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By Steven C. Kerbaugh
There is currently an appeal pending before the United States Supreme Court that is sure to be of import for thousands of employers. Epic Systems Corporation v. Lewis involves the fundamental issue of whether the National Labor Relations Act’s (“NLRA”) protection for “concerted activities” bars enforcement of collective-action waivers in employment contracts. If the Court concludes that it does, Epic would have the effect of allowing employees to bring class actions against their employers notwithstanding collective-action waiver provisions in their employment contracts. Such a conclusion would also serve as a notable departure from a significant line of Supreme Court precedent upholding collective-action waivers in favor of individual arbitration under the Federal Arbitration Act (“FAA”).
In recent years, the Court has repeatedly invoked the FAA in upholding contractual provisions requiring individual arbitration and precluding class actions. For example, the Court held in 2011 that the FAA preempted a California judicial rule regarding the unconscionability of class-arbitration waivers in consumer contracts. AT&T Mobility, LLC v. Concepcion, 563 U.S. 333 (2011). The Court similarly concluded in 2015 that parties to consumer contracts could not contract around FAA preemption regarding class-arbitration waivers. DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463 (2015). Epic, though, involves employment contracts and a legal ripple not present in prior cases – i.e., seemingly competing federal laws in the NLRA and FAA.
Although consolidated with two other actions, Epic gets its namesake from an action that originated in the United States District Court for the neighboring Western District of Wisconsin. Lewis v. Epic Sys. Corp., 823 F.3d 1147 (7th Cir. 2016). Software company Epic Systems required certain employees to agree to bring wage-and-hour claims against the company only through individual arbitration. The agreement did not allow for any type of collective action. Jacob Lewis, a technical writer at Epic, filed an action in federal court, contending that Epic had violated the Fair Labor Standards Act by misclassifying him and other technical writers so as to unlawfully deprive them of overtime pay. Epic moved to dismiss and to compel arbitration. Judge Barbara Crabb denied the motion, concluding that the arbitration clause violated the NLRA. Epic then appealed to the Seventh Circuit Court of Appeals.
The Seventh Circuit focused on Section 7 of the NLRA. That Section provides that “employees shall have the right . . . to engage in . . . concerted activities for the purpose of collective bargaining or other mutual aid or protection.” Analyzing the text, history and purpose of Section 7, and case law construing the provision, the Court concluded that Section 7’s “other concerted activities” language includes class legal remedies such as class action lawsuits. The Court concluded that Epic’s arbitration provision, insofar as it prohibited collective procedures, ran “straight into the teeth of Section 7” and was thus unenforceable.
Epic, however, argued that the FAA overrides the NLRA protection. In relevant part, the FAA provides that any contract “evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising . . . shall be valid, irrevocable, and enforceable . . . .” The Court disagreed that this provision of the FAA entitled Epic to enforce its arbitration provision.
The Seventh Circuit’s holding was based principally on its conclusion that the FAA and the NLRA do not actually conflict. The Court noted that illegal promises are unenforceable under federal law, and that the FAA incorporates that principle by confirming that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The Court held that since the arbitration provision is unlawful under the NLRA, it meets the criteria in the FAA’s savings clause for nonenforcement. The Court accordingly concluded that nothing in the FAA saved the ban on collective action in Epic’s employment agreement.
The Supreme Court granted certiorari in January 2017 and heard oral argument in October. While the Supreme Court has not issued an opinion yet, past precedent regarding the enforceability of collective-action waivers suggests two things. First, there will likely be a split decision with the Supreme Court’s more liberal justices favoring collective legal processes. Second, despite the well-reasoned and well-written opinion of the Seventh Circuit, the Supreme Court may well follow its recent case law supporting individual arbitration and conclude that the NLRA is not a barrier to the enforceability of employment contracts with collective-action waivers. Whatever the case, employers who use or are considering arbitration agreements with collective-action waivers would be well advised to stay tuned.
Steve Kerbaugh is a shareholder at Anthony Ostlund Baer & Louwagie P.A. His practice is devoted entirely to commercial and employment litigation. He has experience representing clients in contract, fiduciary duty, shareholder, non-compete, and fraudulent conveyance matters in federal and state courts, as well as in arbitration. He advocates for clients during all phases of litigation, including trial and appeals.