Federal Appeals Court Deals Huge Blow to Mandatory Arbitration

Published May 26th, 2016 -  - 05.26.1615


In a case with major implications for mandatory arbitration agreements, the seventh circuit today struck down an arbitration clause that prohibited employees from pursuing class proceedings.  The appeals court, in an opinion by Chief Judge Wood, held that by banning collective actions, such an agreement violates the National Labor Relations Act.  The decision, Lewis v. Epic Systems Corp., conflicts with the Fifth Circuit’s holding in D.R. Horton and thus creates a circuit split.

As the seventh circuit correctly observes, Section 7 of the NLRA protects not only collective bargaining but also “other concerted activities.” These “other concerted activities,” moreover, have for decades been held to include “resort to administrative and judicial forums.”  Thus, courts and the NLRB have long concluded that filing collective or class action legal proceedings constitutes protected “concerted activity” under the NLRA.  By prohibiting workers from pursuing class proceedings, a mandatory arbitration clause with a class action waiver therefore requires workers to waive their section 7 rights, something no employment agreement can do.

As the seventh circuit also correctly concluded, the Federal Arbitration Act does not save such an arbitration agreement.  That Act “permits agreements to arbitrate to be invalidated by ‘generally applicable contract defenses'” of which illegality is clearly one such defense.  Thus, the seventh circuit concludes:

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.

Finally, even under the Supreme Court’s recent arbitration cases, no arbitration agreement can require the waiver of substantive statutory rights – procedural rights may be waived, but not substantive ones.  So, for example, although you might be required to waive your (procedural) right to bring an age discrimination claim in court, you can not be required to waive your (substantive) right to be protected against age discrimination.  Here, the seventh circuit correctly observes that the right to act collectively is the substantive right provided by the National Labor Relations Act.  Indeed, the right to act collectively is the “heart” of federal labor law; it is the core of section 7, the statute’s  substantive provision.  To waive the right to act collectively is accordingly to waive the NLRA’s substantive rights, something no arbitration agreement can require.

It would be hard to overstate the importance of this decision for the evolving law of mandatory arbitration agreements.  Unless and until the Supreme Court intervenes, the decision calls into question the legality of all mandatory employment arbitration agreements in the seventh circuit (Illinois, Indiana, and Wisconsin) that contain class action waivers.  It also raises the possibility that other circuits will follow suit.

A final note:  Chief Judge Wood authored this opinion for the seventh circuit, as well as the dissent in the seventh circuit’s recent right-to-work decision, Sweeney v. Pence  (a dissent subsequently embraced by half of the circuit’s judges in an en banc proceeding). This makes Judge Wood the author of two of the most important and persuasive labor law opinions in recent memory.

**An earlier version of this post referred to Chief Judge Wood as the author of Sweeney v. Pence.  Judge Wood authored the dissenting opinion in Sweeney, not the majority opinion.

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