The Fifth Circuit Allows Class Arbitration Waivers in Employment Agreements

Last week, the Fifth Circuit Court of Appeals joined the Ninth, Second and Eighth Circuits in holding that class arbitration waivers in employment agreements are enforceable, notwithstanding the right of employees to engage in concerted activities under the National Labor Relations Act (NLRA). The ruling has been lauded as an enormous victory for employers, even though the National Labor Relations Board (NLRB) remains free to ignore the opinion and continue to strike down class arbitration waivers.

Under the Mutual Arbitration Agreement (MAA) at issue in D.R. Horton, Inc. v. National Labor Relations Board: (1) employees waived their right to a trial in court; (2) all disputes between D.R. Horton and employees had to be resolved by final and binding arbitration; and (3) the arbitrator did “not have the authority to consolidate the claims of other employees” and did “not have the authority to fashion a proceeding as a class or collective action or to award relief to a group or class of employees in one arbitration proceeding.” The combined effect of these three provisions was that D.R.Horton’s employees could not pursue class or collective claims in an arbitral or judicial forum. Instead, their only recourse for any employment disputes was individual arbitration.

When a former D. R. Horton’s superintendent and a number of similarly situated employees attempted to initiate a nationwide class arbitration arising out of D.R.Horton’s alleged violations of overtime provisions of the Fair Labor Standards Act (FLSA), the company responded that the MAA prohibited a collective arbitration, but that the employees could proceed with individual proceedings. The superintendent then filed an unfair labor practice charge alleging that the class-action waiver violated the NLRA. The (NLRB) agreed and found that the MAA violated Section 8(a)(1) of the NLRA for two reasons. First, it required employees to waive their right to maintain joint, class, or collective employment related actions in any form. Second, the employees could reasonably interpret the language of the MAA as precluding or restricting their right to file charges with the NLRB. Last week, the Fifth Circuit rejected the Board‘s first reason, but agreed with the second.

It explained that while Section 7 of the NRLA creates a right on behalf of employees to “engage in [ ] concerted activities for the purpose of collective bargaining or other mutual aid or protection,” it does not create a substantive right to use class action procedures. In fact, the U.S. Supreme Court and several Circuit Courts of Appeals have previously recognized that there is no substantive right to class or collective procedures under the Age Discrimination and Employment Act or the FLSA. On the other hand, using Section 7 of the NRLA to invalidate an agreed waiver of a class arbitration would violate the Federal Arbitration Act (FAA), which requires that any arbitration agreement be enforced according to its terms. The Fifth Circuit found that neither NRLA’s legislative history nor its language authorized it to override the FAA. Absent an explicit language of a congressional intent to override the FAA in the NLRA, the Act’s mandate that an arbitration agreement must be enforced according to its terms – here, with a class arbitration waiver – must be followed.

Although the Fifth Circuit found that class arbitration waiver provisions do not violate the NLRA, the MAA in this case contained the following language, which did violate the statute: the employee “knowingly and voluntarily waives the right to file a lawsuit or other civil proceeding relating to Employee’s employment . . . .” (emphasis in original). Because this statement would lead employees to reasonably believe that they were prohibited from filing unfair labor practice charges with the NLRB, the Court of Appeals ordered that D.R. Horton should clarify in the agreement that employees retain access to the NLRB regardless of their agreement to arbitrate disputes.

CONCLUSION: While the Fifth Circuit’s rejection of the NLRB‘s ruling in D.R. Horton is lauded as a victory for employers, it does not guarantee that the NLRB will allow the use of class waivers in mandatory arbitration agreements. The Board regularly treats Circuit Court decisions with which it disagrees as non-binding in any other case. Thus, it may continue to reject such waivers despite the ruling.

Although the battle over class arbitration waivers in employment agreements is far from over, all employers need to review their arbitration agreements and make sure that the language used there does not convey the impression to employees that they are prohibited from filing administrative charges with the NLRB.

For more information regarding the enforcement or drafting of arbitration agreements in Texas, contact Leiza Dolghih.

You Can’t Have Your Cake and Eat It Too – A Texas Court of Appeals Explains When Proceeding With Litigation Will Waive Arbitration Rights

Almost every contract now contains some sort of an arbitration clause. In fact, it is one of the first clauses an attorney looks for in an agreement when a dispute between the parties arises. This week, the Dallas Court of Appeals’s decision in Ideal Roofing, Inc., et al. v. Armbruster, et al. serves as a reminder that, at some point, proceeding with litigation of a dispute in court can result in a waiver of an applicable and otherwise enforceable arbitration clause.

In this case, Ideal Roofing and Ambrusters entered into a construction contract containing an arbitration clause. When Ambrusters’ roof started leaking, they filed a lawsuit against Ideal Roofing.  Although the defendant could have compelled arbitration almost immediately, it proceeded to litigate the case for eighteen and a half months before filing a motion to compel arbitration.  The trial court denied the motion and the Court of Appeals affirmed, providing an useful overview of the waiver standard.

In general, a party seeking to compel arbitration under the Federal Arbitration Act (FAA) must establish: (1) the existence of a valid, enforceable arbitration agreement and (2) that the claims at issue fall within that agreement’s scope. The party seeking to avoid arbitration must then establish an affirmative defense to enforcement of the otherwise valid arbitration agreement. Since Ambrusters had conceded on appeal that the arbitration agreement was enforceable, only one question remained – whether Ideal Roofing had waived its arbitration rights by participating in the litigation.

Under both federal and state law, there is a strong presumption against waiver of contractual arbitration.  A party waives its contractual arbitration rights when it “substantially invokes judicial process.” According to the Court of Appeals, a party does so when “it has taken specific and deliberate actions, after the filing of the suit, that are inconsistent with the right to arbitrate or has actively tried, but failed, to achieve a satisfactory result through litigation before turning to arbitration.”

What constitutes a “substantial” litigation conduct depends on the context, but a court must consider the following factors when deciding whether a party moving to compel arbitration has waived its contractual arbitration rights:

  • when the movant knew of the arbitration clause

  • how much discovery has been initiated and who initiated it

  • the extent to which discovery related to the merits rather than arbitrability or standing

  • how much of the discovery would be useful in arbitration

  • whether the movant sought judgment on the merits

  • whether the movant sought to compel arbitration on the “eve of the trial”

While the Court of Appeals emphasized that that delay (in moving to compel arbitration) alone does not establish waiver, in this case, the following five out of six factors supported the finding of a waiver:

  • Ideal Roofing was aware of the arbitration agreement at least four months after answering the lawsuit, but it did not move to compel arbitration until the case has been pending for 18 1/2 months and the case had been set for trial three times

  • Ideal Roofing both propounded and answered written discovery, took several expert witnesses’ depositions, and inspected the Ambrusters’ roof

  • None of the discovery conducted in this case related to arbitrability or standing

  • Ideal Roofing asserted affirmative defenses in court, filed a counter-claim, attended a two-day mediation, and filed a motion for summary judgment and set it for hearing twice

  • Ideal Roofing filed its motion to compel four months before the trial date

In addition to the burden of showing that a party seeking to compel arbitration has substantially invoked the judicial process, the party seeking to avoid arbitration must also show prejudice or “inherent unfairness in terms of delay, expense, or damage to its legal position that occurs when the party’s opponent forces it to litigate an issue and later seeks to arbitrate that same issue.” Prejudice is more easily shown when a party delays his request for arbitration and in the meantime engages in pretrial activity inconsistent with an intent to arbitrate.

The Court of Appeals found that the following evidence was sufficient to establish prejudice to Ambrusters: (1) plaintiffs’ attorney, whom they hired on contingency, would have to travel from Dallas to Houston to arbitrate; (2) plaintiffs had already paid for two days of mediation and over $3,500 in expert fees; (3) the arbitration agreement was silent as to whether discovery conducted during litigation could be used during arbitration; and (4) the Ambrusters had completed their discovery and were ready to proceed with trial when Ideal Roofing filed it motion to compel arbitration.

CONCLUSION: While answering a lawsuit and even conducting some discovery will probably not waive one’s arbitration rights, a party who is aware of an enforceable arbitration agreement, should proceed cautiously in court while it assesses whether to enforce the agreement or not and should avoid taking a position that is inconsistent with the intent to arbitrate.

For more information regarding enforcement of arbitration agreements in Texas, contact Leiza Dolghih.

Why Adding an Arbitration Clause to a Non-Compete Agreement Is a Good Idea.

In Nitro-Lift Techs., L.L.C. v. Eddie Lee Howard, et al.the U.S. Supreme Court once again expressed its strong support of the Federal Arbitration Act (FAA), in finding that where an arbitration clause in a non-competition agreement is valid, all other disputes related to the non-compete agreement, including its enforceability, should be decided by an arbitrator rather than the court.

In Nitro-Lift, the dispute arose from an employment contract between Nitro-Lift Technologies, L.L.C., and two of its former employees, which contained a non-compete clause and the following arbitration clause:

“Any dispute, difference or unresolved question between Nitro-Lift and the Employee (collectively the “Disputing Parties”) shall be settled by arbitration by a single arbitrator mutually agreeable to the Disputing Parties in an arbitration proceeding conducted in Houston, Texas in accordance with the rules existing at the date hereof of the American Arbitration Association.”

When the two employees went to work for the Nitro-Lift’s competitor, the company served them with a demand for arbitration, claiming that they breached their non-compete agreement.  Instead of arbitrating the dispute, the employees filed a lawsuit in a state court alleging that the non-compete agreement violated the state law and was null and void.  The state court dismissed their case after determining that the arbitration clause in their employment agreement was valid, but the Oklahoma Supreme Court reversed the lower court and declared that the FAA arbitration clause gave way to Oklahoma’s public policy regarding non-compete agreements and, without addressing validity of the arbitration clause, declared the non-compete “void and unenforceable” under the Oklahoma state law.

The U.S. Supreme Court reversed the Oklahoma Supreme Court and held that under the FAA, it is for the arbitrator – and not the state court – to decide whether a covenant not to compete violates the applicable state law.

PRACTICAL IMPLICATIONS:

The Nitro-Lift decision is a significant ruling for employers, many of which have gravitated toward arbitration agreements to reduce their exposure to costly and time-consuming employment litigation.

The employers can now feel confident that placing an arbitration clause in an employment agreement will allow them to avoid often-messy litigation of the non-compete provisions.

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice.  His practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.