Bankruptcy Judge Brendan L. Shannon wrote a decision on the cutting edge of issues where courts are split on the ability of workers to sue collectively for improper early termination under the National Labor Relations Act, or NLRA.
The Oct. 11 opinion also explores the so-called Chevron deference doctrine in a difficult case where the NLRA seemingly conflicts with the Federal Arbitration Act, or FAA.
The Arbitration Agreement
Two years before a retailer filed a chapter 11 petition in Delaware, an employee signed an agreement requiring arbitration of any employment disputes. The agreement also barred the employee from bringing class claims in arbitration.
The arbitration agreement gave the employee a 30-day window to opt out of the arbitration agreement. The employee did not opt out.
The employee was among those who were fired when the retailer terminated all operations in chapter 11, before selling the assets. On behalf of a class of workers, the employee initiated an adversary proceeding in bankruptcy court, alleging that the debtor violated the federal Worker Adjustment and Retraining Notification Act and a comparable California law requiring employers to give 60 days’ notice of mass firings.
The debtor filed a motion asking Judge Shannon to compel arbitration and provide that the arbitrator could only rule on the named plaintiff’s individual claim.
The motion to compel arbitration raised complex issues given the seeming conflict between two federal statutes. On one hand, there is the FAA, with its strong federal policy favoring arbitration. On the other, the NLRA arguably bars employers from requiring workers to arbitrate and waive their right to file class actions.
Issue One: ‘Concerted Activities’ Protected
For Judge Shannon, the first question was deciding whether the NLRA protects workers’ rights to file class suits. He interpreted Section 7 of the NLRA, which protects workers’ ability to “engage in other concerted activities” for their “mutual aid or protection.”
He followed courts that have held that the statutory reference to “concerted activities” gives workers the right to “collective adjudications,” or class suits. He went on to say that allowing class suits “furthers the policies underlying the NLRA.”
Consequently, Judge Shannon held that Congress has “spoken directly” in the NLRA and created a “substantive right” for employees to “proceed collectively” to vindicate their rights under Section 7.
Issue Two: Chevron Deference
Recently, the National Labor Relations Board, or NLRB, interpreted Section 7 to mean that workers have a substantive right to bring class or collective suits. The debtor argued that the NLRB’s interpretation was not entitled to Chevron deference because the FAA was beyond the labor board’s purview.
Judge Shannon disagreed, finding that Chevron requires the court to give the Board’s interpretation “considerable deference.” To reach his conclusion, Judge Shannon saw the NLRB as interpreting only the NLRA, not also the FAA, contrary to the holding of some courts, including the Fifth Circuit.
Even if he were wrong in having previously held that NLRA Section 7 on its face ensures workers’ rights to bring collective suits, Judge Shannon said that invocation of the Chevron deference doctrine requires the same result, because the NLRB’s decisions were “rational and consistent” with Section 7. He therefore declined to follow courts holding that collective suits are not protected by Section 7.
Issue Three: Substantive Rights
The debtor contended that protection of a class suit is merely procedural and thus not protected by Section 7.
Although the ability to mount a class action is usually a procedural right, Judge Shannon followed the Seventh Circuit, holding that the right to collective action is an “independent substantive right” granted by NLRA Section 7.
Issue Four: Class Waiver Unenforceable
The debtor argued that the waiver of the right to mount a class arbitration is unenforceable because the FAA mandates enforcement of arbitration agreements as written.
Again, Judge Shannon disagreed, citing Section 2 of the FAA, which provides that arbitration agreements are enforceable except “upon such grounds as exist at law or in equity.”
Although the Fifth Circuit found conflict between the FAA and the NLRB, Judge Shannon followed the Seventh Circuit, finding no conflict because, he said, FAA Section 2 does not require enforcement of class waivers. He said the “FAA’s savings clause prevents a conflict between the statutes.”
Judge Shannon therefore concluded that the class wavier was unenforceable because Section 7 of the NLRB is a law falling within the exception contained in Section 2 of the FAA.
Issue Five: No Waiver Via ‘Opt Out’
The debtor relied on a 2014 Ninth Circuit decision holding that an arbitration agreement is enforceable if the employee could have opted out. Judge Shannon said that the appeals court did not refer to any NRLB decisions nor did it discuss Chevron deference.
While no other circuits have directly addressed the issue, Judge Shannon concluded that the ability to opt out does not eradicate rights under NLRA Section 7. In that regard, he interpreted the Seventh Circuit’s Lewis decision as intimating disagreement with the Fifth Circuit.
To bolster his conclusion, Judge Shannon cited a recent decision by the NLRB holding that requiring an employee to opt out of an arbitration agreement interferes with workers’ rights under the NLRA.
Even though the Fifth Circuit summarily reversed the NLRB, Judge Shannon felt compelled by Chevron deference to follow the Board.
Judge Shannon did not reach the question of certifying a class or rule on the validity or invalidity of WARN Act claims. In a footnote, Judge Shannon said that the issues were “core.” If an appellate court decides that the issues were non-core, he said that that his opinion should be taken as proposed findings and conclusions.
By concluding that the NLRA renders the arbitration agreement unenforceable, Judge Shannon was not called upon to utilize judge-made law for overriding an arbitration agreement in the bankruptcy context. In a Lehman case decided on Oct. 6 by the Second Circuit, the appeals court reiterated the two-part test that Judge Shannon would have been obliged to employ were it not for Section 7 of the NLRA.
The two-part test first requires that the dispute be “core.” Second, the court must conclude that arbitration “would severely conflict” with a purpose of the Bankruptcy Code. Courts have tended to enforce arbitration agreements in the non-NLRA context when debtors attempt to mount class actions in bankruptcy.
To read ABI’s discussion of the Lehman decision, click here. For an example of a non-employment case where arbitration was enforced in bankruptcy, click here.