Readers of this blog know I love predicting the future, mainly because people cannot definitively say you are wrong unless they claim to be from the future. Years later, they can always follow up on your predictions, but that takes tenacity and a good memory. With that in mind, hear this: sooner or later, the Supreme Court is going to hit the NLRB with a 2 x 4 over its rulings on class action waivers in arbitration clauses in employment agreements. Now, I’m not advocating violence toward a federal agency; the Supremes’ actions will be entirely legal.
Déjà vu All Over Again
The current dustup reminds me of a spat 18 years ago between the Supreme Court and Montana over Federal Arbitration Act (“FAA”) preemption of the state’s franchise law as it pertained to predispute arbitration agreements (“PDAAs”). Before delving into this preemption battle, some review of arbitration law is in order. Bear with me, I’m a law professor at Fordham Law. In 1925, the FAA was enacted. Prior to the Act’s passage, enforcing predispute arbitration agreements and arbitration awards was very difficult.[1] The FAA abrogated the existing law, which was based on Common Law hostility to arbitration, as to transactions involving interstate commerce. The FAA made written promises to arbitrate specifically enforceable, and established very limited judicial review of arbitration awards.
The legal underpinning of the FAA is as follows: the Constitution’s Supremacy Clause[2] provides that the Constitution is supreme, and states must follow it to the exclusion of contrary state laws:
This Constitution, and the laws of the United States which shall be made in pursuance thereof … shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the Constitution or laws of any State to the contrary notwithstanding.
The Commerce Clause[3] in turn vests in Congress authority to regulate interstate commerce:
The Congress shall have power to … regulate commerce with foreign nations, and among the several states…”
Finally, the FAA is a Congressional enactment that is based on Congress’ power to regulate interstate commerce. Specifically, section 2 of the FAA states:
A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or 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 highlighted phrase is known as the “savings clause” because it creates a window whereby PDAAs may not be enforced under the FAA. Remember it for later, class.
So, along came Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681 (1996). This case involved a Montana law that required arbitration clauses in franchise agreements to be: on first page of contract, underlined, and in capital letters. The Montana Supreme Court declined to order arbitration of a dispute involving a non-complying franchise agreement, relying on the state statute. Meanwhile, the U.S. Supreme Court decided Allied-Bruce Terminex Cos., Inc. v. Dobson, 513 U.S. 265 (1995), in which it held that the FAA preempts state laws negatively impacting PDAAs. So, on the initial appeal, the Supreme Court reversed and remanded the Montana decision for reconsideration consistent with Terminex. This is the Supreme Court’s nice way of saying, “You obviously didn’t know how we were going to rule in Terminex, but now that you do, please fix your erroneous decision.” Not getting the hint, the Montana court, without inviting or accepting argument or briefs, reaffirmed its earlier decision invalidating the PDAA in the franchise agreement. Back the case went to the Supreme Court, which evidently was annoyed (I’m not certain courts can get annoyed, but judges sure can). In an 8-1 ruling, the Court spelled it out in “read our lips” language: “Courts may not invalidate arbitration agreements under state laws applicable only to arbitration provisions…Congress precluded states from singling out arbitration provisions for suspect status, requiring instead that such provisions be placed on the same footing as other contracts. So there.” (OK, I added the “so there” part.)
And this has what to do with the NLRB?
Fast forward to 2011, when the Supreme Court held in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), that PDAAs containing class action waivers were enforceable under section 2 of the FAA, and that a state rule of law prohibiting such waivers was preempted by the FAA. Last year, the Court in American Express Co. v. Italian Colors Restaurant, 570 U.S. ___, No. 12-133 (June 20, 2013), addressed the validity of a PDAA that required an individual to waive the right to participate in a class action litigation and to individually arbitrate a claim arising out of a federal statute. In another in a series of pro-arbitration rulings, the Court enforced the PDAA even though proving the claim in an individual arbitration might be very costly compared to a class action litigation.
As my kids would say, “Yes, but what does this have to do with the NLRB?” Turns out the Board had ruled previously in the D.R. Horton matter that a PDAA containing a class action waiver violated the National Labor Relations Act (“NLRA”) and was not enforceable because, among other things, the class action waiver unduly interfered with employees’ right to unionize. This case eventually found its way to the Fifth Circuit, which reversed this part of the Board’s ruling, in D.R. Horton, Inc. v. NLRB, No. 12-60031 (5th Cir., Dec. 3, 2013). “[W]e disagree and conclude that the Board’s decision did not give proper weight to the Federal Arbitration Act….The NLRA should not be understood to contain a congressional command overriding application of the FAA. The burden is with the party opposing arbitration, Gilmer, 500 U.S. at 26, and here the Board has not shown that the NLRA’s language, legislative history, or purpose support finding the necessary congressional command. Because the Board’s interpretation does not fall within the FAA’s ‘saving clause,’ and because the NLRA does not contain a congressional command exempting the statute from application of the FAA, the Mutual Arbitration Agreement must be enforced according to its terms.”
But, despite the fact that a federal circuit court, relying heavily on several Supreme Court holdings, has expressly overruled the NLRB’s take on class action waivers, some of the Board’s administrative law judges have apparently not gotten the message. In Leslie’s Poolmart, Inc. and Keith Cunningham, No. 21–CA–102332 (SF Office, Jan. 17, 2014), an ALJ invalidated a PDAA that did not contain a class action waiver. That’s right. The judge ruled in Poolmart that, by including a PDAA, the employer “violated Section 8(a)(1) of the [National Labor Relations] Act by maintaining and enforcing a mandatory and binding arbitration agreement which required employees to resolve certain employment-related disputes exclusively through individual arbitration and, though not expressly, but in practice, required them to relinquish any right they have to resolve such disputes through collective or class action.” What about the Fifth Circuit’s ruling in Horton? It doesn’t count until the Supreme Court says it does. “I find that the Supreme Court has not expressly overruled [the NLRB’s prior ruling in] D. R. Horton.
Although the Court has upheld the enforcement of individual arbitration agreement in employment related matters, see, e.g., Concepcion, supra, and American Express Co. v. Italian Colors Restaurant … the Court has not addressed or resolved the issue of exclusive arbitration over class and/or collective actions. As such, D. R. Horton is the controlling law applicable in this case. Even in the face of other Federal circuit decisions to the contrary, D. R. Horton represents current Board precedent that I must follow.” Wow!
Cruisin’ for a Bruisin’
There’s not much I remember from civics class or law school, but I do remember this: congress passes laws, the president signs laws, the courts interpret laws, and, federal administrative agencies carry out and apply federal laws. It is my view that the NLRB is having a bit of an identity crisis, and that sooner or later, the Supreme Court will – in “read our lips” fashion – deliver the message that class action waivers in PDAAs are enforceable under the FAA … and the NLRA.
Postscript
We may not have heard the last of this. The full NLRB now has the Poolmart case. You can follow it here. Also, the NLRB is accepting comments on its policy on deferral to arbitration awards. Stay tuned.
