State of Confusion
The enforceability of class action waivers in employment arbitration agreements is a hotly debated topic that has created not only a circuit split, but an ongoing divide in policy between circuit courts and federal agencies. The National Labor Relations Board has long held that such class action waivers are unenforceable, arguing such provisions limit employees’ ability to bargain collectively under Section 7 of the National Labor Relations Act. See In Re D. R. Horton, Inc., 357 NLRB 2277 (2012). The Fifth Circuit Court of Appeals promptly refused to enforce the NLRB’s ruling, pointing to Supreme Court rulings favoring the enforcement of arbitration agreements, and arguing nothing in the class action waivers could be construed to violate employee’s Section 7 rights. D.R. Horton, Inc. v. N.L.R.B., 737 F.3d 344 (5th Cir. 2013). The Second and Eighth Circuits followed the lead of the Fifth, but a circuit split was created when Seventh and Ninth Circuits issued rulings backing the NLRB. The Third Circuit muddied the waters further when it ruled that a party could be compelled either to individual or class arbitration based on the terms of their arbitration agreement, but failing to address whether class waivers violated Section 7. See Opalinski v. Robert Half Int’l Inc., 761 F.3d 326, 335 (3d Cir. 2014) (never mentioning NLRA Section 7 despite the parties’ arguments on that point). As such, a 3/2/1 circuit split currently exists, with the Second, Fifth, and Eighth Circuits on the side of enforcement of class waivers in arbitration agreements, the Seventh and Ninth Circuits on the side of the NLRB, and the Third Circuit apparently leaning toward enforcement, but not stating so explicitly. The NLRB, standing on its policy to defer only to decisions by the Supreme Court, has continued to dish out rulings that class action waivers in arbitration agreements were invalid.
Change in the Winds
Under the Obama White House, the Department of Justice ostensibly backed the NLRB, petitioning the Supreme Court on behalf of the Board to review of a Fifth Circuit ruling that, once again, held arbitration agreements containing class waivers to be enforceable. The Supreme Court agreed to hear that case, consolidated with two others, in January. Since then, however, the Department of Justice has apparently reversed course. The new Trump DOJ has filed an amicus brief arguing for the legitimacy of class action waivers in arbitration agreements, stating that the Department’s previous position failed to give adequate weight to the Federal Arbitration Act’s requirement that arbitration agreements be enforced unless they “run afoul of arbitration-neutral rules of contract validity.”
What This Means for Your Business
The DOJ’s reversal on the enforceability of collective action waivers in arbitration agreements suggests the Trump White House has planted its flag on the issue and intends to take a pro-business stance. We expect to see this policy change to ripple through the rest of the executive branch—including the Department of Labor and the National Labor Relations Board (to the extent possible). In light of this pro-employer policy shift from the White House, the NLRB could theoretically cease dishing out rulings invalidating collective action waivers in arbitration agreements, if not upholding the waivers outright, but such a drastic shift is unlikely. President Trump has only appointed one Board Member, elevating Miscimarra to Chairman, and the makeup of the Board is currently two Democrats (Pearce & McFerran) and one Republican (Miscimarra). This has essentially been the makeup of the Board for several years, including during President Obama’s tenure.
Regardless, while the executive branch may be leaning toward supporting the enforceability of class action waivers, a circuit split still exists. Without a Supreme Court ruling on the matter, the issue remains in limbo, and you do not want your business to be surprised by a court compelling you to arbitration but refusing to enforce your class waiver. That is generally the worst of all possible scenarios because arbitration is expensive, managed by someone other than a judge, and generally lacks any sort of appeal process.
The Executive Branch’s policy shift is certainly good news for employers. However, without clarification from the Supreme Court, there is still a great deal of uncertainty. Companies that have nation-wide operations may face situations in which their class waivers function normally in one state but not another. An overzealous arbitrator in a no-waiver or undecided jurisdiction may invalidate the waiver, fail to manage the notice process, and then enter a large class action award. Because courts may overturn an arbitrator’s decision “only in very unusual circumstances,” see First Options of Chicago, Inc. v. Kaplan, 514 U. S. 938, 942 (1995), there would be almost no chance of judicial relief from this nightmare scenario.
However, there are a number of ways an employer can mitigate this risk, most of which revolve around how the arbitration agreements are drafted. It might be beneficial to include a tiered appeals process in the agreement, by which the initial decision of an arbitrator can be appealed to a larger panel of arbitrators. For most companies, it may make more sense to include a provision that says the entire arbitration agreement is void if the collective action waiver is struck. For multi-jurisdiction companies, it could be useful to include mandatory forum selection and choice of law provisions requiring all disputes to be heard by a federal court and/or arbitrator within the Second, Third, Fifth, or Eighth Circuit, particularly if the company agrees to pay the employee’s reasonable travel costs during arbitration to avoid having the agreement struck for unconscionability.
While the Trump White House’s new position on collective action waivers in arbitration agreements is good news for employers, the still-extant circuit split means uncertainty abounds–especially for companies that operate across several states. Talk to your lawyer about the best way to reduce your company’s potential liability until the Supreme Court rules. If you would like to discuss a revision to your company’s current arbitration agreement, please feel free to call (470) 839-9300 or email (email@example.com).