Recently, in a case of first impression in the Third Circuit, a Delaware bankruptcy judge presiding over an adversary action in the Chapter 11 bankruptcy of Fresh & Easy LLC ruled that a class action waiver in an employment arbitration agreement violates the National Labor Relations Act (NLRA).

In this action, the employee, Diana Chan, had signed an agreement that mandated her to resolve all employer-related disputes through arbitration and only permitted her to bring claims against the company in her individual capacity and not as part of a class. This agreement contained an opt-out provision of 30 days which the employee failed to exercise. Contrary to the agreement, the employee filed a class action lawsuit pursuant to the Worker Adjustment and Retraining Notification Act (WARN) alleging that the company did not give the required 60 days notice for layoffs when the grocery chain ceased doing business. Fresh & Easy took the position that the Federal Arbitration Act required that the employee’s WARN claims be heard in arbitration per her signed agreement.

Chan successfully argued that the provisions of the agreement barring her right to file a class action lawsuit violated the NLRA as it restricted her ability to engage in collective bargaining activities. The court ruled that the right to file a class action is not a procedural tool that can be changed by the agreement, but is a substantive right protected by Section 7 of the NLRA. Section 7 of the NLRA states in relevant part that “Employees shall have the right ….to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protections…”

The court then took the reasoning one step further and found that not only did the class action waiver fail as a matter of law as it “interferes and burdens the exercise of Section 7 rights,” but that the agreement in its entirety failed because the class action waiver clause was a critical tenet of the agreement. The court refused to sever the issues because the waiver clause was central to the parties’ agreement. Despite language in the agreement that should have saved the remainder of the agreement if any provision was held to be unenforceable, the court exercised its discretion to find the entire agreement illegal.

Interestingly, prior to this decision, the same judge in another adversary action involving the same employer under very similar facts held that he had no authority to prevent the employer from enforcing its agreement. It remains to be seen how the court will ultimately resolve its newly created conflict of reasoning.