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With its May 26 Lewis v. Epic-Systems Corp. decision, the Seventh Circuit became the first circuit to back the reasoning in D.R. Horton, Inc., 357 NLRB No. 184 (2012), and held that a mandatory arbitration agreement prohibiting employees from bringing class or collective actions against their employer violates the National Labor Relations Act (NLRA). This decision creates a circuit split regarding the enforceability of arbitration agreements with class action waivers in the employment context, and the issue is now ripe for potential Supreme Court review.

This split will likely increase inconsistency and uncertainty in this high stakes area of the law, and encourage forum shopping. As an immediate result, class and collective action waivers will not be enforced within the Seventh Circuit (Illinois, Indiana, Wisconsin). However, the same waiver will likely be enforced within Circuits that have disagreed with the D.R. Horton decision (the Second, Eighth, and Fifth Circuits). Federal courts sitting within the circuits that have not yet ruled on this issue now have a circuit court decision to rely on to rule against class action waivers. While Supreme Court review could provide a uniform rule, if the issue is decided before a new justice is appointed, there is a possibility of a 4-4 split, which will only prolong the confusion and uncertainty.

Case Background

During the course of his employment, Lewis, a technical writer, entered into an arbitration agreement with Epic-Systems, his employer. The agreement mandated that wage-and-hour claims could be brought only through individual arbitration and that the employees waived “the right to participate in or receive money or any other relief from any class, collective, or representative proceeding.” When a dispute arose between Lewis and Epic however, Lewis did not proceed under the arbitration clause but filed a suit in federal court on behalf of himself and other technical writers, alleging the company had violated the Fair Labor Standards Act (FLSA) by misclassifying them and depriving them of overtime.

Epic moved to dismiss Lewis’s claim and compel individual arbitration. Lewis responded that the agreement’s class and collective action waiver was unenforceable because it interfered with his right to engage in concerted activities for mutual aid and protection under the NLRA. The district court agreed and denied Epic’s motion. Epic appealed the decision to the Seventh Circuit.

Seventh Circuit’s Analysis

As a threshold matter, the Seventh Circuit assumed the NLRB’s reasoning in D.R. Horton decision, and established that engaging in class, collective or representative proceedings is “concerted activity” and a protected right under Section 7 of the NLRA. According to the court, under this reasoning, it would be an unfair labor practice under Section 8 of the NLRA for an employer “to interfere with, restrain, or coerce employees in the exercise” of this right. The court further noted that the NLRA’s legislative history and purpose indicated that “concerted activity” unambiguously includes representative, class, joint and collective actions. Even if the term “concerted activity” was found to be ambiguous, the court concluded it would then have to give deference to the NLRB’s interpretation, and find the class action waiver to be unlawful.

In support of its position, Epic made three main arguments, which the court rejected. First, the Seventh Circuit rejected Epic’s argument that Congress could not have intended FRCP Rule 23 class actions to be “concerted activity” because such actions did not exist when Congress enacted the NLRA in 1935. The court held that “concerted activity” is not limited to what was “concerted activity” in 1935, and noted that the arbitration agreement waived all other forms of representative, collective or joint proceedings, proceedings which existed prior to 1935.

Second, going against all other circuits that have ruled on this issue, the Seventh Circuit rejected Epic’s argument that the arbitration agreement must be enforced under the Federal Arbitration Act (FAA). The court relied upon the FAA’s savings clause, which provides that arbitration agreements are “enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The court reasoned that because the agreement is illegal under the NLRA, and because an illegal agreement is not enforceable under the FAA’s savings clause, “at least on these facts, there is no irreconcilable conflict between the NLRA and the FAA.”

Lastly, Epic argued that the FAA requires enforcement of the agreement because the right to a class or collective action is a procedural and not substantive right. The court disagreed and held that because the right to engage in “concerted activity” through class or collective actions is a substantive right protected by the NLRA, any agreement requiring employees to relinquish this right is not enforceable under the FAA.

Uncertainty Ahead

With its Lewis v. Epic-Systems Corp. decision, the Seventh Circuit certainly dealt a blow to employers in Illinois, Indiana, and Wisconsin as class and collective action waivers will not be enforced within these states. Moreover, this decision increases inconsistency and forum shopping as the same class and collective action waivers will likely be enforced in the Second, Eighth, and Fifth Circuits. It’s uncertain how courts elsewhere will decide on the issue. Given that there is now a circuit split on this high stakes issue, it seems more likely than not that the Supreme Court will eventually grant review, but the question is when. Until then, there is likely more uncertainty ahead for employers with regards to arbitration agreements.