In a precedent-setting decision late last month, the United States Court of Appeals for the Seventh Circuit deemed an employee arbitration agreement unenforceable on the ground that it violated the National Labor Relations Act (NLRA). The decision is a major win for employees, because it recognizes their right to challenge unlawful employment policies and conditions by engaging in collective legal proceedings. But that victory could have a short life span: the court’s decision creates a circuit split, so the Supreme Court likely will have to step in to clarify the relationship between employment arbitration contracts and the NLRA.
According to the Seventh Circuit, the arbitration agreement at issue in Lewis v. Epic Systems Corp. contained two rules: “first, any wage-and-hour dispute must be submitted to arbitration rather than pursued in court; and second, no matter where the claim is brought, the plaintiff may not take advantage of any collective procedures available in the tribunal.” Although Jacob Lewis accepted the agreement when Epic emailed it to him in April of 2014, he later sued the company in federal court, contending that it had unlawfully deprived him and his fellow technical writers of overtime pay. After Epic moved to compel individual arbitration, Lewis argued that the arbitration agreement violated the NLRA and was therefore unenforceable. Both the District Court and the Seventh Circuit agreed with Lewis.
There were three steps to the Seventh Circuit’s reasoning. The court held first that the National Labor Relations Act (NLRA) protects employees’ right to engage in class or collective legal action. Section 7 of the NLRA provides that “[e]mployees shall have the right . . . to bargain collectively . . . and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” Homing in on the phrase “other concerted activities,” the court found Section 7 to encompass collective, class, and representative legal proceedings. But since Epic’s arbitration provision precluded collective legal proceedings—indeed, it mandated individual arbitration—the three-judge panel held that it violated the NLRA and was therefore unenforceable. Finally, the court concluded that the Federal Arbitration Act (FAA) did not override the NLRA and thereby require enforcement of Epic’s arbitration agreement.
The Seventh Circuit’s decision creates a split with other circuits. The primary point of disagreement between the courts concerns the relationship regarding the NLRA and the FAA. The Seventh Circuit concluded that there is no inherent conflict between the two statutes. The FAA, the court noted, contains a saving clause that permits arbitration agreements to be invalidated by normal contract defenses, such as illegality. Since Epic’s agreement violated the NLRA, it was illegal and therefore invalid under the FAA.
In D.R. Horton, Inc. v. NLRB, the Fifth Circuit, by contrast, held that an employment contract mandating individual arbitration had to be enforced. The court suggested that any law that incidentally burdened arbitration, such as an interpretation of Section 7 of the NLRA that protects employees’ rights to pursue legal proceedings as a class, violated the FAA. A class mechanism burdens arbitration because while individual arbitration is relatively quick, informal, and inexpensive, a class mechanism is slow, procedurally complex, and costly. Therefore, according to the court, “[r]equiring a class mechanism is an actual impediment to arbitration and violates the FAA. The saving clause [of the FAA] is not a basis for invalidating the waiver of class procedures in the arbitration agreement.”
Because the Seventh Circuit’s decision creates a conflict with other circuits, the Supreme Court likely will have to resolve the disagreement about the relationship between the FAA and the NLRA. In recent years, the Supreme Court typically has upheld arbitration agreements in the face of challenge, but the Court has tended to split along ideological lines in these cases, with the conservative Justices outnumbering the liberals 5-4. Consequently, whoever takes Justice Scalia’s place on the Court probably will be the deciding vote in any case involving the FAA and the NLRA.
The ramifications of a Supreme Court decision on the relationship between the FAA and NLRA cannot be overstated. Mandatory individual arbitration provisions have become common features of employment contracts. Such clauses affect not only where and how employees can bring wage-and-hour and other legal claims, they also make it less likely that an attorney will take on a case for a prospective client with an employment complaint, because it is often not cost effective to engage in arbitration for a single individual. A Supreme Court decision affirming the Seventh Circuit’s ruling in Epic, then, has the potential to enhance the ability of employees to vindicate the rights they are guaranteed under the NLRA and other laws.