Seventh Circuit Sides with NLRB on Arbitration Agreements, Creates Circuit Split

Randi Klein Hyatt
Randi Klein Hyatt
06/02/2016

In a surprising decision for atypically business-friendly appellate court, the United States Court of Appeals for the Seventh Circuit has sided with the National Labor Relations Board’s position that a mandatory agreement requiring employees to waive the right to bring a class or collective action in arbitration violates the National Labor Relations Act (NLRA).  Lewis v. Epic Systems Corporation, No. 15-2997 (7th Cir. May 26, 2016).

Epic Systems, a software company, required employees to sign an agreement that provided that any wage and hour claim must be brought as an individual arbitration.  Employees “waived the right to participate in . . . any class, collective, or representative proceeding” under the agreement.  After employee Jacob Lewis sued for overtime wages in federal court, Epic moved to dismiss his complaint and compel individual arbitration under the agreement.  The trial court sided with Lewis and held Epic’s arbitration agreement was unenforceable.

In affirming the lower court, the Seventh Circuit adopted the NLRB’s decision in D.R. Horton, 357 NLRB No. 184 (2012), in which the NLRB found that requiring employees to waive class or collective proceedings interfered with employees’ rights to engage in protected concerted activity under Section 7  of the NLRA.  Agreeing with D.R. Horton, the Seventh Circuit distinguished between procedural rights and substantive rights guaranteed under federal labor laws.  The Court ultimately found that the ability to pursue class, collective, or representative legal remedies was a substantive right guaranteed by the NLRA, not a procedural right that could be waived.

The Court further noted that although the Federal Arbitration Act (FAA) favors the enforcement of arbitration agreements, arbitration agreements, like any other contract,  may be rendered unenforceable if they are based on an illegal provision.  Here, because Epic’s agreement was unlawful under Section 7 of the NLRA, it was unenforceable under FAA.

With the Lewis case, the Seventh Circuit has become the first federal circuit court to agree with the NLRB’s decision in D.R. Horton.  The Fifth Circuit directly reversed D.R. Horton, and the Second and Eighth Circuits have rejected it.  Given this circuit split, the United States Supreme Court likely will weigh in on the legality of class and collective action waivers under mandatory arbitration agreements.

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