Seventh Circuit Finds Class Action Waivers Unlawful

Seventh Circuit Finds Class Action Waivers Unlawful

On May 26, 2016, the U.S. Court of Appeals for the Seventh Circuit in Lewis v. Epic Systems Corporation, held that when an employer conditions continued employment upon the signing of a class or collective action waiver in an arbitration agreement, the agreement violates the National Labor Relations Act (NLRA) and is unenforceable under the Federal Arbitration Act (FAA). The decision creates a split with other circuit courts, including the Second, Fifth and Eighth circuits.

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Employers in the Seventh Circuit will have to re-evaluate how to minimize the risk of class and collective action liability.  The ruling arose out of an arbitration agreement seeking to prevent class and collective actions on wage and hour claims.  Increasingly, employers are being hit with class and collective action wage and hour lawsuits trying to force settlements, despite having named plaintiffs who worked at one location and are often unfamiliar with the employer’s actual policies and practices on a class-wide basis. The Seventh Circuit’s decision makes it more difficult for employers to curb these abuses.

The employer in Lewis provided employees with an arbitration agreement via email that stated any wage and hour claims could only be brought through individual arbitration and that the employees waived the right to participate in, or receive money from, any class, collective or representative proceeding.  The agreement further provided that employees were deemed to have accepted the terms of the arbitration agreement through their continued employment with the company, but also requested that employees acknowledge their receipt of the agreement.

Although the plaintiff in Lewis had acknowledged his receipt of the arbitration agreement, he later filed an action in federal court on behalf of himself and other similarly situated employees contending that the employer had misclassified employees and failed to pay overtime in violation of the Fair Labor Standards Act.  The district court denied the employer’s motion to compel arbitration, finding that the arbitration clause violated the NLRA because it interfered with employee’s rights to engage in concerted activities for mutual aid and protection.

In affirming the district court’s denial of the motion to compel arbitration, the Seventh Circuit first determined that the employer’s arbitration provision violated Section 7 of the NLRA, providing that “[e]mployees 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 and protection.”  Although not specifically including class and collective actions, the Seventh Circuit interpreted “concerted activities” to include such proceedings, reasoning that “[g]iven Section 7’s intentionally broad sweep, there is no reason to think that Congress meant to exclude collective remedies from its compass.”  In support of its ruling, the Court relied on the much-criticized National Labor Relations Board’s decision in D.R. Horton, holding that arbitration agreements prohibiting class or collective actions violate Sections 7 and 8 of the NLRA.

In finding that the employer’s arbitration violated the NLRA, the Seventh Circuit made a significant distinction worth considering for employers.  The Seventh Circuit specifically distinguished rulings from other circuits, including the Ninth Circuit, finding that provisions mandating individual arbitration may be enforceable, where the employees had the right to opt out of the agreement without penalty.  However, because the agreement specifically provided that the employees were “deemed” to have consented to the agreement by continuing with their employment, the court avoided addressing whether an agreement with an opt out provision would be enforceable.

The Seventh Circuit also independently held that the arbitration agreement was unenforceable under the FAA.  In doing so, the Seventh Circuit noted that it was creating a split among circuit courts, on whether the FAA mandates enforcement of individual arbitration provisions over any conflict with the NLRA.

The Seventh Circuit found no conflict with the FAA as the NLRA generally favors arbitration and a violation of Section 7 would not have occurred if the arbitration agreement had permitted class or collective arbitration.  The Court also relied on the FAA’s savings clause in finding no conflict. While the FAA generally favors arbitration, its saving clause provides that arbitration agreements are “enforceable save upon such grounds as exist at law or in equity for the revocation of any contract.”  The Seventh Circuit reasoned that because the arbitration provision violated the NLRA, that illegality rendered it unenforceable under the savings clause.

Notably, the Fifth Circuit, in D.R. Horton, Inc. v. NLRB, has previously rejected the claim that the FAA savings clause could be used to invalidate a class action waiver, as it results in disfavoring arbitration, by eliminating its streamlined convenience and cost savings.  The Fifth Circuit also rejected the argument that that NLRA was exempted from application of the FAA.

Takeaway for Employers:

It remains to be seen when the United States Supreme Court will address the split among circuits on whether class action waivers in arbitration agreement are enforceable under the FAA or violate the NLRA.  However, employers in the Seventh Circuit should now review their arbitration agreements to see if they comply with Lewis.  A class action waiver entered into as a condition of employment will be found invalid by district courts in that circuit.

However, it does not necessarily follow that all class arbitration waivers will be deemed to be per se invalid.  The Seventh Circuit left open the question of whether a class action waiver in an arbitration agreement would comply with the NLRA if the employee were given the choice of opting out in connection with their continued employment.

Contributor:  Daniel C. Zamora, Attorney at Law  |  Weintraub Tobin