Tuesday, January 10, 2012

NLRB Limits the Scope of Arbitration Agreements

In what is being perceived as a part of a continuing attack on the ability of employers to limit their litigation exposure through employment agreements requiring arbitration (and also part of a continuing effort to bolster the business of labor unions and trial lawyers), the NLRB has now determined that employers may not require their employees to sign arbitration agreements limiting class actions or other collective legal claims. The decision, if it goes unchallenged on appeal, will have significant implications for employers that use arbitration agreements as a means of limiting their class-action exposure.

The Board's decision appears to fly in the face of a recent Supreme Court case which held that state courts could not prohibit class-action waivers in arbitration agreements. That case--AT&T Mobility--determined that limiting the scope of an agreement in a consumer contract frustrated the Federal Arbitration Act's purpose of encouraging arbitration of disputes.

The agreement in question here required all disputes and claims relating to employment issues to be submitted to final and binding arbitration, and the arbitrator was limited to hearing only individual claims. The Board determined that the effect of the agreement was to limit employees, as a condition of employment, from filing collective litigation of claims in any form, arbitral or judicial.

The Board determined that the agreement's provision violated the National Labor Relations Act's defense of protected concerted activity by employees; so-called Section 7 rights. Section 7 rights are particularly broad, and apply regardless of whether the employer is unionized. The Board has greatly expanded the scope of Section 7 rights recently, particularly in the arena of social media. Accordingly, all employers that make use arbitration agreements need to pay careful attention to this holding.

In an interesting rhetorical twist, the Board noted that employees represented by a union can waive their collective action rights under the terms of a collective-bargaining agreement, but that individual employees may not. The Board also noted that AT&T Mobility applied to consumer contracts; this was a distinction the Board found important because the Board's decision affected far fewer people in each instance than a typical consumer contract.

This distinction seems to me to be a false one-the scope of the Board's efforts arguably apply to more than 120 million people, far more than an average consumer contract. Moreover, there is Supreme Court precedent indicating that there is no particular difference between arbitration agreements signed by individual employees and those signed by union representatives.

I should also note here that the Board's decision does not foreclose the use of arbitration agreements per se. As long as an employer leaves open a way for its employees to engage in class action litigation, the employer may require individual claims to be arbitrated. Of course, this option keeps in place the ability of employees and their attorneys to engage in hugely expensive collective actions, about which the employer can do nothing.

The employer in this case has the ability to appeal this decision, and I suspect it will do so. In the meantime, one possible way of limiting collective action exposure would be to write a detailed arbitration agreement limiting discovery and litigation processes, which are the most significant expenses in class action litigation. Whether that would survive Board review is an open question.  Finally, employers should note that managerial employees are not covered by the Board's decision, nor are independent contractors, an important exception for many employers.

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