Seventh Circuit Holds that Class Action Waivers are Unenforceable under the NLRA -- Lewis v. Epic Systems Corporation
In Lewis v. Epic Systems Corp., the Seventh Circuit held that arbitration agreements that prohibit class or collective actions by employees are illegal and unenforceable under the National Labor Relations Act ("NLRA"). In particular, the May 26, 2016 decision explained that class lawsuits are a form of "protected concerted" activity under NLRA Sections 7 and 8. Thus, the court reasoned that any purported contractual waiver of these statutorily protected rights is unenforceable:
The [class waiver] provision prohibits any collective, representative, or class legal proceeding. Section 7 provides that “[e]mployees shall have the right to ... engage in ... concerted activities for the purpose of collective bargaining or other mutual aid or protection.” A collective, representative, or class legal proceeding is just such a “concerted activit[y.” Under Section 8, any employer action that “interfere[s] with, restrain[s], or coerce[s] employees in the exercise of the rights guaranteed in [Section 7]” constitutes an “unfair labor practice.” Contracts that stipulate away employees’ Section 7 rights or otherwise require actions unlawful under the NLRA are unenforceable.
(Internal Citations omitted).
The Lewis Court further held that this result is not at odds with the Federal Arbitration Act ("FAA"), as the FAA's "savings clause" only requires enforcement of arbitration agreements which are lawful and otherwise enforceable according to general contract law.
As a general matter, there is no doubt that illegal promises will not be enforced in cases controlled by the federal law. The FAA incorporates that principle through its saving clause: it confirms that agreements to arbitrate “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Illegality is one of those grounds. The NLRA prohibits the enforcement of contract provisions like Epic’s, which strip away employees’ rights to engage in “concerted activities.” Because the provision at issue is unlawful under Section 7 of the NLRA, it is illegal, and meets the criteria of the FAA’s saving clause for nonenforcement. Here, the NLRA and FAA work hand in glove.
(Internal punctuation and citations omitted).
In striking down class action waiver agreements Lewis joins with the reasoning adopted by the NLRB itself. However, it splits with the Fifth and Tenth Circuits, which have held that the pro-arbitration policy of the FAA takes precedence over the right to engage in "protected concerted" activity.
Unless Lewis is overruled following a grant of en banc review, the circuit split regarding the legality of class action waivers will inevitably end up before the Supreme Court. However, the Supreme Court's prior pro-waiver decisions have been sharply divided 5-4 decisions authored by the recently departed Justice Scalia. As a result, time may be running out on employers' most effective technique for avoiding class action liability.