United States: Seventh Circuit Finds Class Action Waiver Unenforceable In Arbitration Agreements, Creates Split Among Circuits

The Seventh Circuit Court of Appeals recently dealt a blow to employers when it held in Jacob Lewis v. Epic Systems Corporation that arbitration agreements that prohibit employees from seeking class, collective or representative remedies to wage-and-hour disputes are unenforceable.

The suit involved a privately held health care software company that required all employees to consent to an arbitration agreement as a condition of continued employment. The agreement mandated that any wage-and-hour disputes could be brought only through individual arbitration and that employees waived the right to participate in any class, representative or collective proceedings.

BACKGROUND

Plaintiff Jacob Lewis opted to sue Epic in federal court despite having endorsed the arbitration clause. When Epic moved to dismiss the case, pursuant to the arbitration agreement, Lewis argued that the provision was unenforceable under the National Labor Relations Act (NLRA). The district court agreed, denying Epic's motion. Epic then appealed the denial to the Seventh Circuit.

The Court of Appeals held that the agreement violated section 7 of the NLRA, which guarantees employees "the right to self-organization, 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." Interpreting the statute broadly, the Court followed several other circuits in determining that "other concerted activities" include class, representative and collective legal proceedings.

Epic countered by arguing that the Federal Arbitration Act (FAA) dictated enforcement of the provision in question. The FAA states that any written contract "evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."

Nonetheless, the Court concluded that the two statutes could be read compatibly. Pursuant to the NLRA, Epic's arbitration agreement was an unlawful contract, as it eliminated the employees' rights to engage in "other concerted activities." Thus, the Court ruled, the FAA was inapplicable according to its "saving clause," which states that the FAA only applies to legally valid contracts. For this reason, the Court stated, "it is not clear to us that the FAA has anything to do with this case."

ANALYSIS

The decision represents a split from the Fifth Circuit, which previously held, in D.R. Horton, Inc. v. NLRB, that any law that even incidentally burdens arbitration necessarily conflicts with the FAA. The Seventh Circuit rejected the Fifth Circuit's logic, finding that the Fifth Circuit failed to "harmonize" the two statutes, as required during legislative interpretation. Moreover, the Lewis Court held that the NLRA is decidedly pro-arbitration, undercutting the Fifth's Circuit's analysis.

Though the decision limits the ability of employers in the Seventh Circuit to guard against class and collective action litigation, notably, the Court distinguished between the arbitration clause in Epic's agreement and the collective proceeding clause. The Court observed that the NLRA does not disfavor arbitration, but Epic's agreement impermissibly limited collective action.

In fact, in dicta, the Court specifically stated that Epic's agreement would have been valid had it permitted collective arbitration or had it been included in a collective bargaining agreement:

In essence, the Court ruled that employers cannot completely eliminate employees' right to act collectively, but they may limit the ways in which employees can act collectively. Thus, despite the restrictive ruling, the Court left open the door for employers to enforce class/collective waivers, so long as they permit some form of collective action, such as collective arbitration.

Only one week after the Seventh Circuit's decision in Lewis, the Eighth Circuit Court of Appeals handed down a conflicting ruling on a similar issue. In Cellular Sales of Missouri, LLC v. NLRB, an employer required its employees to sign an arbitration agreement with a similar clause to the provision in Lewis, prohibiting employees from filing class or collective proceedings. The employee filed a claim with the National Labor Relations Board (NLRB), alleging that the agreement violated the NLRA. The NLRB agreed and ordered the employer to either rescind or revise the agreement and pay for the employee's legal fees.

The employer then filed a petition for review with the Eighth Circuit. After oral arguments, the Court of Appeals declined to enforce the NLRB's order. Finding that the Fifth Circuit precedent was "fatal" to the NLRB's argument, the Court held that the ban on class or collective proceedings did not violate the NLRA. Nonetheless, the Court agreed with the NLRB that the arbitration agreement violated section 8(a)(1) of the NLRA because employees would reasonably interpret the agreement to limit or preclude their rights to file unfair labor practice charges with the NLRB. Thus, the Court enforced the NLRB's order with respect to this issue.

Because of the split between the Fifth and Seventh Circuits, the issue in Lewis is likely to be taken up by the U.S. Supreme Court. In the meantime, employers should be mindful that arbitration provisions that eliminate the right to a collective or class action may not be enforceable in states governed by the Seventh Circuit Court of Appeals, which include Illinois, Indiana and Wisconsin.

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