Seventh Circuit Creates Circuit Split, Striking Down Agreement to Arbitrate Employment Claims on an Individual Basis

On May 26, 2016, the United States Court of Appeals for the Seventh Circuit issued its decision in Lewis v. Epic Systems Corp., becoming the first federal court of appeals to decide that an agreement between an employer and an employee to arbitrate wage-and-hour claims only on an individual basis, as opposed to a class action basis, is unenforceable. The court’s opinion has created a circuit split, as the Second, Fifth, and Eighth Circuits have enforced similar agreements.

Background

The plaintiff, Jacob Lewis, worked as a “technical writer” for Epic Systems, a healthcare software company. In 2014, he agreed to settle any future wage-and-hour disputes with the company through an arbitration process, rather than in court. He also agreed that he could not pursue any such claim through a class or collective action.

Despite that agreement, Lewis filed a collective action complaint in the Western District of Wisconsin alleging that Epic had deprived him and other employees of overtime pay in violation of the Fair Labor Standards Act (“the FLSA”) and Wisconsin law. Epic filed a motion to dismiss the complaint and to compel individual arbitration, citing the parties’ agreement. Lewis argued that the agreement was unenforceable because it interfered with his right to engage in protected, concerted activity under Section 7 of the National Labor Relations Act (“the NLRA”). Section 7 provides that employees “shall have 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.” 29 Lewis argued and the District Court agreed, that Lewis’ collective action FLSA claim constituted a “concerted activity” under Section 7 and, thus, that his agreement to assert a claim only on an individual basis was illegal. Accordingly, the District Court denied Epic’s motion to dismiss the lawsuit.

The Seventh Circuit’s Opinion

The Seventh Circuit held that that Section 7’s text, history, and purpose supported the conclusion that “filing a collective or class action suit constitutes ‘concerted activit[y]’ under Section 7.” And noted that, contracts requiring an employee to renounce rights guaranteed by the NLRA are generally unlawful and unenforceable.

The court acknowledged that the definition of “concerted activity” is considered ambiguous by some, but, even if that were the case, the National Labor Relations Board’s interpretation would be entitled to judicial deference. And, in D.R. Horton, the Board had held that agreements requiring employees to waive the right to pursue joint, class, or collective employment claims in any forum are in violation of the NLRA.

The court also addressed the employer’s argument that enforcement of the arbitration agreement was required by the Federal Arbitration Act (“the FAA”). Having held that the maintenance of a class or collective action is protected activity, the court noted that the FAA would only mandate enforcement if it superseded the NLRA. The court found that the defendant had failed to overcome the “heavy presumption” that the two statutes are not in conflict, and held that the FAA’s savings’ clause, which states that arbitration agreements are enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract,” allowed for the revocation of Lewis’ agreement not to bring a class or collective arbitration action without violating the FAA.

It is important to note that the Seventh Circuit’s decision is limited in some important respects. First, the court left open the question of whether the agreement in question would have been enforceable if it had not been a condition of continued employment. Section 8 of the NLRA prohibits an employer from interfering with or restraining employees in the exercise of Section 7 rights. If the plaintiff had had the opportunity to opt out of the agreement without penalty, it is possible, although unlikely, that a different result would have been reached. Second, the court noted that the NLRA does not prohibit arbitration. Thus, if the agreement had allowed the plaintiff to pursue a class or collective action through an arbitration proceeding, it may have been lawful. Finally, the court noted that the NLRA may not prohibit class and collective action waivers that are part of a collective bargaining agreement, since any such waiver would be the result of concerted activity.

Conflict in the Circuits

As noted, several courts of appeals have held, contrary to the Seventh Circuit’s decision in Epic Systems, that the FAA requires the enforcement of arbitration agreements that obligate employees to waive the right to bring class or collective action claims. The Fifth Circuit, for example, concluded that class or collective action statutory or rule-created mechanisms are only “procedural” and do not create any “substantive” rights that Section 7 of the NLRA was intended to protect. Unless and until the Supreme Court resolves this conflict, whether an arbitration agreement that requires an employee to assert claims on an individual basis will be enforced will depend on the jurisdiction where suit is brought. We will keep our readers apprised of future court decisions on this issue.

For answers to any questions regarding this blog, or with regard to arbitration agreements generally, please feel free to contact an attorney in the Gibbons Employment & Labor Law Department.

Timothy D. Tremba is an Associate in the Gibbons Employment & Labor Law Department.
Print