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Class Action Waivers Survive NLRB's Repeat Challenge

By Kristen L. Burge, Litigation News Contributing Editor – November 28, 2016

If at first you don't succeed, try, try again. Heeding this advice, the National Labor Relations Board challenged for a third time the validity of class action waivers in mandatory employment arbitration contracts. The U.S. Court of Appeals for the Fifth Circuit refused to overturn its two prior decisions holding such waivers valid and enforceable under the National Labor Relations Act (NLRA) and the Federal Arbitration Act (FAA). Citi Trends, Inc. v. NLRB highlights the circuit split over the validity of such waivers, and increases the likelihood that the Supreme Court will seek to resolve the conflicting decisions, according to certain ABA Section of Litigation leaders.

The Fifth Circuit Holds Trend on Waiver Validity
In Citi Trends, a former employee filed an unfair labor practices charge over a class action waiver in the company's mandatory arbitration agreement. The employee argued requiring employees to waive employee class and collective actions violated Section 8(a)(1) of the NLRA.

An administrative law judge agreed and the NLRB later affirmed the judge's decision. The NLRB reasoned the mandatory arbitration agreement unlawfully required "employees to waive their right to maintain class or collective actions in all forums, whether arbitral or judicial."

On appeal, the NLRB requested the Fifth Circuit reconsider its two prior decisions. Twice prior, the Fifth Circuit held "an employer does not engage in unfair labor practices by maintaining and enforcing an arbitration agreement prohibiting employee class or collective actions and requiring employment-related claims to be resolved through individual arbitration."

The Fifth Circuit refused to deviate from its earlier decisions citing its binding precedent.

The Widening Circuit Split
The Fifth Circuit's unpublished decision in Citi Trends highlights the emerging circuit split over the validity of such waivers. The Fifth Circuit joins the Second and Eighth Circuits, all upholding these waivers. In the Seventh and Ninth Circuits, however, the NLRB's position prevails, with both circuits holding employers cannot lawfully include class action waivers in mandatory arbitration agreements. By invalidating these waivers, the Seventh and Ninth Circuits recognize class actions as a protected "right to engage in collective legal action," explains Teresa Rider Bolt, cochair of the Section of Litigation's Employment & Labor Relations Law Committee.

The waiver's validity turns on, depending on the circuit, whether a court considers NLRA-provided actions substantive or procedural rights. "Because there is a circuit split, and the NLRB has shown determination to continue litigating the matter, it is very likely that the Supreme Court will soon step in to resolve the issue," suggests Bolt. Three petitions for certiorari are pending before the U.S. Supreme Court, all filed in 2016. The timing "is likely influenced by two factors," notes Trish Higgins, chair of the Wage-and-Hour Subcommittee of the Section's Employment & Labor Relations Law Committee. "One, there are now two circuits that support the NLRB's position, and two, the Supreme Court has lost its strongest advocate for upholding arbitration agreements with class action waivers, Justice Scalia," observes Higgins.

To resolve the split, the Supreme Court must decide whether "the NLRA provides an unwaivable substantive right for employees to pursue employment claims on a class and collective action basis," explains Higgins. Interpreting such a right as substantive, however, "opens the door for some strange results," she warns.

These possible strange results serve to "underscore that the class mechanism is a procedural vehicle and not a substantive right," adds Higgins. Other section leaders agree too. "As the Fifth Circuit reasoned in D.R. Horton, Inc. v. NLRB, the right to bring a class action lawsuit is a procedural right, not a substantive right," notes Bolt, adding the Fifth Circuit applied Supreme Court precedent in this regard.

Managing Class Action Waivers in Uncertain Legal Landscape
The NLRB "is not required to acquiesce to adverse decisions of the federal courts in subsequent proceedings not involving the same parties," warns Bolt. Therefore, "the Board may continue to challenge arbitration agreements on the same grounds." To minimize this risk–and associated costs–employers should incorporate certain provisions into the arbitration agreements to avoid legal challenges.

As a practice pointer, "the arbitration agreement should provide employees the option to opt-out of the agreement," recommends Higgins. "With an opt-out provision, the employer can argue that it did not 'coerce' employees to waive their 'right' to file a class action in violation of the NLRA," suggests Higgins.

She also noted that providing a reasonable amount of time to opt-out and a relatively easy mechanism to do so could be crucial to the agreement's enforceability. The agreement should also carve out NLRA claims by stating "claims under the NLRA are not subject to the agreement to arbitrate and that nothing in the agreement prohibits the employee from filing a charge . . . with, or communicating or cooperating with, the NLRB," advises Higgins.

Regardless, whenever drafting or signing contracts waiving legal remedies, both employers and employees alike should consult with legal counsel. "There are legal rights guaranteed under federal law that simply cannot be waived. Just because an agreement is in writing and signed does not mean a court will enforce it," reminds Bolt.

Keywords: labor and employment law, arbitration agreements, class action waiver, NLRB

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