On May 26, 2016, in the matter of Lewis v. Epic Systems Corporation, the U.S. Court of Appeals for the Seventh Circuit held that an arbitration agreement, which required employees to submit to individual arbitration for any wage and hour claims against the company, violates the National Labor Relations Act (“NLRA”) and is unenforceable under the Federal Arbitration Act (“FAA”).  In issuing this decision, the Seventh Circuit gave credence to the National Labor Relations Board’s (“NLRB”) decision in D. R. Horton and, in doing so, has created a split amongst U.S. Circuit Courts of Appeal regarding the enforceability of arbitration agreements that preclude class actions.

The arbitration agreement at issue in Epic Systems mandated that any employee wage and hour claims could only be brought through individual arbitration and that employees waived “‘the right to participate in or receive money or any other relief from any class, collective, or representative proceeding.’”  The agreement also provided that employees were deemed to have accepted the terms of the arbitration agreement if they continued working for Epic Systems.  The Plaintiff, previously a technical writer for Epic Systems, reviewed the arbitration agreement and originally agreed to its terms.  However, after a dispute arose with Epic Systems, the Plaintiff filed a class action in federal court alleging that he and other technical writers were misclassified under the Fair Labor Standards Act (“FLSA”).  Epic Systems moved to dismiss the complaint and compel arbitration.  The district court denied Epic Systems’ motion, finding that the arbitration clause violated the NLRA and was unenforceable because it interfered with employees’ rights to engage in protected concerted activity.  Epic Systems appealed to the Seventh Circuit.

In affirming the district court’s decision and finding that Epic Systems’ arbitration agreement violated the NLRA, the Seventh Circuit gave judicial deference to the NLRB’s view that class and collective actions constitute concerted activity under the NLRA.  In so holding, the Seventh Circuit found that “[t]he NLRA’s history and purpose confirm that the phrase ‘concerted activities’ in Section 7 should be read broadly to include resort to representative, joint, collective, or class legal remedies.”

Since the Seventh Circuit held that Epic Systems’ arbitration agreement violated the NLRA, the second part of the Court’s opinion addressed whether the FAA overrides Section 7 of the NLRA, thereby entitling Epic Systems to enforce its arbitration agreement in full.  The Seventh Circuit’s answer to this question was no, the FAA does not override Section 7 of the NLRA.  Specifically, in reaching this conclusion, the Seventh Circuit focused on the FAA’s “savings clause,” which provides that arbitration agreements are “enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  The Seventh Circuit found that “[b]ecause the provision at issue is unlawful under Section 7 of the NLRA, it is illegal, and meets the criteria of the FAA’s savings clause for nonenforcement.”

Finally, the Seventh Circuit rejected Epic Systems’ argument that, even if the NLRA protects a right to proceed in a class or collective action, such right is procedural, not substantive and, therefore, the FAA demands enforcement of the agreement.  In rejecting this argument, the Seventh Circuit held, even though class actions are a procedural device, the right to engage in concerted activity through class or collective actions is a substantive right under the NLRA.  As such, since the arbitration agreement required employees to relinquish a substantive right, the agreement was not enforceable under the FAA.

In issuing this decision, the Seventh Circuit has now created a split amongst the U.S. Circuit Courts of Appeal.  The Second, Fifth, Eighth, Ninth, and Eleventh Circuits have all reached opposite conclusions regarding the enforceability of class action waivers in some capacity.  As a result, the decision sets the stage for Supreme Court review.  But, given the current status of the Court, it could be a long time before guidance is issued.  And, without a uniform rule, employers will be challenged on how to enforce nationwide arbitration agreements.

That said, it is important to note that the decision does not address the enforceability of waivers contained in voluntary agreements such as those that are not required as a condition of employment or that include an “opt-out” provision (although the NLRB has taken the position that class and collective action waivers are unlawful even where employees are provided with an opportunity to opt-out of the agreement).  Further the decision does not affect arbitration agreements between employers and individuals who do not have Section 7 rights (e.g., supervisors, managers, independent contractors and other non-employees).  It is also possible that, following the 2016 election, a change in the political make-up of the NLRB results in a change in its position.  Until then, employers should anticipate that class and collective action waivers contained in mandatory arbitration agreements will not be enforced by federal courts sitting in the Seventh Circuit (Illinois, Indiana and Wisconsin).

*Meghan Mahder is a summer associate in Sheppard Mullin’s New York office, and contributed to this article.