the end of a long handbook. Not surprisingly, the court first found that the agreement was "procedurally unconscionable,"  because

It was part of a preprinted form agreement drafted by LPI that all of LPI‘s California property managers were required to sign on a take-it-or-leave-it basis. The arbitration clause was located on the last two pages of a 43-page handbook. While the top of page 42 contains a highlighted prominent title ―TEAM MEMBER ACKNOWLEDGMENT AND AGREEMENT,‖ the title makes no reference to arbitration and the arbitration language itself appears in a small font not set off in any way to stand out from the rest of the agreement or handbook. Moreover, unless Nelsen happened to be conversant with the rules of pleading in the Code of Civil Procedure, the law and procedure applicable to appellate review, and the rules for the disqualification of superior court judges, the terms and rules of the arbitration referenced in the clause would have been beyond her comprehension.

So, now the courts say that failing to attach the Code of Civil Procedure makes an agreement procedurally unconscionable.  What happened to "everyone is bound to know the law?" or "ignorance is no excuse?"  Also, by saying that the agreement is not in a different font, the court is imposing a requirement that does not apply to other contracts.  That's not supposed to be allowed, demonstrating once again that the unconscionability doctrine is just an end run around Federal Arbitration Act preemption.

However, the court then turned to "substantive" unconscionability, which must also exist for an arbitration agreement to be invalidated.  In this case, though, the arbitration agreement was pretty much lifted verbatim from a California Supreme Court decision. (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064.)  So, the Court did not find substantive unconscionability.

But Nelsen then argued that, regardless of unconcsionability, the arbitration agreement violated "public policy" under the California Supreme Court's decision in  Gentry v. Superior Court (2007) 42 Cal.4th 443.  In particular, Nelsen argued that the arbitration agreement barred her from bringing a class claim in arbitration because the agreement was silent as to class claims.

The court of appeal held that, indeed, the silent agreement did not encompass class-based claims.
However, the court then decided that Gentry did not invalidate the arbitration agreement because Nelsen did not adequately support the argument to the trial court.  That is, Gentry does not invalidate "all" class action waivers, so you have to establish the Gentry "factors," which Nelsen did not do.  In ruling this way, the court sidestepped whether Gentry remains good law.

Finally, the court decided that the National Labor Relations Board's decision in DR Horton was not binding and that the court would not follow it. The court noted that the decision was issued by just 2 Board members and that the issue of whether class action waivers are enforceable are beyond the Board's normal expertise.

So, another arbitration agreement survives.