Armies of One: The Battle Over the Validity of Class Action and Arbitration Waivers in the Federal Circuits

By Gus Laggner, Senior Associate

Introduction

One of the most important Congressional acts of the previous century is the National Labor Relations Act (“NLRA”).[1] It was enacted in 1935 to protect the rights of American employees and employers, curtail harmful workplace management practices, and promote collective bargaining.[2] Before the NLRA, “a single employee was helpless in dealing with an employer,” and thus a “union was essential to give laborers opportunity” to deal equally with their employers.[3] In other words, the NLRA attempted to put employers and employees on equal footing when negotiating labor conditions.

Although the NLRA has drawn both ire and praise from every conceivable source, this comment highlights a recent decision in the Seventh Circuit Court of Appeals that demonstrates how two skilled minds may arrive at different conclusions when applying the laws of Congress to labor disputes. In Lewis v. Epic Systems Corp., the Seventh Circuit held that an arbitration agreement requiring employees to waive the right to bring collective actions for federal wage-and-hour violations in favor of individual arbitration was a violation of the NLRA.[4] Surprisingly, the Seventh Circuit decided this case in express contravention[5] of the Fifth Circuit’s earlier opinion in D.R. Horton, Inc. v. NLRB, in which the court found that such a clause did not violate the NLRA and enforced the agreement.[6] This circuit split may well end up on the steps of the U.S. Supreme Court, and this comment addresses the tribunals’ difference of opinion.

The Fifth Circuit: D.R. Horton, Inc. v. NLRB

            In 2006, D.R. Horton, Inc., began requiring all its employees to sign a “Mutual Arbitration Agreement.[7] The agreement required all wage-and-hour disputes to be resolved by individual arbitration, regardless of whether the alleged violation was occurring simultaneously with multiple employees.[8] In 2008, Michael Cuda, a Horton employee, along with a nationwide class of similarly situated Horton employees, sought to initiate collective arbitration on the grounds that Horton had misclassified some of its employees as exempt from overtime pay under the Fair Labor Standards Act (“FLSA”).[9] Horton asserted that the Mutual Arbitration Agreement barred such a collective proceeding and instead required the employees to initiate individual arbitration.[10] Cuda then filed an unfair labor practice charge with the NLRB, alleging that the waiver violated the NLRA.[11]

The NLRB found that the Mutual Arbitration Agreement violated the substantive rights granted to employees under section 7 of the NLRA, which provides that employees have the right to engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection.[12] By prohibiting collective action under the Mutual Arbitration Agreement, the NLRB held that Horton committed an unfair labor practice by requiring employees not to act “in concert” in the pursuit of their claims.[13]

The Fifth Circuit disagreed with the NLRB. The Fifth Circuit held that the Federal Arbitration Act (“FAA”) mandated enforcement of the agreement.[14]  The FAA, which was enacted in 1926 in response to judicial hostility to arbitration, “establishes a liberal federal policy favoring arbitration agreements.”[15] Under the FAA, arbitration agreements must be enforced according to their terms, [16] except “upon such grounds as exist at law or in equity for the revocation of any contract.”[17]

The Fifth Circuit then held that because the “overarching purpose of the FAA . . . is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings,” mandating the availability of classwide arbitration procedures “interferes with fundamental attributes of arbitration” and “creates a scheme inconsistent with the FAA.”[18] The court found that the effect of the NLRB’s interpretation of the NLRA as prohibiting class action waivers was to disfavor arbitration by sacrificing “the principal advantage of arbitration—its informality—and mak[ing] the process slower, more costly, and more likely to generate procedural morass than final judgment.”[19] The court held the NLRB’s interpretation of the NLRA to be in conflict with the FAA and ultimately enforced the Mutual Arbitration Agreement per the FAA’s general mandate of enforceability.[20]

The Seventh Circuit: Lewis v. Epic Systems Corp.

            Shortly after Horton was decided, in 2014, Epic Systems Corp. emailed some of its employees an agreement stipulating that wage-and-hour claims could be brought only through individual arbitration and that the employees waived the right to participate in or receive relief from any other class proceeding.[21] Epic required the employees to accept the terms of the agreement if they wanted to keep their jobs.[22] Jacob Lewis, an employee at Epic, accepted this agreement by clicking the appropriate computer prompts.[23]

Thereafter, Lewis had a dispute with Epic and filed suit in federal court alleging that Epic misclassified Lewis and other technical writers as exempt from overtime in violation of the Fair Labor Standards Act.[24] Epic moved to dismiss and to compel arbitration, citing the agreement between Epic and its employees.[25] Lewis argued that the arbitration provision violated the NLRA by interfering with employees’ right to engage in concerted activity for mutual aid or protection.[26]

The Seventh Circuit agreed with Lewis and held the clause unenforceable. As mentioned, the NLRA protects the rights of employees to self-organize and collectively bargain for their mutual benefit.[27] The court cited longstanding NLRB decisions holding that employer-imposed, individual agreements that purport to restrict NLRA rights are unlawful and may be declared unenforceable by the NLRB.[28] In the first step of its analysis, the court held that imposing a waiver on all class remedies for labor disputes violated section 7 of the NLRA.[29]

As in Horton, the Seventh Circuit was required to take its analysis a step further and determine the applicability of the FAA. The Seventh Circuit diverged significantly from the Fifth Circuit in this step.[30] Instead of holding that the FAA required the enforcement of collective action waivers, the Seventh Circuit found that the FAA’s exception—the “saving clause”—applied to the enforceability of the agreement.[31] The saving clause allows for exceptions to the general rule of enforcing arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.”[32] Because the saving clause affords employers and employees the same defenses to arbitration contracts as any other contract and illegality is a standard contract defense, the court’s finding that the arbitration agreement violated the NLRA meant that the agreement was illegal and therefore unenforceable via the saving clause of the FAA.[33] The Seventh Circuit struck down the waiver.[34]

Conclusion

The only effective solution to a federal circuit split is for the Supreme Court to hear the issue and declare the law of the land. Given the current political climate and the current eight-justice Court, whether this split will be resolved in the near future is uncertain. Supreme Court justices, much like federal circuits, sometimes reach different conclusions when presented with the same law and facts. Therefore, the U.S. needs that ninth black robe back to resolve this significant circuit split. Writs have been filed.[35] Time will tell.

[1] 29 U.S.C. § 151–69 (2012).

[2] See 29 U.S.C. § 151.

[3] NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1, 33 (1937); see also NLRB v. City Disposal Systems Inc., 465 U.S. 822, 835 (1984) (stating that in enacting the NLRA, “Congress sought generally to equalize the bargaining power of the employee with that of his employer by allowing employees to band together in confronting an employer regarding the terms and conditions of their employment”).

[4] Lewis v. Epic Systems Corp., 823 F.3d 1147, 1151 (7th Cir. 2016).

[5] Id. at 1157.

[6] D.R. Horton, Inc. v. NLRB, 737 F.3d 344, 357 (5th Cir. 2013).

[7] Id. at 348.

[8] Id..

[9] Id. at 349.

[10] Id.

[11] Id.

[12] Id. at 355; 29 U.S.C. § 157 (2012).

[13] D.R. Horton, 737 F.3d at 355.

[14] 9 U.S.C. §§ 1–16 .

[15] CompuCredit Corp. v. Greenwood, 132 S. Ct. 665, 668–69 (2012).

[16] D.R. Horton, 737 F.3d at 358.

[17] 9 U.S.C. § 2; D.R. Horton, 737 F.3d at 358.

[18] D.R. Horton, 737 F.3d at 359 (citing AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 344 (2011) (holding that a California statute requiring the availability of class action proceedings in both judicial and arbitral forums was not an exception to the FAA’s enforcement requirement)).

[19] Id.

[20] Id. at 364. The court additionally analyzed whether the NLRA contained any congressional command such that the FAA would be precluded. Because the Seventh Circuit did not reach this issue, it has been omitted from this comment.

[21] Lewis v. Epic Systems Corp., 823 F.3d 1147, 1151 (7th Cir. 2016).

[22] Id. at 1151

[23] Id.

[24] Id.

[25] Id.

[26] Id.

[27] See 29 U.S.C. § 157 (2012).

[28] Lewis, 823 F.3d at 1152.

[29] Id. at 1154.

[30] The Seventh Circuit acknowledged the split created by its decision and asserted arguments as to why the Fifth Circuit’s decision was incorrect. For further reading see id. at 1158–61.

[31] Id. at 1159.

[32] 9 U.S.C. § 2; Lewis, 823 F.3d at 1157.

[33] Lewis, 823 F.3d at 1157.

[34] Id. at 1161.

[35] Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016), petition for cert. filed, (No. 16-285) (U.S. Sept. 2, 2016).

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