United States: Seventh Circuit Decision Rejecting Class Action Waiver Sets Stage For Supreme Court Review

Executive Summary: On May 26, 2016, a three-judge panel of the U.S. Court of Appeals for the Seventh Circuit held that a class and/or collective action waiver contained in an arbitration agreement was unlawful under the National Labor Relations Act (NLRA) and was, therefore, unenforceable. Lewis v. Epic Systems Corporation, No. 15-2997.

This decision renders class and/or collective action waivers unenforceable in those states covered by the Seventh Circuit–Illinois, Indiana, and Wisconsin. The decision also creates a split among the federal circuit courts. In two separate opinions, the U.S. Court of Appeals for the Fifth Circuit has held that collective action waivers do not violate the NLRA. It is now more likely that the U.S. Supreme Court will eventually decide this issue.

Board Clashes with Appeals Courts over Enforceability of Class/Collective Action Waivers

After issuing its decision in D.R. Horton, Inc. in 2012, the National Labor Relations Board (NLRB) has repeatedly held that agreements by an employee not to file a class or collective action on behalf of himself and his fellow employees, i.e. class and collective action waivers, are unlawful under the NLRA. The NLRB's rationale is that such waivers violate Section 7 of the NLRA. Section 7 provides that employees have the right to engage in concerted activities for the purpose of collective bargaining or other mutual aid or protection. The Fifth Circuit reviewed the Board's decision in D.R. Horton and, in large part, declined to enforce it. For more information on this decision, please see our December 4, 2013 Alert, Fifth Circuit Further Strengthens Class Action Waivers with Latest DR Horton Decision.

Rather than seeking review of the D.R. Horton decision by the United States Supreme Court, the NLRB issued a decision less than a year later in Murphy Oil U.S.A., Inc. that reaffirmed its reasoning and holding in D.R. Horton. In October 2015 the Fifth Circuit denied enforcement of the NLRB's order in Murphy Oil. Relying upon its determination in D.R. Horton that the NLRA did not contain a congressional command overriding the Federal Arbitration Act (FAA) and that the use of class action procedures was not a substantive right under the NLRA, the Fifth Circuit held that Murphy Oil's arbitration agreement and collective action waiver did not violate the NLRA. On May 13, 2016, the Fifth Circuit denied the NLRB's petition asking the full panel of Fifth Circuit judges to hear the case.

Nevertheless, even in the aftermath of the Fifth Circuit's decisions in D.R. Horton and Murphy Oil, the NLRB has continued to issue complaints against employers who require employees to sign arbitration agreements that (1) require employees to waive their right to bring complaints on a class or collective basis, or (2) seek enforcement of such agreements in any forum.  

Facts of Epic Systems

In April 2014, Epic submitted an arbitration agreement to its employees requiring them to agree to arbitrate any wage/hour claims and containing a class action waiver. Employees who continued to work at the company were considered to have accepted the agreement. The agreement did not give employees the ability to continue their employment if they declined to sign it. The agreement also included a clause that stated if the class/collective action waiver provision was unenforceable, then any class or collective action must be in filed in a court, and not through arbitration.

Lewis, an employee at Epic, reviewed and acknowledged the arbitration agreement, but later sued Epic in federal court claiming the company violated the Fair Labor Standards Act and Wisconsin law by misclassifying him and his co-workers as exempt employees and depriving them of overtime pay.

Epic moved to dismiss Lewis' claims and to compel individual arbitration. The district court denied Epic's motion on the ground that the arbitration agreement violated the NLRA. Epic appealed to the U.S. Court of Appeals for the Seventh Circuit.

The Seventh Circuit's Opinion

The Seventh Circuit became the first federal appellate court to adopt the NLRB's analysis and hold that employees have a right to engage in class or collective litigation under Section 7 of the NLRA. Employers are thus prohibited, under Section 8 of the NLRA, from interfering, restraining, and/or coercing employees in the exercise of that right.

The Seventh Circuit rejected Epic's argument that the NLRA was not intended to protect employees' right to class remedies simply because Rule 23 of the Federal Rules of Civil Procedure (which creates the procedural mechanism under which many class actions are brought in federal court) did not exist when the NLRA was enacted in 1935. The Seventh Circuit noted that numerous representative mechanisms preceding Rule 23 had long been part of Anglo-American civil procedure; that Congress was aware of such class, collective, and representative proceedings; and that the plain language of Section 7 of the NLRA encompassed them.

The Seventh Circuit also rejected Epic's argument that the arbitration agreement (including the class and collective action waiver) must be enforced under the FAA. The Court found that there was no conflict between the NLRA and the FAA. The Seventh Circuit relied upon the FAA's "savings clause" in 9 U.S.C. § 2, which states that arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." The Seventh Circuit reasoned that because the class and collective action waivers were unlawful under the NLRA they were also unenforceable under the FAA's savings clause, and therefore, there was no irreconcilable conflict between the two federal laws.

Alternatively, the Seventh Circuit held that the right to engage in collective action pursuant to Section 7 of the NLRA was a substantive right, not a procedural right. The Court noted that under the FAA itself, a party cannot prospectively waive substantive rights. For example, where an arbitration agreement deprives an employee of statutory damages otherwise available to that employee, courts have found arbitration agreements to be unenforceable because they interfered with an employee's substantive rights.  

Employers' Bottom Line

The Seventh Circuit panel stated that no judge in that Circuit wanted to hear this case en banc; therefore, the Epic Systems decision is final. In considering where to go from here, employers should keep the following in mind:

  • Arbitration agreements between employers and employees that do not contain class or collective waivers are still lawful. Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001).
  • The NLRA only protects the right of employees to engage in protected, concerted activities, so the Seventh Circuit's decision does not affect arbitration agreements between companies and their customers, independent contractors, and other non-employees. AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).
  • The case renders class and/or collective action waivers unenforceable in Illinois, Indiana, and Wisconsin. Although the Seventh Circuit limited its holding to class and/or collective action waivers that were a mandatory term of employment, the NLRB has taken the position that class and collective action waivers are unlawful even where employees are provided with an opportunity to opt out of the agreement.
  • Under the NLRA, an employer can seek review of a Board decision in the circuit where the unfair labor practice allegedly took place, in the United States Court of Appeals for the District of Columbia, or in any circuit where the employer transacts business. 29 U.S.C. § 160(f). Those employers appealing an adverse Board decision on their class or collective action waivers should seek review in the Fifth Circuit, if possible. Otherwise, employers should consider seeking review in the Second, Eighth, or Eleventh Circuits where the courts have enforced class and collective action waivers in similar contexts, albeit without directly addressing the NLRB's argument. Unfortunately, employers who raise a motion to compel arbitration in response to a lawsuit that has been filed will not have that same luxury. However, they should consider on the front end whether any facts would permit a change in venue to a more favorable circuit.
  • If there is a silver lining in this cloud, it is that the question of the legality and enforceability of class and collective action waivers in arbitration agreements, has, at least, been teed up for review by the Supreme Court. We may receive some guidance from the Supreme Court in the foreseeable future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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