In a sweeping May 26 opinion, the U.S. Court of Appeals for the Seventh Circuit shook up the arbitral landscape and created a remarkable circuit split regarding the enforceability of arbitration agreements with class action waivers in the employment sector.
In Lewis v. Epic Systems Corp., No. 15-2997, the Seventh Circuit held that an arbitration agreement precluding collective arbitration or collective action violates Section 7 of the National Labor Relations Act, 29 U.S.C. § 157 (NLRA), and is unenforceable under the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq (FAA). The decision put the Seventh Circuit decidedly at odds with the Fifth, Second, Eighth, Ninth and Eleventh Circuits on this crucial issue that ultimately influences the extent to which employers can rely on class action waivers in arbitration agreements to limit class liability. Since 2011, when the U.S. Supreme Court permitted such waivers in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), employers have relied upon them to require that disputes be resolved through individual arbitration. Those waivers precluded employees from pursuing collective action relief for Fair Labor Standards Act (FLSA) claims.
Concepcion, however, arose in the consumer class action context, and involved the precise question of whether a state contract law proscribing individual arbitration had to yield to the FAA’s pro-arbitration command. 563 U.S. at 340. Apparently realizing that Concepcion’s fit with Section 7 of the NLRA was not necessarily airtight, the National Labor Relations Board (NLRB) pushed back, and continued to bring enforcement actions for labor violations, arguing that while the FAA may trump contrary state law, it does not displace employees’ rights to engage in concerted activities under Section 7. See e.g., D.R. Horton, 357 N.L.R.B. No. 184 (2012); Murphy Oil USA, Inc., 361 N.L.R.B. No. 72 (2014). And as we have discussed in detail here before, every circuit court to analyze the NLRB’s argument has rejected it by holding that the FAA’s policy of favoring arbitration overrides any concerted activity rights employees have to class or collective remedies. See D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013); Walthour v. Chipio Windshield Repair, LLC, 745 F.3d 1326, 1336 (11th Cir. 2014); Richards v. Ernst & Young, LLP, 744 F.3d 1072, 1075 n. 3 (9th Cir. 2013); Owen v. Bristol Care, Inc., 702 F.3d 1050, 1053–55 (8th Cir. 2013); Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297 n. 8 (2d Cir. 2013). That is, until last Thursday.
In Epic, a unanimous Seventh Circuit panel opinion written by Chief Judge Diane Wood scrutinized two key legal questions: whether a collective action waiver violates Section 7 in the first place, and if so, whether the FAA overrides the Section 7 right. Factually, the court had to decide whether an Epic employee was barred from pursuing a collective action under the FLSA because of a waiver in his arbitration agreement. On the less controversial issue, Judge Wood’s opinion deferred to the NLRB position that an FLSA collective action constitutes “concerted activity,” and therefore a waiver as a condition of continued employment violates Section 7 rights. It was on the second question where Epic created the undeniable circuit split.
The FAA and its pro-arbitration policy does not displace Section 7, Judge Wood wrote, because the statutes do not actually conflict on the issue of class waivers. She pointed to the FAA’s savings clause, which provides that any arbitration contract “shall be valid, irrevocable, and enforceable, save upon grounds as exist at law or in equity for the revocation of any contract.” Epic, slip op. at 12. Illegality, she noted, is one of those grounds for revoking an arbitration contract. And illegality existed in Epic because the collective action waiver violated Section 7. Thus, Judge Wood concluded that Section 7 and the FAA coexist neatly on this issue, and that the FAA does not mandate individual arbitration where the agreement itself is illegal.
On that point, she criticized the Fifth Circuit for neglecting to make an effort to harmonize the statutes in its D.R. Horton opinion and for overstating the effect of Concepcion where a state law hostile to arbitration is not present. Epic, slip op. at 15-17.
The impact of Epic is likely to be significant, in no small part because it sets the stage for an ultimate Supreme Court review. Not only could Epic seek review from the panel opinion, but so could the NLRB in its Murphy Oil appeal in which the Fifth Circuit reversed the NLRB holding that a class waiver was unenforceable. Fifth Cir. No. 14-60800. On May 13, the Fifth Circuit denied the NLRB’s petition to rehear its appeal en banc, giving the NLRB until mid-August to petition for certiorari review. The NLRB had resisted seeking Supreme Court review when existing circuit opinions were decided in favor of arbitration and Justice Scalia was on the bench. But now, with a circuit split created by the Seventh Circuit no less, the landscape for a favorable Supreme Court ruling, from the Board’s standpoint, may seem more appealing.
Yet uncertainty still looms. For one, the Supreme Court may deny certiorari review. Or if it does grant certiorari, what happens if it decides the case before a new justice is appointed? Indeed, Justice Scalia’s recent death looms large here. After all, he wrote the majority opinions in Concepcion and American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), two of the most influential class action waiver cases within the past decade. Without his power of persuasion on the Court, particularly with respect to FAA pro-arbitration policy, how much room is there for Judge Wood’s reasoning to prevail? Alternatively, could a 4-4 split leave both the Fifth and Seventh Circuit opinions standing? And doctrinally, the Court may be compelled to consider that it previously held employment statutory claims that provided for class treatment to be subject to mandatory arbitration. See, e.g., Gilmer v. Interstate/Johnson Lane Corp., 50 U.S. 20 (1991). For now, though, much of that is speculative. In the meantime, companies will be challenged on how to enforce nationwide arbitration agreements.
The Seventh Circuit’s Epic opinion created a split among the circuits regarding the enforceability of class action waivers in the employment context. Within the Seventh Circuit, such waivers are presently not enforceable because they violate employees’ Section 7 NLRA rights to engage in concerted activity. Elsewhere, the pro-arbitration policy of the FAA overrides Section 7 interests and requires enforcement of the class waivers. Potential Supreme Court review could provide a uniform rule or simply prolong the uncertainty with a 4-4 split. Only time will tell.