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Employers can use arbitration agreements to bar class action suits

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Companies can require their workers to sign arbitration agreements waiving their rights to class action lawsuits to resolve any employment-related disputes with little worry thanks to a significant appeals court ruling.

The eagerly awaited ruling in D.R. Horton Inc. v. National Labor Relations Board came Dec. 3 when the 5th U.S. Circuit Court of Appeals in New Orleans overturned a January 2012 ruling by two NLRB members who held that a “mutual arbitration agreement” required by the Fort Worth, Texas-based home builder as a condition of employment violated the National Labor Relations Act.

While companies may have held off imposing or implementing such policies while awaiting the ruling, which added to decisions in three other circuits, observers say the NLRB may continue pushing for its policy in circuits that have yet to rule on the issue. Observers say the NLRB is unlikely to prevail.

In its 2-1 ruling, the appeals court said the NLRB board's decision “did not give proper weight to the Federal Arbitration Act,” a law that provides for private dispute resolution through arbitration and limits courts' ability to set aside arbitration awards.

“Case law under the FAA points us in a different direction than the course taken by the board,” the 5th Circuit ruled. “Neither the NLRB's statutory text, nor its legislative history, contains a congressional command against application of the FAA.”

The issue in the case, brought by a group of workers who alleged they were misclassified as exempt from overtime, was a narrow one, the court said. “Do the rights of collective action embodied in (the NLRA) make it distinguishable from cases which hold that arbitration must be individual arbitration?” The answer is “no,” the court said.

“We add that we are loathe to create a circuit split,” the ruling said.

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“Every one of our sister circuits to consider the issue have either suggested or expressly stated that they would not defer to the NLRB's rationale, and held arbitration agreements containing class waivers enforceable,” the 5th Circuit panel said, citing rulings earlier this year by the 2nd Circuit in New York, 8th Circuit in St. Louis and 9th Circuit in San Francisco.

In addition, the U.S. Supreme Court in 2011 held in AT&T Mobility L.L.C. vs. Vincent and Liza Concepcion. that arbitration agreements may contain a class action waiver. This was followed by this year's ruling in February in American Express Co. et al. v. Italian Colors Restaurant et al., in which a divided high court said the federal arbitration law does not permit courts to invalidate contractual waivers of class arbitration.

An NLRB spokesman said the board is studying Horton.

“I would say this is what everyone sort of expected” as a result of the Supreme Court rulings, said Jaime A. Bianchi, a partner at law firm White & Case L.L.P. in Miami.

“The big picture is that, with another court of appeals rejecting the NLRB's rationale, the path is increasingly clear for businesses to adopt fair arbitration agreements with their employees to resolve disputes on an individual basis instead of by class or collective action,” said Archis A. Parasharami, a partner at Mayer Brown L.L.P. in Washington.

Jeffrey T. Johnson, a partner at Holland & Hart L.L.P. in Denver, said the NLRB's ruling was a “fundamental shift” and had come as a surprise to most labor lawyers who felt the board “really stepped outside of its typical scope of dealing with union matters by saying even nonunion employees can't have class action waivers in their arbitration agreements because that violates the NLRB.”

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“For employers, it's going to mean that they can proceed as they thought they could before the NLRB” tried to do an “end run” around the arbitration law, said Michael D. Leffel, a partner at Foley & Lardner L.L.P. in Madison, Wis.

However, employers still need to be sure that there is nothing “unconscionable” in the arbitration agreement and that it is clearly written, he said.

The 5th Circuit's ruling resolves the uncertainty created by NLRB board's decision, said Mr. Johnson. “Employers don't like uncertainty. They want to know what the rules are so they can play by the rules,” he said.

“It's a significant victory” for all employers because it validates the issue of class action waivers, said Ron Chapman Jr., a shareholder at Ogletree, Deakins, Nash, Smoak & Stewart P.C. in Dallas. “There has been a marked increase in the number of class and collective actions filed against employers, usually on unpaid overtime, and many employers have adopted arbitration agreements containing class action waivers as a defense to those claims.”

While other circuits have not yet ruled on the issue, “It's a good start,” said Christin M. Choi, an associate at Fisher & Phillips L.L.P. in Philadelphia.

However, the NLRB could pursue the issue in the circuits that have not yet dealt with it.

“I do think it would be unfortunate if the NLRB continued to press its rationale, given how weakly that rationale has been received by the courts,” Mr. Parasharami said.