Class Action Waivers in Employment-Related Arbitration Agreements

At the same time, the National Labor Relations Board (“NLRB”) has begun to focus on the non-unionized workforce with increasing aggression. For most franchisors and franchisees, unionization in the workforce is uncommon, and interaction with the NLRB is rare. Even if union activity does not increase at all, it is likely that experience with the NLRB is about to change.

The Board has given its greatest attention recently to employee handbooks and agreements between non-unionized employers and employees and whether the rules and policies in those written documents infringe on employees' rights to engage in concerted, protected activity. Social media policies have drawn the most activity and publicity after highly controversial statements from the NLRB General Counsel, but in a decision released in early 2012, the Board ruled in D.R. Horton, Inc., 357 N.L.R.B. No. 184 (Jan. 3, 2012), that an employer who required an employee to sign an arbitration agreement containing class and collective action waivers violated the National Labor Relations Act (“NLRA”) and committed an unfair labor practice. It reasoned that the requirement to waive class claims prevents employees from acting in concert to protect their rights under Section 8(a)(1). Thus, franchisors and franchisees ' as employers subject to the NLRA's requirements ' are on notice that very common policies and procedures in employee handbooks may prompt unfair labor practice charges with the NLRB whether a union has ever darkened the employer's door or not.

Inconsistencies

Concepcion and D.R. Horton are, obviously, inconsistent at best. On its face, the Concepcion decision plainly holds that class waivers in arbitration agreements must be upheld. D.R. Horton just as clearly concludes that class waivers in employment arbitration agreements are facially illegal. The dilemma created for the franchisor and franchisee is whether the holding in Concepcion from the highest court in the land protects an employer's right to include class and representative action waivers in mutual agreements to arbitrate workplace disputes with employees despite an unmistakable signal from the most active and influential employment-related governmental agency that it will not read Concepcion to permit these agreements.

Case law subsequent to the NLRB's D.R. Horton decision has largely rejected its analysis. But the D.R. Horton precedent remains valid in matters before the NLRB and stands as a persuasive conclusion from a prominent authority that class waivers in arbitration agreements violate the NLRA. And an employer can no longer dismiss the risks and costs associated with unfair labor practice charges merely because its workforce is not unionized. Presumably, a franchisor or franchisee with a well-designed employee arbitration agreement that specifically precludes class relief and limits arbitration to individual claims has given careful consideration to its decision to resolve disputes in this manner. In the current climate, though, an employer enforcing the agreement ' which is completely consistent with the Supreme Court's ruling in Concepcion ' must just as carefully consider that the NLRB believes that decision was illegal.

The Morvant Decision

Concepcion came before the U.S. Supreme Court on a dispute over whether class waiver in arbitration agreements is unconscionable under California law. Similar arguments have been presented to attack arbitration agreements in contractual relationships governing the employment relationship, due to its unique nature. Indeed, in a subsequent California federal court decision reviewing the Concepcion and D.R. Horton conflict, Morvant v. PF Chang's China Bistro, Inc., 2012 U.S. Dist. LEXIS 63985 (N.D.Cal. May 7, 2012), the court acknowledged plaintiffs' arguments that arbitration agreements arising from the employment relationship should be viewed with more scrutiny than those in the consumer context because different substantive rights are at issue. But the specific arguments raised ' the modest size of the potential individual recovery, the potential for retaliation against members of the class, the fact that absent members of the class may be ill-informed about their rights, and other real-world obstacles ' are mostly identical to the public policy concerns the Concepcion court considered.

Retaliation was not directly analyzed in Morvant, but it is a concern that can be addressed in a subsequent arbitration if it occurs. There is no practical reason a retaliation threat is any greater because arbitration is the forum where the underlying claim is pursued. Thus, the Morvant court held there was no basis to find it is “unconscionable” as a matter of law to apply Concepcion to arbitration agreements that govern the employment relationship.

Morvant also specifically rejected D.R. Horton's “public policy” analysis and its impact on the result. The plaintiffs correctly argued in Morvant that the NLRB's D.R. Horton decision plainly held that class waivers in employment agreements expressly violate the NLRA; there is no question the NLRB intended to fully preclude class waivers in the employment arena in any context. And these plaintiffs ' as will many other future plaintiffs ' urged that it is against public policy to enforce agreements in conflict with a federal statute. As support for the self-sustaining argument, they invoked the Federal Arbitration Act itself, which provides that agreements to arbitrate may be invalidated “on such grounds as exist at law or in equity for the revocation of any contract.” So, the argument goes, when an agreement to arbitrate includes a class waiver, it constitutes an unfair labor practice under the NLRA (based on the D.R. Horton decision) and, thus, is contrary to public policy under the FAA (which permits revocation on public policy grounds). If it is contrary to public policy, a court cannot enforce it.

But the Morvant court wholly rejected the public policy argument. Concepcion, it begins, strongly favors arbitration agreements, and the NLRB's attempt to pigeonhole its analysis into a package that makes it appear consistent with Concepcion simply fails. While it is true that plaintiffs cannot be required to forego the substantive rights provided in federal statutes, the Concepcion opinion and prior Supreme Court decisions do not impact substantive rights; plaintiffs may still pursue those claims individually in arbitration. According to Morvant and other cases, the D.R. Horton analysis has no persuasive value to federal courts.

But for employers evaluating whether to modify the employee handbook, to update their arbitration agreements, or weighing whether to commit to arbitration at all, the conflict leaves a fairly serious Catch-22. Any employer committed to including class waivers in arbitration agreements to avoid inefficient litigation must accept the possibility that it may be forced to defend unfair labor practice charges before the NLRB when it seeks to enforce the agreement. For many employers ' especially non-unionized employers with no experience before the NLRB and no desire to gain it ' this risk outweighs the potential benefits. For others, the exposure to class and collective action claims is so great that it is no real choice at all; the NLRB simply cannot devastate the employer in the same way as, for example, a nationwide collective action under the Fair Labor Standards Act. Moreover, many employers and their attorneys believe the likelihood that the Supreme Court will ultimately extend Concepcion to clearly cover class waivers in employment-related arbitration agreements minimizes the NLRB risk in any event.

Valuable Lessons

For all employers, especially franchisors and franchisees who often utilize unique employment models, Concepcion and the cases interpreting it provide valuable lessons. Businesses have been given a road map for every contractual agreement in which arbitration provisions might appear, and the signposts point to fairness. For example, Concepcion took special care to note that AT&T's arbitration agreement required the company to pay all the costs for non-frivolous claims; the arbitration must take place in the location where the customer was billed and not necessarily where AT&T's headquarters were located; AT&T was prohibited under the terms of the agreement from seeking attorney's fees against the consumer filing for arbitration; and the arbitrator was authorized to award any form of individual relief, presumably to include injunctive relief and punitive damages. In other words, as arbitration agreements go, AT&T's was extremely consumer-friendly.

While an employer does not necessarily need to go to these extremes to enforce a class waiver in an arbitration agreement or employee handbook, the message Concepcion sends is that basic fairness is unquestionably relevant. And negative case law interpreting Concepcion focuses like a laser beam on any perceived basis for finding substantive unconscionability. Franchisors and franchisees should analyze their agreements with employees and in other business relationships to assess whether the arbitration rules impose any burden on a person or entity greater than traditional litigation would impose. If they do, careful consideration should be given to modifications that alleviate those burdens. The last straw for a plaintiff's attorney to grasp when desperate to get a case certified as a class action before a jury is to persuade the trial judge that the arbitration agreement is so one-sided it is substantively unconscionable. It is, of course, not nearly as costly for an employer to pay an arbitrator's fee or permit arbitration in a slightly less convenient forum than to lose the forum completely due to the correct application of the substantive unconscionability doctrine.

The advantages and disadvantages arbitration can create are as varied and case-specific as any other business decision. Whether to implement an arbitration mechanism to resolve employment disputes is already complicated enough and often revolves around the jurisdiction in which the employer does business. It is not any easier to decide whether to use a separate agreement that highlights the arbitration mechanism or place the provisions in an employee handbook to minimize its significance; those questions do not have universally applicable answers and are extremely jurisdiction-specific. Concepcion, unfortunately, has not made these decisions any easier. Although it was unquestionably a business-friendly ruling, Concepcion merely added one more decision to the many that already existed. And it is a choice that could be a game-changing win for employers while simultaneously fraught with peril.

For franchisors and franchisees, the new, complex, post-Concepcion climate simply demands partnership with legal counsel to weigh whether and how to add class waivers to existing agreements if they were not already included, to evaluate each provision for its fairness and enforceability under existing law, to assess the risk from potential unfair labor practice charges if an arbitration agreement containing a class waiver must be enforced, and to consider the most effective way to bind current and new employees to its terms. The aggressive NLRB activity means each decision is likely to be reviewed carefully and with skeptical scrutiny. There is much to be gained from getting the decision right and a lot to lose if it is wrong.

K. Bryance Metheny is a partner in the labor and employment practice at Burr & Forman LLP in Birmingham, AL. He counsels franchisors and franchisees in developing employment policies and procedures to govern their businesses effectively. He may be reached at [email protected] or 205-458-5178.

In April 2011, the U.S. Supreme Court issued a landmark opinion addressing whether arbitration agreements drafted to prohibit class relief are enforceable. AT&T Mobility LLC v. Concepcion , 131 S.Ct. 1740 (2011) reiterated the Court's strong and consistent message that arbitration agreements must be enforced according to their terms. It emphasized in its holding that the parties' expectations must be honored even if those terms include class or collective action waivers, because “arbitration is a matter of contract.” In fact, the Concepcion Court went further and noted the incompatibility between arbitration's demonstrated efficiencies in resolving individual disputes compared with the statistical inefficiency of class relief. It concluded that class relief is inappropriate in arbitration unless the parties' agreement specifically authorizes it.

Although Concepcion arose in the consumer finance context, its analysis is not limited to any particular industry or contractual relationship. For franchisors and franchisees, the case is obviously critical to the franchise agreement itself, which often contains an arbitration agreement and may limit class relief. Whether it is a good thing that Concepcion guarantees parties the right to limit class relief in the franchise agreement likely depends on perspective. But both franchisors and franchisees are employers, and employment standards and procedures are often important terms in the franchise agreement. Employment relationships created in these agreements typically result in many employees in multiple locations. The opportunities Concepcion presents for franchisors and franchisees as employers to limit class relief in employee lawsuits cannot be ignored. As implications from the opinion continue to evolve, an employer's decision whether and how to craft enforceable arbitration agreements with employees has become more important than ever.

The NLRB's Decision in D.R. Horton

At the same time, the National Labor Relations Board (“NLRB”) has begun to focus on the non-unionized workforce with increasing aggression. For most franchisors and franchisees, unionization in the workforce is uncommon, and interaction with the NLRB is rare. Even if union activity does not increase at all, it is likely that experience with the NLRB is about to change.

The Board has given its greatest attention recently to employee handbooks and agreements between non-unionized employers and employees and whether the rules and policies in those written documents infringe on employees' rights to engage in concerted, protected activity. Social media policies have drawn the most activity and publicity after highly controversial statements from the NLRB General Counsel, but in a decision released in early 2012, the Board ruled in D.R. Horton, Inc., 357 N.L.R.B. No. 184 (Jan. 3, 2012), that an employer who required an employee to sign an arbitration agreement containing class and collective action waivers violated the National Labor Relations Act (“NLRA”) and committed an unfair labor practice. It reasoned that the requirement to waive class claims prevents employees from acting in concert to protect their rights under Section 8(a)(1). Thus, franchisors and franchisees ' as employers subject to the NLRA's requirements ' are on notice that very common policies and procedures in employee handbooks may prompt unfair labor practice charges with the NLRB whether a union has ever darkened the employer's door or not.

Inconsistencies

Concepcion and D.R. Horton are, obviously, inconsistent at best. On its face, the Concepcion decision plainly holds that class waivers in arbitration agreements must be upheld. D.R. Horton just as clearly concludes that class waivers in employment arbitration agreements are facially illegal. The dilemma created for the franchisor and franchisee is whether the holding in Concepcion from the highest court in the land protects an employer's right to include class and representative action waivers in mutual agreements to arbitrate workplace disputes with employees despite an unmistakable signal from the most active and influential employment-related governmental agency that it will not read Concepcion to permit these agreements.

Case law subsequent to the NLRB's D.R. Horton decision has largely rejected its analysis. But the D.R. Horton precedent remains valid in matters before the NLRB and stands as a persuasive conclusion from a prominent authority that class waivers in arbitration agreements violate the NLRA. And an employer can no longer dismiss the risks and costs associated with unfair labor practice charges merely because its workforce is not unionized. Presumably, a franchisor or franchisee with a well-designed employee arbitration agreement that specifically precludes class relief and limits arbitration to individual claims has given careful consideration to its decision to resolve disputes in this manner. In the current climate, though, an employer enforcing the agreement ' which is completely consistent with the Supreme Court's ruling in Concepcion ' must just as carefully consider that the NLRB believes that decision was illegal.

The Morvant Decision

Concepcion came before the U.S. Supreme Court on a dispute over whether class waiver in arbitration agreements is unconscionable under California law. Similar arguments have been presented to attack arbitration agreements in contractual relationships governing the employment relationship, due to its unique nature. Indeed, in a subsequent California federal court decision reviewing the Concepcion and D.R. Horton conflict, Morvant v. PF Chang's China Bistro, Inc., 2012 U.S. Dist. LEXIS 63985 (N.D.Cal. May 7, 2012), the court acknowledged plaintiffs' arguments that arbitration agreements arising from the employment relationship should be viewed with more scrutiny than those in the consumer context because different substantive rights are at issue. But the specific arguments raised ' the modest size of the potential individual recovery, the potential for retaliation against members of the class, the fact that absent members of the class may be ill-informed about their rights, and other real-world obstacles ' are mostly identical to the public policy concerns the Concepcion court considered.

Retaliation was not directly analyzed in Morvant, but it is a concern that can be addressed in a subsequent arbitration if it occurs. There is no practical reason a retaliation threat is any greater because arbitration is the forum where the underlying claim is pursued. Thus, the Morvant court held there was no basis to find it is “unconscionable” as a matter of law to apply Concepcion to arbitration agreements that govern the employment relationship.

Morvant also specifically rejected D.R. Horton's “public policy” analysis and its impact on the result. The plaintiffs correctly argued in Morvant that the NLRB's D.R. Horton decision plainly held that class waivers in employment agreements expressly violate the NLRA; there is no question the NLRB intended to fully preclude class waivers in the employment arena in any context. And these plaintiffs ' as will many other future plaintiffs ' urged that it is against public policy to enforce agreements in conflict with a federal statute. As support for the self-sustaining argument, they invoked the Federal Arbitration Act itself, which provides that agreements to arbitrate may be invalidated “on such grounds as exist at law or in equity for the revocation of any contract.” So, the argument goes, when an agreement to arbitrate includes a class waiver, it constitutes an unfair labor practice under the NLRA (based on the D.R. Horton decision) and, thus, is contrary to public policy under the FAA (which permits revocation on public policy grounds). If it is contrary to public policy, a court cannot enforce it.

But the Morvant court wholly rejected the public policy argument. Concepcion, it begins, strongly favors arbitration agreements, and the NLRB's attempt to pigeonhole its analysis into a package that makes it appear consistent with Concepcion simply fails. While it is true that plaintiffs cannot be required to forego the substantive rights provided in federal statutes, the Concepcion opinion and prior Supreme Court decisions do not impact substantive rights; plaintiffs may still pursue those claims individually in arbitration. According to Morvant and other cases, the D.R. Horton analysis has no persuasive value to federal courts.

But for employers evaluating whether to modify the employee handbook, to update their arbitration agreements, or weighing whether to commit to arbitration at all, the conflict leaves a fairly serious Catch-22. Any employer committed to including class waivers in arbitration agreements to avoid inefficient litigation must accept the possibility that it may be forced to defend unfair labor practice charges before the NLRB when it seeks to enforce the agreement. For many employers ' especially non-unionized employers with no experience before the NLRB and no desire to gain it ' this risk outweighs the potential benefits. For others, the exposure to class and collective action claims is so great that it is no real choice at all; the NLRB simply cannot devastate the employer in the same way as, for example, a nationwide collective action under the Fair Labor Standards Act. Moreover, many employers and their attorneys believe the likelihood that the Supreme Court will ultimately extend Concepcion to clearly cover class waivers in employment-related arbitration agreements minimizes the NLRB risk in any event.

Valuable Lessons

For all employers, especially franchisors and franchisees who often utilize unique employment models, Concepcion and the cases interpreting it provide valuable lessons. Businesses have been given a road map for every contractual agreement in which arbitration provisions might appear, and the signposts point to fairness. For example, Concepcion took special care to note that AT&T's arbitration agreement required the company to pay all the costs for non-frivolous claims; the arbitration must take place in the location where the customer was billed and not necessarily where AT&T's headquarters were located; AT&T was prohibited under the terms of the agreement from seeking attorney's fees against the consumer filing for arbitration; and the arbitrator was authorized to award any form of individual relief, presumably to include injunctive relief and punitive damages. In other words, as arbitration agreements go, AT&T's was extremely consumer-friendly.

While an employer does not necessarily need to go to these extremes to enforce a class waiver in an arbitration agreement or employee handbook, the message Concepcion sends is that basic fairness is unquestionably relevant. And negative case law interpreting Concepcion focuses like a laser beam on any perceived basis for finding substantive unconscionability. Franchisors and franchisees should analyze their agreements with employees and in other business relationships to assess whether the arbitration rules impose any burden on a person or entity greater than traditional litigation would impose. If they do, careful consideration should be given to modifications that alleviate those burdens. The last straw for a plaintiff's attorney to grasp when desperate to get a case certified as a class action before a jury is to persuade the trial judge that the arbitration agreement is so one-sided it is substantively unconscionable. It is, of course, not nearly as costly for an employer to pay an arbitrator's fee or permit arbitration in a slightly less convenient forum than to lose the forum completely due to the correct application of the substantive unconscionability doctrine.

The advantages and disadvantages arbitration can create are as varied and case-specific as any other business decision. Whether to implement an arbitration mechanism to resolve employment disputes is already complicated enough and often revolves around the jurisdiction in which the employer does business. It is not any easier to decide whether to use a separate agreement that highlights the arbitration mechanism or place the provisions in an employee handbook to minimize its significance; those questions do not have universally applicable answers and are extremely jurisdiction-specific. Concepcion, unfortunately, has not made these decisions any easier. Although it was unquestionably a business-friendly ruling, Concepcion merely added one more decision to the many that already existed. And it is a choice that could be a game-changing win for employers while simultaneously fraught with peril.

For franchisors and franchisees, the new, complex, post-Concepcion climate simply demands partnership with legal counsel to weigh whether and how to add class waivers to existing agreements if they were not already included, to evaluate each provision for its fairness and enforceability under existing law, to assess the risk from potential unfair labor practice charges if an arbitration agreement containing a class waiver must be enforced, and to consider the most effective way to bind current and new employees to its terms. The aggressive NLRB activity means each decision is likely to be reviewed carefully and with skeptical scrutiny. There is much to be gained from getting the decision right and a lot to lose if it is wrong.

K. Bryance Metheny is a partner in the labor and employment practice at Burr & Forman LLP in Birmingham, AL. He counsels franchisors and franchisees in developing employment policies and procedures to govern their businesses effectively. He may be reached at [email protected] or 205-458-5178.