Case Rules Arbitration and Class-Waiver Agreements Unenforceable

In Lewis v. Epic Systems Corp., the Seventh Circuit recently held that individually-bargained agreements that (a) compel arbitration and (b) preclude all forms of collective or representative actions are illegal under the National Labor Relations Act (NLRA) and therefore are unenforceable. The pro-plaintiff ruling means that even companies whose employees have signed arbitration agreements may be exposed to class or collective lawsuits in Wisconsin, Illinois and Indiana. With no sign that Epic will ask for Supreme Court intervention or an en banc rehearing, employers facing class/collective actions in any of those three states would do well to push aggressively for a venue transfer.

Lewis involved allegations that Epic had misclassified as exempt from overtime wage requirements a class of similarly situated employees in violation of the Fair Labor Standards Act (FLSA) and Wisconsin law. The plaintiff had previously signed an agreement that required him to bring any wage-and-hour claims “through individual arbitration” and to waive “the right to participate in or receive money or any other relief from any class, collective or representative proceeding.” The plaintiff argued the agreement was unenforceable because it was illegal under the NLRA.

Ruling for plaintiff, the Court first held that filing collective or class-action cases constitutes protected “concerted activity” under Section 7 of the NLRA, which provides that employees shall have the right to, among other things, “engage in … concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The Court found support for its conclusion in both the NLRA’s plain language and the National Labor Relations Board’s (NLRB) interpretation of the same. Next, the Court held that the arbitration agreement at issue violated Section 7. Specifically, the agreement ran afoul of the law because, under its terms, “no matter where the claim is brought, the plaintiff may not take advantage of any collective procedures available in the tribunal.”

The Court also rejected the contention that there had been no NLRA violation because the plaintiff had voluntarily entered into the agreement.  (Section 8, which enforces the rights declared in Section 7, states that violations occur only if the employee is forced to waive a Section 7 right.)  Its reasoning for doing so, however, is unique to the Seventh Circuit, whose applicable case law holds that individually bargained agreements limiting Section 7 rights are a per se violation of the NLRA.

Critically, unlike the Eighth and Fifth Circuit Courts of Appeal, the Seventh Circuit found that its expansive reading of the NLRA did not conflict with the Federal Arbitration Act (FAA). In so doing, the Court first noted that statutes should be deemed to conflict only in rare instances where the disagreement is clear and irreconcilable. Second, it reasoned that finding the agreement unlawful under the NLRA did not undermine the FAA because the agreement prohibited all forms of collective or representative actions, not just those in arbitration. As such, finding against the agreement’s wholesale prohibition did not disfavor the use of arbitration. Third, it found that the NLRA is, as a whole, pro-arbitration, even noting that the agreement before it likely would have been lawful had it been the product of collective bargaining. Therefore, giving effect to the NLRA could not be incompatible with the FAA. Fourth, the court concluded the FAA savings clause, which permits “agreements to arbitrate to be invalidated by generally applicable contract defenses,” would be rendered meaningless if the agreement at issue was enforced despite being illegal under Section 7 of the NLRA.

In support of its finding that the NLRA and FAA do not conflict, the Court also offered a halfhearted attempt to distinguish several decisions that have arrived at the opposite conclusion. The Court first took on the Supreme Court’s seminal Concepción and Italian Colors cases, reading them narrowly to mean that not everything that “conceivably makes arbitration less attractive automatically conflicts with the FAA.” With respect to other Circuit Court decisions, the Court simply noted that of “these courts … none has engaged substantively with the relevant arguments.”

Finally, the Court rejected Epic’s contention that the right to file collective or class action claims is a procedural—as opposed to substantive—right that cannot trump the FAA. The Court relied on the text of the NLRA to find that, contrary to Epic’s contention, the rights covered under Section 7 were actually substantive rights.

The Court’s decision is notable because it goes against the Supreme Court, Eighth Circuit, Fifth Circuit and Ninth Circuit precedent and creates a split among the circuit courts. If an employer finds itself facing a class or collective suit in Wisconsin, Illinois and Indiana, it is advised and in the employer’s best interest to transfer to a more favorable venue.