Arbitration Agreements that Prohibit Class and Collective Actions Violate the National Labor Relations Act


A major storm-the biggest in decades- has been brewing for years in the American workplace.  At its center is whether employers can require workers to waive their right to bring class, collection, and representative actions.  The implications are enormous:  As union membership has declined, workers have relied moreGear-and-Gavel_dark-blue on litigation to stop companies from breaking the law.  If employers succeed in stripping workers of the right to do so, the results will be grim indeed.

Until recently, the field of combat had consisted of, on the workers’ side, the National Labor Relations Board, which held in D.R. Horton that such agreements violate Section 7 of the National Labor Relations Act (NLRA).  On the employers’ side is a series Circuit Court decisions, D.R. Horton v. NLRB (5th Cir. 2013); Owen v. Bristol Care, Inc. (8th Cir. 2013); Sutherland v. Ernst & Young LLP (2d Cir. 2013); and Richards v. Ernst & Young, LLP (9th Cir. 2013).  Each of those cases, to some degree, rejected the NLRB’s decision in D.R. Horton.

That field shifted dramatically on May 26, 2016.  In Lewis v. Epic Systems Corporation, the Court of Appeals for the Seventh Circuit held that an arbitration agreement that prohibited class and collective actions violates Section 7 of the NLRA and was therefore not enforceable.  [In a post dated February 2, 2016, I discussed a similar ruling by the Hon. Dolly M. Gee, a courageous federal judge.]  As the first Circuit Court to reach this holding, Lewis changed the legal landscape significantly in a manner that benefits workers.In Lewis, Epic Systems Corporation followed the familiar pattern of requiring its employees to sign an arbitration agreement in order to keep their jobs.  The agreement contained many of the most unfair provisions that employers force on their workers:

  • Epic required employees to waive their right to participate in, or receive money from, class, collective, or representative actions.
  • Epic provided that if that waiver was not enforceable, the employee was required to file suit in a court of law.  (In other words, if Epic could not prevent the employee from bringing a class, collective, or representative action, it did not want to be in arbitration.  This double standard shows Epic’s hypocrisy.)
  • Epic gave employees no choice in the matter if they wanted to keep their jobs.

Section 7 of the NLRA provides that employees have the right to engage in concerted activities for the purpose of mutual aid and protection.  Courts have long recognized that concerted activities include resort to judicial fora, including the filing of class action lawsuits.  And it is well-settled that contracts that require employees to renounce their rights under the NLRA are unlawful and unenforceable.

Despite this backdrop, Epic argued that class actions did not exist in 1935 when the NLRA was enacted.  Therefore, Epic claimed, the NLRA could not be read to protect the right to bring class actions.  The Lewis court rejected this analysis because nothing in the NLRA indicates that Congress intended to limit Section 7’s protections to concerted activities that were available in 1935.  To the contrary, the phrase “other concerted activities” indicates that Congress intended for Section 7 to be interpreted broadly.  Furthermore, although Rule 23 of the Federal Rules of Civil Procedure (which governs class actions) was enacted in 1937, class and collective procedures had existed for a long time before that date.  Congress was aware of these types of proceedings when it passed the NLRA.  Therefore, the plain language of Section 7 controls and renders unenforceable any contracts that waive the right to other concerted activities.

The Lewis court then turned to the question of whether Epic’s arbitration clause violated Section 7, and found that it clearly did.  Epic’s clause prohibited any collective, representative, or class legal proceedings.  These proceedings are concerted activities.

The court then distinguished  Lewis from a case called Johnmohammadi v. Bloomingdale’s, Inc. (9th Cir. 2014).  In Johnmohammadi, the Ninth Circuit held that an arbitration agreement with a class action waiver that was voluntary (because the employee could have opted out of it) did not run afoul of the NLRA.  Furthermore, the Ninth Circuit did not explain why it did not defer to earlier decisions of the NLRB holding that such agreements were not enforceable.

The final issue, and probably the most thorny, involves the interplay between the NLRA and the Federal Arbitration Act (FAA).  Section 2 of the FAA provides that arbitration agreements are enforceable except upon “such grounds as exist at law or in equity for the revocation of any contract.”  Does the FAA then conflict with the NLRA?

When courts analyze two statutes to determine whether they are capable of coexistence, the first question is whether there is an express congressional intention to the contrary.  Where each statute has its own scope and purpose, courts are not supposed to find that one precludes the other.  Instead, courts are supposed to harmonize the statutes unless there is some irreconcilable conflict between them.  on this issue.

The Lewis court found that there was no conflict between the NLRA and the FAA.  The FAA explicitly provides that arbitration agreements may be found to be unenforceable under such grounds as exist at law for the revocation of any contract.  Any contract that strips employees of their right to engage in concerted activities is unenforceable under the NLRA.  That doctrine fits squarely within the saving clause of the FAA.

Lewis then turned to Epic’s specious argument, which follows the reasoning of the Fifth Circuit, that arbitration is not well suited to class litigation.  Although arbitration is well suited to class litigation, and had been used for class litigation for decades, Epic argued that requiring it to arbitrate on a class basis would violate the FAA.  The Lewis court disposed of this argument for several reasons.  First, the NLRA does not disfavor arbitration in any way.  (In fact, the NLRA is resolutely pro arbitration.)  Second, nothing in the NLRA requires Epic to engage in class arbitration.  Rather, it only restrains Epic from interfering with its employees’ right to concerted activity.  Third, Epic’s argument ignores the FAA’s savings clause, which provides that arbitration agreements can be invalidated in certain circumstances.

Lewis then turned to Epic’s argument that the right to bring a class action is procedural, and not substantive.  The court held that the right to collective action in Section 7 of the NLRA was substantive.  Arbitration agreements that waive substantive rights are not enforceable, and courts routinely invalidate such agreements.

Lewis is an incredibly important decision, and sets the stage for a massive showdown at the U.S. Supreme Court.  Stay tuned:  this fight is far from over.