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NLRB and FINRA Signal Federal Push To Create A Right for Employees To Pursue Collective Litigation Regardless of Arbitration Agreements


Two major regulatory agencies have signaled a government-wide effort to provide employees with a right to pursue collective and class litigation in court proceedings regardless of governing arbitration agreements.  In a highly anticipated decision on January 3, 2012, D. R. Horton, Inc., Case 12–CA–25764, the National Labor Relations Board ("NLRB" or "Board") held that employee arbitration agreements must permit employees to pursue joint, collective, and class litigation workplace grievances through judicial proceedings.  This decision follows closely on the heels of a December 23, 2011 proposed rule change, FINRA 2011-75, by the Financial Industry Regulatory Authority (“FINRA”), that would preclude collective action claims from being arbitrated under the Industry Code.  Taken together, these developments demonstrate the growing preference of federal regulators for redirecting class and collective employee claims from arbitration to judicial proceedings. 

Section 8(a)(1) of the National Labor Relations Act (“NLRA”) prohibits employers from interfering with employees’ Section 7 rights “to engage in . . . concerted activities for . . . mutual aid or protection.”  In D. R. Horton, Inc., the Board noted that it “has long held, with uniform judicial approval, that the NLRA protects employees’ ability to join together to pursue workplace grievances, including through litigation.”  In the underlying case, the charging party, Michael Cuda, was employed as a superintendent of national homebuilder D. R. Horton. As a condition of Mr. Cuda’s continuing employment, he was required in 2006 to sign a Mutual Arbitration Agreement (“MAA”) requiring that all employment-related disputes “be resolved through individual arbitration,” and prohibiting employees from pursuing “class or collective litigation of claims in any forum, arbitral or judicial.”  In 2008, Mr. Cuda notified D. R. Horton that he was initiating arbitration against the company for alleged violations of the Fair Labor Standards Act of 1938, as amended (“FLSA”) on behalf of himself as well all similarly situated superintendents.  D. R. Horton argued that Mr. Cuda’s notice of intent to arbitrate was ineffective because the MAA precluded arbitration of collective claims.  In response, Mr. Cuda filed a successful unfair labor practice charge, claiming that the MAA violated various provisions of the NLRA.

On appeal, the NLRB held, inter alia, that the MAA violated Section 8(a)(1) of the NLRA, finding that an absolute bar to the ability of employees to litigate claims collectively violated the statutorily protected right to collective action.  The Board explained that its opinion did not conflict with Supreme Court’s decision in AT&T Mobility, LLC. v. Concepcion, in which the Court found that the Federal Arbitration Act (“FAA”) preempted a California law banning class action waivers in commercial arbitration agreements. As the Board explained, the Concepcion decision dealt with commercial contracts, not the NLRA, and involved a “conflict between the FAA and state law, which is governed by the Supremacy Clause, whereas the present case involves the argument that two federal statutes conflict.”  The Board, moreover, noted that its decision did not run afoul of Concepcion’s holding that a party cannot be forced to arbitrate a collective claim without consent.  According to the Board, under its ruling an employer can still require that arbitration be conducted “on an individual basis” so long as “the employer leaves open a judicial forum for class and collective claims.”  Thus, the Board’s decision was limited to arbitration agreements that provide an absolute bar to collective action in both arbitral and judicial proceedings.

The Board’s decision follows closely in the wake of a December 23, 2011 proposed rule change by FINRA (FINRA 2011-75) that would bar collective action claims under the FLSA, the Age Discrimination in Employment Act of 1967, as amended, or the Equal Pay Act of 1963 from being arbitrated under the Industry Code.  As explained in that proposal, “FINRA believes the proposed rule would facilitate the efficient resolution of collective actions, as the courts have established procedures to manage these types of representative actions” and that “access to courts for class or collective action litigation should be preserved for associated persons.” FINRA rules already excluded class actions from arbitration, but it noted that the proposed rule change was necessary given a recent U.S. District Court ruling, Hugo Gomez v. Brill Securities, Inc., 10 Civ. 3503, 2010 U.S. Dist. LEXIS 118162 (S.D.N.Y. Nov. 2, 2010), which found that FINRA’s rules still permitted arbitration of collective actions under federal labor statutes.

Taken together, these recent actions by the NLRB and FINRA demonstrate an increasingly active push by federal regulators to allow employees the right to pursue collective and class action claims in court regardless of governing arbitration agreements.  In light of these developments, employers subject to the NLRA and/or FINRA should carefully assess existing arbitration agreements in order to ensure that they do not preclude class and collective action by employees in judicial proceedings.  As always, Crowell & Moring labor and employment attorneys are available to assist companies in developing, modifying and/or evaluating existing arbitration agreements to accommodate these new developments.

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Jeffrey W. Pagano
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Jared Levine
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Partner – Washington, D.C.
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