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Employment Claim Dispute Resolution Programs Survive Despite Seventh Circuit Decision

You may have heard that the National Labor Relations Board (the “NLRB” or the “Board”) now has one federal circuit court in its corner in its fight against collective and class waiver language in workplace arbitration clauses. It’s important to keep two things in mind, however: (1) this opinion out of the Seventh Circuit is only binding in Illinois, Indiana, and Wisconsin; and (2) workplace dispute resolution programs are still (mostly) intact, with the main point of contention being solely the collective and class waiver portions of these programs. In Lewis v. Epic Systems Corp., No. 15-2997 (7th Cir. May 26, 2016), the Seventh Circuit held that an employee’s waiver of “the right to participate in or receive money or any other relief from any class, collective, or representative proceeding,” in the company’s arbitration clause was unlawful under the National Labor Relations Act (“NLRA”). That court agreed with the NLRB that these clauses infringed on employees’ right to engage in “concerted activities” for “mutual aid or protection,” guaranteed by section 7 of the NLRA, because bringing a claim on behalf of others that are purportedly similarly situated falls under that protection. 

The Seventh Circuit disagreed with the Fifth Circuit, which has twice concluded that the Federal Arbitration Act (“FAA”) trumped any section 7 rights (discussed in an earlier blog post). Instead, it found that “the NLRA and the FAA work hand in glove” here, because the FAA’s “savings clause” provides that arbitration provisions are enforceable only to the same extent as ordinary contracts. Since illegality is a defense under ordinary contract law, the Seventh Circuit’s finding that the class and collective waiver violated section 7 and was thus illegal rendered the agreement unenforceable under the FAA. The Seventh Circuit ignored the other circuit courts that have weighed in on the side of the Fifth Circuit, because, it said, they had not “engaged substantively with the relevant arguments.”

This case doesn’t mean that entire dispute resolution programs are sunk, even in the Seventh Circuit. However, at least for now, employees in Illinois, Indiana, and Wisconsin can’t effectively waive their right to collective and class claims. The fact that the Seventh Circuit based its decision on the contract defense of illegality might provide companies some ammunition to argue that their programs remain otherwise enforceable, depending on the applicable state contract law. Companies can increase their chances by making sure that: (i) the class and collective action waiver provision is a separate clause, making it easily severable from the agreement to arbitrate claims; and (ii) the agreement specifies that if a provision of the agreement is unenforceable, the other provisions will remain in effect. The Seventh Circuit also left open the door to the possibility that it might find class/collective action waivers enforceable if companies give employees the option of opting out of the entire arbitration program. Before adopting that approach, however, companies should both consider the likelihood of enforceability and weigh the benefits versus detriments of such an approach.

While the Seventh Circuit indicated that it would have upheld a provision that allowed for class and collective claims to be brought in arbitration (rather than in court), companies should carefully weigh the pros and cons of arbitrating class claims before adopting such a provision. As the Supreme Court recognized in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662, 684–87 (2010), a shift from bilateral arbitration to class arbitration changes the fundamental nature of arbitration.

While there are things companies can do to put themselves in the best position to maintain their arbitration programs as a whole (notwithstanding these waivers), they should be prepared to lose before the NLRB. As a matter of litigation strategy, companies that can have their NLRB cases reviewed by the Fifth Circuit—encompassing Texas, Louisiana, and Mississippi—can still be reasonably assured that they will eventually win on the class waiver issue. Companies in other appellate courts outside of Illinois, Indiana, and Wisconsin might also be able to win an appeal of an adverse Board decision, though it’s more of an open question. Unfortunately, it appears we’ll have to wait and see whether the Supreme Court decides to review Lewis or another case on this issue and conclusively resolve the question.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.