Yesterday, the Fifth Circuit denied the NLRB’s petition for en banc review of its December 3, 2013 decision wherein the Fifth Circuit refused to enforce the NLRB’s decision invalidating class action waivers in mandatory employee arbitration agreements. See D.R. Horton, Inc. v. NLRB, — F.3d —, 2013 WL 6231617 (5th Cir. Dec. 3, 2013). In the NLRB decision overturned by the Fifth Circuit (In re D.R. Horton, Inc., 357 NLRB No. 184 (Jan. 3, 2012), the NLRB held that D.R. Horton’s mandatory arbitration agreement, which prohibited employees from filing class or collective action claims in any judicial or arbitral forum, violated Sections 7 and 8(a)(1) of the National Labor Relations Act (“NLRA”) by prohibiting employees’ ability to engage in collective action. In reversing the NLRB’s decision, the Fifth Circuit held 2-1 that the NLRB failed to give appropriate weight to the Federal Arbitration Act (“FAA”) and Congressional policies favoring arbitration. In sum, the court concluded that class action waivers in employment agreements are lawful.

Section 7 of the NLRA states that employees have the right to “engage in [ ] concerted activities for the purpose of collective bargaining or other mutual aid or protection.” 29 U.S.C. § 157. Section 8(a)(1) of the NLRA prohibits employers “interfer[ing] with, restrain[ing], or coerc[ing] employees in the exercise of their rights” granted in Section 7. 29 U.S.C. § 158. In a widely discussed 2012 decision, the NLRB found that D.R. Horton’s arbitration agreement, and specifically the restrictions on class or collective actions, violated these provisions. D.R. Horton appealed, arguing that the NLRA does not grant employees a substantive right to class action procedures and that the decision impermissibly conflicted with the FAA. In large part (but not entirely) the Fifth Circuit agreed.

The Fifth Circuit held that prohibiting class action waivers would conflict with the FAA. The Fifth Circuit, applying the U.S. Supreme Court’s reasoning in AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011), found that the NLRB’s prohibition on class action waivers had the effect of disfavoring arbitration because “employers would be discouraged from using individual arbitration,” and requiring class arbitration would “interfere[ ] with fundamental attributes of arbitration and thus create[ ] a scheme inconsistent with the [FAA].” D.R. Horton did not completely carry the day, however. The Fifth Circuit affirmed the NLRB’s holding that the language of D.R. Horton’s arbitration agreement would lead employees to reasonably believe that they were prohibited from filing charges of unfair labor practices with the NLRB itself. Accordingly, the court enforced the NLRB’s decision requiring D.R. Horton to rescind or revise its agreement to clarify that employees are not prohibited from filing unfair labor charges with the NLRB.

The NLRB’s decision in D.R. Horton, has been rejected by all of the circuit courts of appeals (Fifth, Second, Ninth and Eighth) and nearly all of the district courts which have considered the issue. Appeals from Board decisions go to the Circuit Courts of Appeal. District court decisions arise where an employee seeks to set aside an arbitration agreement containing a class action waiver on the ground that it conflicts with NLRB law. The district courts in those cases also tend to reject the Board’s position. Of the few cases that went the Board’s way, most are from one of the circuits that later rejected D.R. Horton and, thus, those decisions are now bad law and would go the opposite way if decided today. The few Florida federal courts that mention D.R. Horton held that it was required to follow pre-D.R. Horton Eleventh Circuit law which affirmed use of class action waivers in an FLSA overtime claim. See Caley v. Gulfstream Aerospace Corp., 428 F.3d 1359 (11th Cir. 2005). The Eleventh Circuit recently sidestepped the issue in Walthour v. Chipio Windshield Repair, LLC, 2014 WL 1099286 (11th Cir., March 21, 2014) in a decision generally viewed as pro-arbitration.

Will the NLRB petition the Supreme Court to grant certiorari? Probably not until there is a circuit split. Will the NLRB acquiesce and abandon efforts to attack class action waivers? They will one day run out of circuits to peddle this theory.

Therefore what?

Employers should recognize that the issue still is not settled. Although several federal courts of appeal now agree that the Board’s position is incorrect, the Board is not bound by those decisions, and even if it does not seek review by the Supreme Court (which is pro arbitration), the Board may ignore the decisions and continue issuing complaints. The final outcome of this issue is tied up in a pending case before the Supreme Court that will be issued in the next few weeks. If the Supreme Court affirms the lower court ruling that the NLRB was improperly constituted at the time D.R. Horton was issued, this could potentially wipe the entire case away. And while that may initially sound attractive, it might only mean that the current Board could take up the issue again starting from square one.

Another potential variable is whether the NLRB will appeal the DR Horton decision to the Supreme Court. I suspect that the NLRB will not appeal. The current Supreme Court (or at least five members of the Court) has expressed an unfailing affection for arbitration. The NLRB may be inclined to defer seeking Supreme Court review until it believes that it has a more favorable majority. The NLRB may simply ignore the court’s decision outside the Circuits where it had not prevailed. Or it may ignore the federal court decisions regardless of the jurisdiction in which a case arises. The Board tends to view itself as bound only by Supreme Court decisions, and (on some occasions) views the circuit courts as simply an interesting distraction. The risk exists that the NLRB will issue a complaint against an employer that requires employees to execute class action action arbtration agreements. The NLRB has been accused of operating a rogue agency that will harass employers despite having no legal basis for doing so. In the interim, it is likely that a district court will enforce an otherwise enforceable arbitration agreement containing a class action waiver if the court is presented with a motion to compel arbitration.

The bottom line

While the Fifth Circuit’s rejection of D.R. Horton is encouraging, the Board may very well ignore the Fifth Circuit (and the Second, Eighth and Ninth Circuits, which have also rejected D.R. Horton) and continue to issue complaints against employers that use class waivers in mandatory arbitration agreements.

How would this play out?

A plaintiff files a class action lawsuit. The employer moves to compel arbitration. The plaintiff claims the class action waiver is unlawful. It is unlikely that a court would refuse to force the class action waiver based on D.R. Horton. An adverse ruling could be appealed to the Eleventh Circuit. A plaintiff’s attorney may elect not to do so.

Alternatively, the NLRB could issue a complaint based on an unfair labor practice charge. That could be ruled upon by an ALJ in an administrative hearing, and then appealed to the NLRB (although if the case is clean, it could go directly to the Board on a stipulated record, which seems likely on these facts – there would be no litigation other than briefing). The appeal would sit there for a few months or years. The Board will rule against the employer (unless there is some intervening Supreme Court decision) whereupon the decision would be appealed to the Circuit Court of Appeal – either the D.C. Circuit or the Eleventh Circuit (assuming the cases starts in Florida). The appellate court would likely refuse to enforce the NLRB’s order. It would take years for the issue to play out and class actions would be disabled in the interim.

Of course, the risk exists that the courts change directions and start affirming the Board’s decision in D.R. Horton. If the NLRB charge is based on simply requiring the agreement as a condition of employment (i.e., the demand by itself is unlawful), the Board’s remedy would be to require employers to stop doing it, post a notice, but not much more. If the charge is based on an allegedly unlawful termination arising from a refusal to sign, there could be backpay liability for the affected persons. In general, employment law firms are advising employers who want protection from class actions to require the employees to sign arbitration agreements containing class action wiavers, and in the unlikely event that it results in a NLRB charge, fight it out in court.

There is another option, but few recommend it. Employers can permit employees to opt out of the arbitration clause by notifying the company within 30 days. Inertia will work in the employer’s favor. It comes at the price of allowing employees to opt out, which defeats the objective, and the NLRB disapproves of these agreements too. Employers give up a lot, and get very little protection. But such agreements are slightly easier to defend, and hence, a slightly less attractive target for the NLRB’s enforcement efforts.