Seventh Circuit Pans Arbitration Pact with Class Action Waivers Based on NLRA, Creates Circuit Split

Practical Law Legal Update w-002-5258 (Approx. 9 pages)

Seventh Circuit Pans Arbitration Pact with Class Action Waivers Based on NLRA, Creates Circuit Split

by Practical Law Labor & Employment

Background

In April 2014, Epic Systems Corp. (Epic), a health care software company, emailed some of its employees an arbitration agreement that mandated that wage-and-hour claims be brought only through individual arbitration and required employees to waive the right to participate in any class or collective action through arbitration or other forums. Employees were required to accept the agreement if they wanted to continue employment with Epic. Jacob Lewis registered the agreement, but later did not proceed under the arbitration clause when he had a dispute with Epic. Lewis sued Epic in federal court and argued that the company violated the FLSA and Wisconsin law by misclassifying him and his fellow technical writers and by depriving the technical writers of overtime pay.

When Epic moved to dismiss the claim and compel Lewis to exercise arbitration, he responded that the arbitration clause was unenforceable because it interfered with the employees' rights to engage in concerted activities for mutual aid and protection violated the NLRA. The district court agreed with Lewis and denied Epic's motion to dismiss. Epic appealed to the Seventh Circuit and contended that the district court erred when it did not enforce the agreement under the FAA.

Outcome

The Seventh Circuit:

Affirmed the district court's denial of Epic's motion to dismiss Lewis's wage-and-hour claims.
Held that:
- Epic's arbitration agreement violates Sections 7 and 8 of the NLRA because it precludes employees from seeking class, collective or representative remedies to wage and hour disputes; and
- nothing in the FAA saves this type of ban on collective action from being unlawful and unenforceable.

Violation of Sections 7 and 8 of the NLRA

The Seventh Circuit noted that:

Section 7 of the NLRA 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 U.S.C. § 157). Concerted activities have included resorting to administrative and judicial forums and filing collective or class action suits (Eastex, Inc. v. NLRB, 437 U.S. 556, 566 (1978); Brady v. National Football League, 644 F.3d 661, 673 (8th Cir. 2011)).
While the NLRA does not define "concerted activities," its history confirms that the phrase should be read broadly to include resorting to representative, joint, collective or class legal remedies. Further, the US Supreme Court has found that an employee acting alone engages in concerted activities when he intends to engage in group activity (NLRB v. City Disposal Sys., Inc., 465 U.S. 822, 831 (1984)).
Section 7 is not ambiguous concerning collective lawsuits, but even if it were, the NLRB has interpreted Sections 7 and 8 as prohibiting employers from making agreements that bar access to class or collective remedies (D. R. Horton, Inc., 357 N.L.R.B. 2277, 2280 (2012)).
Section 8 of the NLRA enforces Section 7 by stating that it is an unfair labor practice (ULP) to "interfere with, restrain or coerce employees in the exercise" of their Section 7 rights (29 U.S.C. § 158(a)(1)).
Contracts that renounce employees' guaranteed NLRA rights are unlawful and may be declared unenforceable by the NLRB (Nat'l Licorice Co. v. NLRB, 309 US 350, 365 (1940)). The NLRB has held agreements that try to restrict Section 7 rights to be unenforceable (D. R. Horton, Inc., 357 N.L.R.B. at 2280).
While the US Court of Appeals for the Ninth Circuit has held that an arbitration agreement requiring individual arbitration may be enforceable if the employee had the right to opt out of the agreement without penalty, the Seventh Circuit held that stipulating away Section 7 rights necessarily interferes with the exercise of Section 7 rights (Johnmohammadi v. Bloomingdale's, Inc., 755 F.3d 1072, 1077 (9th Cir. 2014); NLRB v. Stone, 125 F.2d 752, 756 (7th Cir. 1942)).
Congress did not intend the NLRA to only protect concerted activities that were available when the NLRA was enacted. There is no evidence of Congress's intent to exclude class, representative and collective proceedings when enacting the NLRA.
The NLRB has held arbitration agreements similar to those in this case agreed to under similar circumstances violate Sections 7 and 8.

The Seventh Circuit held that:

Epic's arbitration provision impinged on employees' Section 7 rights to engage in concerted activities by stating that a plaintiff may not engage in the available collective procedures of any tribunal in which he brings a claim.
Requiring agreement with Epic's arbitration provision as a condition of continued employment qualified the contract as interference with, or restraint of, the employees' Section 7 rights, in violation of Section 8.

Federal Arbitration Act Does Not Save the Ban on Collective Action

The Seventh Circuit noted that:

The FAA was enacted:
- in response to judicial hostility to arbitration; and
- to make arbitration agreements as enforceable as other contracts.
(CompuCredit Corp. v. Greenwood, 132 S. Ct. 665, 668 (2012); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 n.12 (1967).)
Federal statutory claims are arbitrable unless the FAA's mandate has been overridden by a contrary congressional command (CompuCredit Corp., 132 S. Ct. at 669).
The Supreme Court has held that when two statutes such as the NLRA and FAA can coexist despite potential clashes, it is the court's duty to regard them both as effective (Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528, 533 (1995)).
The FAA's savings clause states that arbitration agreements are valid and enforceable aside from those with grounds that prevent enforcement, such as illegality (Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444 (2006)).

The Seventh Circuit held that:

If the NLRA eliminates the collective action waiver in Epic's contract, the FAA does not resuscitate it and the other arbitration mandates.
The FAA does not mandate the enforcement of Epic's arbitration clause, so there is no conflict between the NLRA and the FAA.
Epic did not carry the burden of showing an irreconcilable conflict between the NLRA and FAA.
Since Epic's arbitration provision is unlawful under Section 7 of the NLRA, it is illegal and meets the FAA's savings clause for nonenforcement. The two laws do not conflict, but rather work together.

Split Between Federal Circuit Courts

In D.R. Horton, Inc. v. NLRB, the Fifth Circuit came to a conclusion different from the Seventh Circuit about a conflict between the NLRA and the FAA (737 F.3d 344 (5th Cir. 2013)). The Seventh Circuit noted that:

The Fifth Circuit reasons that:
- since the FAA favors arbitration, any law that burdens arbitration (including Section 7 of the NLRA) conflicts with the FAA;
- class arbitration eliminates arbitration's advantage of informality and slows the process; and
- the effect of requiring class arbitration procedures is to disfavor arbitration.
(D.R. Horton, 737 F.3d at 359.)
When examining interactions between federal statutes, courts must employ a strong presumption that the statutes may both be given effect (Morton v. Mancari, 417 U.S. 535, 551 (1974)).
The NLRA is pro-arbitration, allowing unions and employers to arbitrate disputes (29 U.S.C. 171(b)).
Despite the Fifth Circuit's interpretation of the dicta in the AT&T Mobility LLC v. Concepcion and American Express Co. v. Italian Colors Restaurant, the US Supreme Court did not say that:
- anything that makes arbitration less attractive automatically clashes with the FAA; or
- an arbitration clause automatically prevents collective action, even when silent on the issue.
(563 U.S. 333, 340 (2011); 133 S. Ct. 2304, 2310 (2013).)
Finding the NLRA in conflict with the FAA would render the FAA's savings clause a nullity (TRW Inc. v. Andrews, 534 U.S. 19, 31 (2001)).
Several other circuits seem to agree with the Fifth Circuit in this split (Owen v. Bristol Care, Inc., 702 F.3d 1050, 1052 (8th Cir. 2013); Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297 n.8 (2d Cir. 2013); Richards v. Ernst & Young, LLP, 744 F.3d 1072, 1075 n.3 (9th Cir. 2013).
The US Supreme Court has held that by agreeing to arbitration of a statutory claim, a party does not give up the rights afforded by the statute (Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985)).
While other employment laws do not guarantee collective process, the NLRA does.

The Seventh Circuit further observed that:

If Epic's provision had permitted collective arbitration, it would not have violated Section 7's substantive right to act collectively.
None of the circuit courts that appear to align with the Fifth Circuit engaged substantively in the arguments that were relevant to the present matter.
The NLRA rendered Epic's arbitration provision unlawful, so the FAA does not mandate its enforcement.
Epic acted unlawfully by contracting with Lewis to waive his rights under Section 7, even if he agreed to it.

Practical Implications

In Lewis v. Epic Systems Corporation, the Seventh Circuit held that an employment agreement was unenforceable because it contained an arbitration provision that precluded employees from seeking class, collective, or representative remedies. The court's analysis largely tracked that of the NLRB holding that employees have a statutory right under and through Sections 7 and 8 of the NLRA to collective process as a means of engaging in protected concerted activity.

The Seventh Circuit has now created a circuit split. The Fifth Circuit has held (in D.R. Horton and Murphy Oil USA, Inc. v. NLRB, 808 F.3d 1013 (5th Cir. 2015)) (and other circuits have agreed) that laws that burden arbitration conflict with the pro-arbitration FAA. It also held that class arbitration slows the arbitration process and that requiring class arbitration procedures is to disfavor arbitration.

The NLRB is not a party to this case. This appeal springs from an attempt to compel individual arbitration of wage and hour claims rather than from ULP proceedings at the NLRB. However, this decision could accelerate Supreme Court review on, among other issues, whether (as the NLRB holds) the NLRA creates a statutory right for employees to engage in class, collective, or multi-employee plaintiff actions processes to resolve any form of employment-related claim.

UPDATE

In Epic Systems Corp. v. Lewis, the US Supreme Court held that arbitration agreements with class and collective action waivers are not prohibited under Section 7 of the NLRA and must be enforced as written under the Federal Arbitration Act (FAA). The decision reversed the judgment in this case. (( (U.S. May 21, 2018); see Legal Update, SCOTUS: Arbitration Agreements with Class Action Waivers Must Be Enforced as Written, and NLRA Does Not Command Otherwise and Article, Expert Q&A on Class Action Waivers in the Employment Context.)

Seventh Circuit Pans Arbitration Pact with Class Action Waivers Based on NLRA, Creates Circuit Split | Practical Law