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7th Circuit Rules Class Arbitration Waivers are Unenforceable, Sets Stage for U.S. Supreme Court to Decide Issue

By: Mario R. Bordogna

Employment agreements containing arbitration clauses that restrict the rights of employees to initiate class arbitration, and instead confine them to seeking individual relief, have become more popular in the last decade, and with good reason. Using them has benefits for employers and, because arbitration is generally favored in the eyes of the law as a way of resolving disputes, these clauses tend to be upheld more often than not.

Of course, the National Labor Relations Board ("Board" or "NLRB") has taken a different view in recent years, generally adopting the position that agreements which prohibit class arbitration violate the provision of the National Labor Relations Act ("NLRA") that guarantees employees the right to act concertedly for their own mutual aid and protection. Unfortunately for the Board, when it tried to defend that position in court in the last few years, the Fifth Circuit Court of Appeals concluded - twice, first in D.R. Horton v. NLRB, and then later in Murphy Oil, U.S.A v. NLRB - that the Board was wrong. The Eighth Circuit has reached the same conclusion. While the Board has defiantly looked the other way and continued to invalidate class arbitration waivers in other jurisdictions, a recent case from the Seventh Circuit Court of Appeals may now give the NLRB's position more traction.

In Lewis v. Epic Systems Corporation, decided on May 26, 2016, the 7th Circuit backed the Board's view on this issue. It concluded that the arbitration agreement the employer required the Plaintiff to sign in the case  - which required individual arbitration of wage and hour claims and precluded collective arbitration - was unenforceable. Unlike the 5th Circuit, the Court in Epic Systems was not convinced that the arbitration clause was invalid simply because the Federal Arbitration Act generally requires the enforcement of private arbitration agreements. Instead, it concluded that such an agreement would conflict with the rights of employees under Section 7 of the NLRA to engage in concerted activity about terms and conditions of employment for their mutual aid - including the filing of a collective action.

While there are many specifics in the weeds of these situations which can distinguish them, what is unambiguous is that in deciding Epic Systems, the 7th Circuit created a pretty stark conflict with the view of the 5th and 8th Circuits. Importantly, that conflict makes the question of whether these types of agreements are legal or not much more ripe for the United States Supreme Court to resolve, if the employer in the case decides to ask that Court to take up the issue. Unsurprisingly, because it was concerned it might set an adverse precedent, the NLRB did not seek review of the D.R. Horton or Murphy's Oil, U.S.A. cases in the U.S. Supreme Court, even though the 5th Circuit ruled against it.

The other important conclusion to draw from the Epic Systems case is that employers who have or are considering using employment agreements with any type of class waivers, including class arbitration waivers, are increasingly wise to consult with competent counsel about the subject, given the varying authority in this area. Such agreements can certainly be beneficial in the right circumstance, but there is no one-size-fits-all, and given the tenuous state of the law on the question, could be just as dangerous for employers to adopt or continue using. Until the Supreme Court weighs in on the question, caution is advised.

If you have any questions about the court's decision on class action waivers in arbitration policies, please contact Mario R. Bordogna at (412) 394-2487 | eat0@eau0eav0eaw0 or another member of Clark Hill's Labor and Employment Practice Group.