“Yellow-Dog” Arbitration Clauses Headed to High Court?

    Federal labor law makes it illegal for an employer to require a would-be employee to promise not to join a union if hired. These agreements, known as yellow-dog contracts, were a common weapon for anti-union employers in the late 19th and early 20th centuries, but Congress declared them illegal in 1932 in the Norris-LaGuardia Act. Today, they are an historical relic and the term is all but unused.
    The National Labor Relations Act (NLRA), enacted in 1935, fortifies the prohibition by specifying in section 7 that employees have the right “to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The act’s section 8 makes it an “unfair labor practice” for an employer “to interfere with, restrain, or coerce employees in the exercise of the rights” guaranteed in section 7.
    The National Labor Relations Board (NLRB), the agency charged with enforcing the law, ruled in 2012 that the act’s protection for “concerted activities” also makes it an unfair labor practice for an employer to prevent employees from joining together in class actions against the employer. But many employers are now including in employment contracts clauses that require any disputes to be resolved through arbitration and only individually, not combined with other employees in class actions.
    Business groups are arguing strongly that the NLRB got it wrong because the Federal Arbitration Act (FAA), enacted in 1925, makes arbitration agreements enforceable and that law trumps the NLRA. Federal appeals courts have split on the issue, a split deepened by a ruling by the Ninth U.S. Circuit Court of Appeals last week [Aug. 22]. With five appeals courts now divided 3-2 on the question, an issue affecting blue- and white-collar workers alike nationwide seems all but certain to reach the Supreme Court, perhaps as early as the new term set to open in October.
    Congress enacted the FAA at the behest of business groups who saw arbitration as more efficient and less expensive than litigation for resolving commercial disputes but found courts reluctant to enforce pre-dispute arbitration agreements. The Supreme Court began in the 1980s to view the act as embodying a general federal policy favoring arbitration not only in arms-length arbitration clauses between companies but also in contracts imposed by companies on workers, consumers, investors, and other potential plaintiffs.
    The Roberts Court fortified the pro-arbitration tilt under a line of closely divided decisions written by the late justice Antonin Scalia that enforced class action waivers written into arbitration clauses. Writing for a five-justice majority in American Express Co. v. Italian Colors Restaurant (2013), Scalia blocked a California restaurant from joining with other merchants in an antitrust claim against the big credit card issuer. The restaurant argued, and the federal appeals court in New York agreed, that it could not afford to mount a major antitrust case on its own given a potential recovery of no more than $38,000. In an acerbic dissent, Justice Elena Kagan summarized the “nutshell version” of the ruling as, “Too darn bad.”
    Scalia’s death leaves the court evenly divided between the conservative and liberal blocs on whether to extend the pro-arbitration rulings or limit or even reverse the trend. Before Scalia’s death, labor groups might have been wary about taking this issue to the high court. Now, it is up to business interests to decide whether to appeal the Ninth Circuit’s decision or a ruling to the same effect by the Seventh Circuit in May.
    The Ninth Circuit’s decision, like the Seventh Circuit’s, is a Fair Labor Standards Act case charging the plaintiffs’ employer with failing to pay overtime. The NLRB’s initial decision in 2012 against enforcing class action waivers in employment agreements similarly came in an overtime suit against the national homebuilding company D.R. Horton. “Being required to proceed individually is no proper substitute for proceeding together,” the NLRB majority wrote in the decision.
    On appeal, the Fifth U.S. Circuit Court of Appeals became the first of what are now three appeals courts to reject the NLRB’s position and enforce the class action waivers imposed by employers on their workers. The Second and Eighth Circuits fell in line, but the Seventh Circuit created a split with its May 26 decision in Lewis v. Epic Systems Corp. agreeing with the NLRB’s stance.
    Writing for a 2-1 majority in the Ninth Circuit decision, Chief Judge Sidney Thomas emphasized that “concerted action” is “the basic tenet” of federal labor law. “The NLRA precludes contracts that foreclose the possibility of concerted work-related legal claims,” Thomas wrote in Morris v. Ernst & Young LLP. “An employer may not condition employment on the requirement that an employee sign such a contract.” Thomas, a Clinton appointee, was joined in the ruling by an Obama appointee, Andrew Hurwitz.
    In a dissent, Judge Sandra Segal Ikuta, a Bush43 appointee, accused the majority of ignoring “the thrust” of recent Supreme Court decisions. The ruling, she said, was “breathtaking in its scope and in its error.”
    The anti-union pledges of yesteryear came to be known as yellow-dog contracts when a United Mine Workers official wrote in 1921 that such an agreement “reduces to the level of a yellow dog any man that signs it.” The class action waivers of current day similarly force workers to forgo a right seemingly guaranteed by federal labor law. The future of those provisions may well turn on the future ninth justice, whoever he or she may be.