United States: Seventh Circuit Holds That Mandatory Arbitration With Class Waiver Violates NLRA, Setting Up Circuit Split

On May 26, the U.S. Court of Appeals for the Seventh Circuit held that a wage-and-hour class arbitration clause violated the National Labor Relations Act (NLRA), setting up a circuit split with the Fifth Circuit, and opening the door for the U.S. Supreme Court to weigh in on arbitration clauses in employment agreements containing class action waivers.

In Lewis v. Epic Systems Corp. (cv-15-2997), the court held that a mandatory class arbitration clause negating an employee's ability to bring and recover from any wage-and-hour collective actions violated Sections 7 and 8 of the NLRA.  Finding that the provision did not conflict with the Federal Arbitration Act's (FAA) strong presumption in favor of arbitration overall, the Seventh Circuit's decision squarely conflicts with the Fifth Circuit's holding in D.R. Horton v. NLRB. At least two circuits (the Second and Eighth) agree with the Fifth Circuit's approach in D.R. HortonSee Owen v. Bristol Care, Inc., 702 F.3d 1050, 1052 (8th Cir. 2013) (rejecting argument that there is inherent conflict between NLRA/Norris LaGuardia Act and FAA); Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297 n.8 (2d Cir.  2013)  (rejecting NLRA-based argument without analysis); Richards v. Ernst & Young, LLP,  744  F.3d 1072, 1075 n.3 (9th Cir. 2013) (noting "[w]ithout deciding the issue"  that  a  number  of  courts  have  "determined  that  they  should not defer to the NLRB's decision in D.R. Horton").

Background on D.R. Horton

In a controversial decision, in D.R. Horton, Inc. 357 N.L.R.B. No. 184, at *13–14 (Jan. 3, 2012), a two-member panel of the NLRB held that mandatory arbitration agreements requiring all employment disputes to be resolved through individual, bilateral arbitration violate the NLRA.  The NLRB held that such agreements impermissibly restrict employees' rights to engage in "concerted action for mutual aid or protection," notwithstanding the Federal Arbitration Act (FAA) or any Supreme Court decisions upholding the FAA such as AT&T Mobility v.  Concepcion, 131 S.Ct. 1740 (2011).

On appeal, the Fifth Circuit held that the arbitration agreement containing a class waiver did not violate the NLRA.  D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013).  Relying on more recent Supreme Court precedent, the Fifth Circuit held that the FAA requires arbitration agreements to be enforced according to their terms; that the FAA's savings clause-deeming unenforceable agreements on grounds "as exist at law or in equity for the revocation of any contract"-did not apply; and that the application of the FAA was not precluded by contrary congressional command in the NLRA.  See also Murphy Oil USA, Inc. v. NLRB, No. 14-60800, 2015 WL 6457613 (5th Cir. Oct. 26, 2015) (holding that it would be unreasonable for an employee to construe the arbitration agreement to prohibit the filing of charges with the NLRB when the agreement says the exact opposite).

The Lewis Decision

In Lewis, the Seventh Circuit read the savings clause differently and found that it allows agreements to be invalidated by "generally applicable contract defenses" such as illegality..." Id. at 14. As the arbitration waiver violated Sections 7 and 8 of the NLRA, the FAA's exception applied.

Directly addressing the holding in D.R. Horton, the Seventh Circuit criticized what it characterized as the Fifth Circuit's failure to "harmonize" the NLRA and the FAA.  Rather, the court stated that the statutes "work hand in glove":

When addressing the interactions of federal statutes, courts are not supposed to go out looking for trouble:  they may not "pick and choose among congressional enactments."  Rather, they must employ a strong presumption that the statutes may both be given effect.

Id. at 15 (Internal citations removed).

As such, the savings clause represented Congress' acknowledgement that arbitration clauses are not limited by other federal statutes.

The Seventh Circuit's opinion creates a clear circuit split on the confines of the FAA and its relationship to the NLRA and will lead to calls for the Supreme Court to resolve the issue.  In the meantime, wage-and-hour class action waivers are clearly at risk for employers in the Seventh Circuit (Illinois, Indiana, and Wisconsin).  It remains to be seen how broadly or narrowly future courts will read Lewis.  The Seventh Circuit's decision nullified an arbitration clause in the wage and hour context while D.R. Horton upheld a broader arbitration clause relating to all employment related claims.  But for now, it seems that there's a possibility that the Supreme Court may have the next (and final) word on this.

In the meantime, the NLRB shows no signs of slowing down.  On Tuesday, May 31, the NLRB issued two decisions (Lincoln Property Company, 364 NLRB No. 16, and Adriana's Insurance Services, Inc., 364 NLRB No. 17) striking down arbitration clauses under the NLRA.

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