On December 3, 2013, the Fifth Circuit U.S. Court of Appeals rejected the National Labor Relations Board's decision that a mandatory arbitration agreement that waived an employee's right to bring a class or collective action in any forum was a violation of the National Labor Relations Act. D.R. Horton, Inc. v. National Labor Relations Board, No. 12-60031 (Dec. 3, 2013).

The case arose initially when Michael Cuda, an employee of the Company, attempted to initiate a class action arbitration asserting that he and similarly-situated employees were misclassified as exempt employees in violation of the Fair Labor Standards Act. The Company refused to participate in a class arbitration, relying upon the class and collective action waiver in the Mutual Arbitration Agreement (MAA) which all employees were required to sign as a condition of employment. When the Company refused to participate in the class arbitration, Cuda filed an unfair labor practice with the NLRB, alleging that the waiver provisions in the MAA violated Section 8(a)(1) of the NLRA and deprived employees of their rights under Section 7 of the Act to engage in protected concerted activity. The NLRB ultimately agreed with Cuda, holding that the MAA violated Section 8(a)(1) in two ways. First, the NLRB found that the MAA was overly broad, in that employees could reasonably conclude that the waiver language prohibited the filing of unfair labor practice charges with the NLRB. More significantly, the Board found that requiring employees to sign a waiver of class or collective actions in any forum, whether arbitral or judicial, infringed upon employees' protected Section 7 rights.

The Company, supported by numerous business group amici, appealed the NLRB's decision to the Fifth Circuit Court of Appeals. The Company argued that the NLRA does not give individuals a substantive right to adjudicate claims collectively. The Company further submitted that the NLRB's decision ran afoul of the Federal Arbitration Act (FAA) and Supreme Court precedent holding that, with limited exceptions, arbitration agreements are to be enforced according to their terms.

In its 2-1 decision, the Fifth Circuit agreed with the majority of the Company's arguments. It found that it is well-established that the use of class or collective actions is a procedural issue and not a substantive right.

The Fifth Circuit majority also held that the NLRB did not give sufficient weight to the FAA. Relying on Supreme Court precedents, the court reiterated that arbitration agreements must be enforced according to their terms, unless the agreement is unenforceable under the FAA's "savings clause" or if the FAA's application is precluded by another statute's contrary congressional command. The Court found that neither exception applied to the Horton case. Relying on U.S. Supreme Court decisions favoring the enforcement of arbitration agreements, the Fifth Circuit held that the FAA's "savings clause" was inapplicable.

The Court further found that the NLRB had not met the burden of showing that the FAA's liberal policy of favoring the enforcement of arbitration agreements was overridden by any contrary congressional intent. The Court noted that there is no explicit language in the NLRA indicating that Congress intended the NLRA to trump the FAA. It further held that there was nothing in the legislative history of the NLRA which would indicate that Congress intended the NLRA to take precedence over the FAA. Thus, since neither exception to the FAA was present, the Court held that the MAA was legal and must be enforced according to its terms.

The Fifth Circuit did find, however, that some of the MAA's language violated Section 8(a)(1) of the Act. The MAA expressly provided that employees would arbitrate all claims related to wages, benefits or other compensation, and that the employees waived the right to file a lawsuit or civil proceeding relating to their employment with the Company. The Court agreed that an employee could reasonably conclude from this language that the filing of an unfair labor practice was prohibited, and upheld the NLRB's determination that this language thus violated Section 8(a)(1).

At the present time, it is unknown how the NLRB will proceed in light of the Fifth Circuit's decision. It may ask for a rehearing before the full Fifth Circuit, appeal the decision to the Supreme Court, or choose to ignore the decision as it processes cases raising similar issues.