Seventh Circuit Creates Circuit Split by Holding That Class Actions Waivers in Arbitration Agreements Violate the NLRA

Decision: On May 26, 2016, the Seventh Circuit held in Lewis v. Epic-Systems Corp., No. 15-2997, that the company’s arbitration agreement, which prohibited employees from taking part in “any class, collective or representative proceeding” violated the employees’ Section 7 right to engage in concerted activity under the National Labor Relations Act (NLRA). The court emphasized that the right to take part in such proceedings is a substantive, rather than procedural, right under the NLRA and that it was unlawful for the company to require its employees to forgo that right as a condition of employment. Although the court recognized that the Federal Arbitration Act (FAA) makes arbitration agreements as enforceable as other contracts, it emphasized that there was no conflict between the NLRA and FAA because any agreement that violates Section 7 of the NLRA falls within the FAA’s savings clause (§ 2) for nonenforcement.

As we have explained in amicus briefs filed on behalf of the Chamber of Commerce of the United States, the Seventh Circuit made at least two fundamental errors. First, in holding that illegality under Section 7 of the NLRA is a generally applicable contract defense for purposes of Section 2’s savings clause, the Seventh Circuit overlooked the fact that in AT&T Mobility LLC v. Concepcion, the Supreme Court rejected the functionally indistinguishable argument that California’s rule against exculpatory clauses is a generally applicable defense for purposes of Section 2. Second, in holding that the FAA and NLRA are reconcilable—and hence that there is no need to identify in the NLRA a clear congressional command to override the FAA—the court overlooked the Supreme Court’s core holding in Concepcion that the purposes of the FAA will be thwarted if the enforceability of arbitration provisions is conditioned on the availability of class procedures.

Impact: This decision is important because the Seventh Circuit is the first court of appeals to agree with the National Labor Relations Board’s (NLRB) position in D.R. Horton that class action waivers in arbitration agreements are unlawful. Previously, the Second, Fifth and Eighth Circuits—as well as the California Supreme Court and dozens of federal district courts—had rejected the NLRB’s stance, setting the stage for a future Supreme Court review to settle a circuit split. In the meantime, employers should be aware that mandatory class and collective action waivers may no longer be enforceable in federal courts in Illinois, Indiana and Wisconsin. Accordingly, employers will need to determine whether they can seek to enforce their arbitration provisions containing class waivers in the Second, Fifth or Eighth Circuits if those provisions are challenged by the NLRB or an employee.