May 31, 2016 – Epic Systems, a Wisconsin-based health care software company, can’t force certain employees to bring their wage and hour claims individually through arbitration, the U.S. Court of Appeals for the Seventh Circuit ruled last week.

In 2014, some Epic employees received an email from management with arbitration agreements that mandated individual arbitration for wage and hour claims and barred class and collective claims. Employees could not decline the agreement.

They were “deemed to have accepted” the agreement if they kept working at Epic. A technical writer, Jacob Lewis, was one of the employees who received the email.

Lewis acknowledged the agreement and continued his employment but did not pursue individual arbitration when a dispute later arose. Instead, Lewis filed a lawsuit in federal court, claiming that he and other employees were unlawfully deprived of overtime pay.

U.S. District Judge Barbara Crabb, of the Western District of Wisconsin, denied Epic’s motion to dismiss based on the arbitration agreements. Epic appealed.

Recently, a three-judge panel for the Seventh Circuit Court of Appeals affirmed in Lewis v. Epic Systems Corp., No. 15-2997 (May 26, 2016), concluding Epic’s agreements unlawfully interfere with their employees’ right to engage in concerted activities.

Arbitration Contract Violates the NLRA

The panel noted that Section 7 of the National Labor Relations Act (NLRA) says employees have a right to self-organize, join unions, and “engage in concerted activities for the purpose of collective bargaining or other mutual aid or protection.” Under Section 8, employers commit unfair labor practices by interfering with such Section 7 rights.

Filing class or collective actions, the panel explained, constitutes “concerted activity” by employees under the NLRA, and contracts that force employees to waive that right as a condition of employment can be declared unenforceable.

“Collective, representative, and class legal remedies allow employees to band together and thereby equalize bargaining power,” Judge Diane Wood wrote for the three judge panel. “Given Section 7’s intentionally broad sweep, there is no reason to think that Congress meant to exclude collective remedies from its compass.”

The panel noted that the National Labor Relations Board has interpreted Section 7 and 8 “to prohibit employers from making agreements with individual employees barring access to class or collective remedies.”

And the panel rejected Epic’s claim that class action procedure rules did not exist when the NLRA was enacted in 1935, so Congress did not contemplate class action remedies. “There is no reason to think that Congress intended the NLRA to protect only ‘concerted activities’ that were available at the time of NLRA’s enactment,” Wood wrote.

Judge Wood also noted that class, representative, and collective action procedures existed long before the federal class action procedure rule, Fed. Civ. Pro. Rule 23.

“Congress was aware of class, representative, and collective legal proceedings when it enacted the NLRA,” Judge Wood wrote. “The plain language of Section 7 encompasses them, and there is no evidence that Congress intended them to be excluded.”

The panel noted that other circuits “have some differences of opinion in this area,” possibly making this case ripe for review by the U.S. Supreme Court.

For instance, Judge Wood noted that the Ninth Circuit (covering the Western states) has ruled that agreements mandating individual arbitration could be enforceable so long as the employee can opt-out of such agreements without penalty.

That decision conflicted with a Seventh Circuit decision in 1942, NLRB v. Stone, which held that contracts can never contain provisions that stipulate away Section 7 rights.

“We have no need to resolve these differences today, however, because in our case, it is undisputed that assent to Epic’s arbitration provision was a condition of continued employment,” Judge Wood wrote.

Contracts Not Enforceable Under FAA

Epic argued that the contracts are enforceable under the Federal Arbitration Act (FAA), which supports arbitration agreements as an enforceable means to resolve disputes, “save upon such grounds as exist at law or in equity for the revocation of any contract.”

First, the panel noted that Epic’s agreements contained a “saving clause” stating that if the class and collective action waivers were deemed to be unenforceable, the class and collective claims were to proceed in a court of competent jurisdiction.

That is what happened in this case, the panel noted. But it went on to address Epic’s argument that the FAA trump’s the NLRA and allows Epic’s arbitration agreements. Again, it noted that different circuits have different views on the FAA’s sweep.

“Before we rush to decide whether one statute eclipses another, we must stop to see if the two statutes conflict at all,” wrote Judge Wood. “In order for there to be a conflict between the NLRA as we have interpreted it and the FAA, the FAA would have to mandate the enforcement of Epic’s arbitration clause. As we now explain, it does not.”

The panel noted that the NLRA and the FAA “work hand in glove” because the FAA allows arbitration agreements so long as they do not infringe on Section 7 rights.

That view conflicts with a case from the Fifth Circuit, D.R. Horton Inc. v. NLRB, in which the court suggested that a conflict exists any time a law burdens arbitration.

“There are several problems with this logic,” Wood wrote. “First, it makes no effort to harmonize the FAA and NLRA.” Judge Wood said courts must attempt to harmonize federal laws and employ a “strong presumption” that the laws can work in tandem.

Judge Wood also noted that two U.S. Supreme Court decisions that upheld arbitration clauses under the FAA did not deal with provisions implicating Section 7 rights:

“Neither Concepcion nor Italian Colors goes so far as to say that anything that conceivably makes arbitration less attractive automatically conflicts with the FAA.”

The panel noted that the FAA’s saving clause – “save upon such grounds as exist at law or in equity” – leaves room to reject arbitration when it violates another law.

“If the NLRA does not render an arbitration provision sufficiently illegal to trigger the saving clause, the saving clause does not mean what it says,” Judge Wood wrote.

The panel noted that Epic’s arbitration agreements would likely be lawful if included within a collective bargaining agreement, because the NLRA encourages employers and employees to reach agreement through the collective bargaining process.

“If Epic’s provision had permitted collective arbitration, it would not have run afoul of Section 7 either,” Judge Wood wrote. “But it did not, and so it ran up against the substantive right to act collectively that the NLRA gives to employees.”

Finally, the panel rejected Epic’s argument that any NLRA right to class or collective action is procedural, not substantive, so the FAA controls.

“The right to collective action in section 7 of the NLRA is not, however, merely a procedural one,” Wood wrote. “It instead lies at the heart of the restructuring of employer/employee relationships that Congress meant to achieve in the statute.”

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