In May 2016, the Seventh Circuit weighed in on a topic that has been at the forefront of employment law in recent years: Whether employers may use arbitration agreements to strip their employees of the right to move forward on a collective, class, or representative basis.

Lewis v. Epic Systems Corp.

In Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016), the court considered whether the class waiver provision of an arbitration agreement violated an employee's National Labor Relations Act (NLRA) right to engage in concerted activities with other employees for their mutual aid or protection. Id. at 1151-56. The court also considered whether there was an inherent conflict between the NLRA and Federal Arbitration Act (FAA) which required the FAA’s provisions to supersede the NLRA in light of the FAA’s policy in favor of enforcing arbitration agreements. Id. at 1156-61.

With regard to the NLRA right to concerted activity, the court held that an employee’s ability to bring legal claims in a collective, class, or representative action fell within the scope of an employee’s Section 7 rights and that the arbitration agreement at issue violated those rights. Id. at 1152-56. In doing so, the court acknowledged cases from around the country – including the Supreme Court in Eastex, Inc. v. NLRB, 437 U.S. 556 (1978) – which had established that concerted activities under the NLRA extended to administrative and judicial forums. Id. at 1152. The court then considered Congress’ intent in drafting the plain language of Section 7 without limitation to determine that “there is no reason to believe that Congress meant to exclude collective remedies from [Section 7’s] compass.” Id. at 1152-53.

However, the court did not end its analysis there. While explicitly acknowledging that Section 7’s language is unambiguous, the court determined that – even if it was – it would still have been bound by the National Labor Relations Board’s reasonable interpretation of Section 7 in accordance with the Supreme Court’s Chevron standard of deference to administrative agencies. Id. at 1153.

When next analyzing if the plaintiff’s Section 7 rights were violated, the court stated that the collective action waiver at issue “ran straight into the teeth of Section 7.” Id. at 1155. The court then took the opportunity to distinguish its analysis from the Ninth Circuit’s decision in Johnmohammadi v. Bloomingdale’s, Inc., 755 F.3d 1072, 1077 (2014), which held that an agreement requiring individual arbitration did not violate Section 7 rights if the employee could opt out of the agreement without penalty – and thus without coercion. Lewis, 823 F.3d at 1155-56. The court noted that its own precedent in NLRB v. Stone, 125 F.2d 752 (7th Cir. 1942) made even uncoerced agreements to individually arbitrate a per se violation of Section 7 rights under the NLRA. Id. at 1155. The Court additionally noted that the Johnmohammadi court failed to defer to the NLRB and that – in light of NLRB decisions finding substantively identical agreements under similar facts to have violated the NLRA – the arbitration agreement at hand had also violated its employees’ Section 7 rights. Id. at 1155-56.

With that issue resolved, the court turned to Epic’s argument that the FAA mandated the enforcement of the arbitration agreement. Id. at 1156-61. Epic’s argument rested on the FAA’s liberal policy favoring the enforcement of arbitration agreements as expressed in 9 U.S.C. §2 and argued that it required the agreement to be enforced absent a congressional statement in the NLRA stating that arbitration was inappropriate for such matters. Id. The court held that no such mandate was required enforcing the arbitration agreement here and further noted that, “[l]ooking at the arbitration agreement, it [was] not even clear that that the FAA had anything to do with this case.” Id. at 1156-57.

Rather than presuming that the FAA governed because the NLRA’s lack of a clear congressional command, the court stated that it was Epic’s burden at the first step of the analysis to show that an actual conflict between the two statutes existed Id. at 1156. Relying on the FAA’s savings clause – which states that legal or equitable grounds for invalidating any contract may also invalidate arbitration agreements – the court held that “[b]ecause the provision at issue is unlawful under Section 7 of the NLRA, it is illegal, and meets the enforcement criteria of the FAA’s savings clause for nonenforcement.” Id. at 1157. In essence, while the FAA may create a policy favoring arbitration agreements moving forward, the FAA’s savings clause makes clear that the FAA cannot be used as end around complying with the substantive rights bestowed by other federal statutes. Id.

Importantly, the court also critiqued the Fifth Circuit’s decision in D.R. Horton v. NLRB, 757 F.3d 344 (2013), which held that the burdens of collective action inhibit arbitration and thus violate the FAA’s policy favoring the enforcement of arbitration agreements. Lewis, 823 F.3d at 1157-58 (internal citations omitted). The court stated that the Fifth Circuit’s logic in the D.R. Horton decision was flawed because it failed to attempt harmonize the NLRA and FAA according to statutory construction principles and effectively nullified the FAA’s savings clause. The Court further noted that the D.R. Horton decision’s reliance on two Supreme Court cases – AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) and American Express, Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013) – was misplaced. Id. at 1158-59. The court stated that “[n]either Concepcion nor Italian Colors goes so far as to say anything that conceivably makes arbitration less attractive automatically conflicts with the FAA, nor does either case hold that an arbitration clause automatically precludes collective action even if it is silent on that point.” Id. at 1158 (emphasis in original). The court then relied on language from Italian Colors for the principle that the FAA – like other federal laws – did not pursue its purposes at all costs. Id. at 1158-59. Rather, the FAA’s savings clause was enacted for this exact scenario and to prevent the FAA from creating contracts that were impervious to judicial oversight. Id.

The Court then rejected Epic’s argument that the NLRA’s right to concerted activity was a procedural right – as opposed to a substantive right – and that, as a result, the FAA should supersede it. Id. at 1160. The court determined that “Section 7’s rights are “substantive” is plain from the structure of the NLRA: Section 7 is the only substantive provision.” Id. The Court relied on Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) for the principle that a party cannot give up substantive legal rights by agreeing to arbitrate. Id.

Riederer v. United Healthcare Services, Inc.

With the Lewis decision in hand, the district court in Riederer v. United Healthcare Services, Inc. struck down another arbitration agreement whose terms prevented collective, class, or other joint actions by employees. See No. 15-cv-1292, ECF No. 20 (E.D. Wis. July 13, 2016). While Defendant-Appellant United Healthcare agreed that Lewis was binding on the district court, it appealed on the grounds that the Lewis decision was decided on an incorrect analysis of the potential conflict between the FAA and NLRA. In large part, United Healthcare’s argument was that Lewis was incorrect because it required a showing of an actual conflict between the statutes before the court would consider which statute governed rather than first looking for a congressional command undermining the FAA to determine if the FAA could give way to the NLRA. Riederer v. United Healthcare Services, Inc., No. 16-3041, ECF No. 11 (7th Cir. Nov. 14, 2016).

After briefing completed, the Seventh Circuit issued an order affirming the district court’s decision in light of its unanimous decision that additional oral arguments were unnecessary. Riederer v. United Healthcare Services, Inc., No. 16-3041, ECF No. 22 (7th Cir. Nov. 14, 2016). The Court stated that none of its judges indicated that an en banc hearing was necessary for further consideration the Lewis matter after the Lewis decision had been circulated. Id. Finally, the court noted that several petitions for certiorari had been filed to resolve the “entrenched conflict among the circuits on the question in Lewis, and this court’s reconsideration could not spare the Supreme Court the need to resolve the conflict” and concluded that the Supreme Court was the correct forum for United Healthcare’s arguments. Id.

So, Why Does This Matter?

Anyone familiar with the principle of stare decisis should not be surprised that the Seventh Circuit declined to alter its Lewis decision in the Riederer matter. However, the Seventh Circuit’s Lewis decision is notable for only for its holding but how it got there. In determining that the FAA cannot be used to strip employees of the right to engage in concerted activity under the NLRA, the court detailed why the principles of statutory construction – as well as the plain language of the FAA and NLRA – necessitated its holding. In doing so, the Seventh Circuit articulated a clear roadmap to undermining the reasoning of other appellate courts that have held to the contrary and, with the Riederer decision, further made clear that its position is firm until the Supreme Court decides otherwise. Until – and unless – that happens, employees in Wisconsin, Illinois, and Indiana can rest assured that they can proceed with their legal claims as a group regardless of whether they have signed an arbitration agreement stating otherwise with their employers.