Fifth Circuit Issues D.R. Horton Ruling

Earlier today, in a 2-to-1 decision giving a victory to employers, the Fifth Circuit reversed the NLRB’s finding that D.R. Horton had violated the National Labor Relations Act by requiring its employees to sign arbitration agreements with class action waivers.  D.R. Horton, Incorporated v. NLRB, No. 12-60031 (5th Cir. Dec. 3, 2013) (click here for a copy of the decision).

The Fifth Circuit reasoned that the NLRB did not give proper weight to the FAA, and the Fifth Circuit discussed two exceptions to the core principle that arbitration agreements are generally enforceable under the FAA.  First, an arbitration agreement may be invalidated based on generally-applicable contract defenses pursuant to the FAA’s savings clause, and second, another statute’s contrary congressional command may preclude application of the FAA.

With respect to the FAA’s savings clause, the Fifth Circuit explained that although the NLRB’s ruling appears to be facially neutral by requiring employees to have access to class procedures in either arbitration or judicial proceedings, the NLRB’s ruling disfavors arbitration.  The Fifth Circuit relied heavily on the Supreme Court’s Concepcion decision, where the majority found that requiring class procedures is inconsistent with the “fundamental attributes” of arbitration under the FAA.  The Fifth Circuit also found that neither the text nor the legislative history of the National Labor Relations Act overrides the FAA.   The Fifth Circuit concluded that although the National Labor Relations Act does generally protect employees’ rights of collective action, arbitration agreements containing class action waivers are enforceable under the FAA.

The Fifth Circuit noted that some particular language of the arbitration clause at issue was problematic.  The clause at issue stated that the employee was waiving his or her “right to file a lawsuit or other civil proceeding.”  The NLRB found, and the Fifth Circuit agreed, that employees could reasonably misconstrue this broad language as precluding their ability to file administrative charges with the NLRB, and as a result, this misleading language from the arbitration agreement violated the National Labor Relations Act.

A dissenting judge found that the NLRB’s ruling would not conflict with the FAA.  The dissenting judge reasoned that the FAA was intended to place arbitration agreements on equal footing with any other contract, and to find that an arbitration agreement must yield to federal labor law treats the arbitration agreement just like any other contract that conflicts with labor law.

The Fifth Circuit’s decision is flawed.  The Fifth Circuit reasoned that nothing in the National Labor Relations Act indicates that it overrides the FAA.  However, the Fifth Circuit was assuming that the FAA is applicable to this fact pattern to begin with.  As explained in my book exploring the legal history of the FAA, Outsourcing Justice, the FAA was never intended to apply in the employment context.