The Government Seems Confused About Class Action Waivers

By Fiona W. Ong & Elizabeth Torphy-Donzella - Shawe Rosenthal LLP

July 13, 2017

The issue of whether employees can be required to sign arbitration agreements that contain waivers of their right to file a class or collective action over employment-related disputes is one that has drawn much attention – and much conflict – in recent years. The Obama administration, it seemed, steadfastly opposed such waivers. Under the Trump administration, which (regardless of your politics) has had a slow and bumpy transition of federal agency leadership, the agencies do not appear to be operating from the same playbook – as evidenced by recent actions by the National Labor Relations Board, (NLRB), the Department of Justice (DOJ), and the Consumer Financial Protection Board (CFPB).

In its 2012 decision in D.R. Horton, the NLRB first articulated its position that arbitration agreements containing waivers of the right to bring class or collective actions prevented employees from engaging in concerted activities regarding the terms and conditions of employment – a right that is protected by the National Labor Relations Act. The NLRB’s position was rejected by the U.S. Court of Appeals in the 5^th Circuit. Other federal appeals courts subsequently weighed in, with the 2^nd and 8^th Circuits joining the 5^th Circuit, while the 7^th and 9^th Circuits, and now most recently, in June 2017, the 6^th Circuit, ruling in favor of the NLRB in NLRB v. Alternative Entertainment, Inc. In January of this year, the U.S. Supreme Court agreed to hear this issue in D.R. Horton and two other associated cases.

Typically, the DOJ represents federal agencies in cases before the Supreme Court. When the Supreme Court was considering whether to grant certiorari in the cases (meaning that it would hear the cases), the Obama DOJ filed a brief in support of the Board’s position. On June 16, 2017, however, the Trump DOJ filed a brief reversing its prior position, and now stating that such class waivers could not be precluded by the NLRA, and should be enforced under the Federal Arbitration Act! The DOJ’s brief asserted that its prior position failed to give sufficient weight to the Congress’ policy of enforcing arbitration agreements as set forth in the FAA. The DOJ’s opposition leaves the NLRB on its own, with a weakened position, before the Supreme Court.

Less than a month after the DOJ came out with its abrupt about-face, the CFPB issued a rule blocking arbitration provisions containing class waivers in consumer financial product contracts – including, presumably, contracts involving employer background checks on prospective employees. According to the CFPB, the rule is required because such clauses limit the potential recovery to such small amounts that consumers are deterred from filing suit against financial service providers. This also, according to the CFPB, reduces the amount that companies have to pay out. And the CFPB states that class actions are more effective in deterring illegal activity.

(It is worth noting, however, that the CFPB’s stated rationales are called into question by the Wall Street Journal‘s editorial board in the July 12, 2017 opinion piece, “Richard Cordray’s Financial Damage.” The editors note that the CFPB issued a study in 2015, and the findings from that study contradict the CFPB’s current statements. Specifically, the editors state:

Of the 562 class actions the CFPB studied, none went to trial. Most were dismissed by a judge, withdrawn by the plaintiffs or settled out of class. The putative class victims received benefits in fewer than 20% of cases, and the average cash recovery was—wait for it—$32. Lawyers took an average 24% cut of the cash payments (about $424 million) in cases that settled.

Meanwhile, consumers were awarded relief in 32 of the 158 arbitration disputes the bureau examined, and rewards averaged $5,389—or about 57% of every dollar claimed. Consumers who used arbitration received relief on average in two months after filing claims. Class-action members had to wait two years.)

Now the reasons why the NLRB and the CFPB oppose class action waivers are different, and either may be more or less valid than the other (that determination is above our pay grade, although we refer you to the Wall Street Journal editors quoted above!). But the DOJ’s emphasis on the Congressional policy of enforcing arbitration agreements would seem to apply in either case….

What does this mean for employers? Well, we have a bit of  pickle, with various federal agencies supporting or opposing class waivers. What the Supreme Court decides in the D.R. Horton and associated cases will bring some certainty to the issue in the context of the NLRA. And depending on how broadly the Supreme Court words its decision (e.g. let’s say that it generally proclaims the interests in enforcing arbitration agreements to be paramount), it could impact class waiver pronouncements from other agencies, like the CFPB. On the other hand, a narrowly tailored decision upholding class action waivers only in the labor context, or a broader decision rejecting such waivers, means that other agencies’ positions on this issue (which apparently may be all over the place) will need to be considered. And may be subject to challenge. We may be struggling with this issue for some time to come!