In Lewis v. Epic Systems Corp., No. 15-2997 (7th Cir. May 26, 2016) (slip op.), the Seventh Circuit held that class and collective action waivers in arbitration agreements are not enforceable because they violate the National Labor Relations Act (NLRA), 29 U.S.C. §§ 151 et seq. In so doing, the court created a circuit split on this issue with the Second, Fifth, Eighth and Ninth Circuits, which previously rejected challenges to the enforceability of employment arbitration agreements that were based on the NLRA. Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297 (2d Cir. 2013); D.R. Horton, Inc. v. N.L.R.B., 737 F.3d 344, 362 (5th Cir. 2013); Owen v. Bristol Care, Inc., 702 F.3d 1050, 1055 (8th Cir. 2013); Johnmohammadi v. Bloomingdale’s, Inc., 755 F.3d 1072, 1075 (9th Cir. 2014).

The defendant in Lewis required employees to agree to arbitrate all wage and hour claims, and included a class and collective action waiver in its arbitration agreements. Employees did not have an option to opt out of the arbitration agreement, which was made a condition of continued employment. Slip op. at 2.

The Seventh Circuit held that the class and collective action waiver violated Sections 7 and 8 of the NLRA. Section 7 provides that employees have a right “to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” 29 U.S.C. § 157. Section 8, in turn, provides that an employer shall not “interfere with, restrain, or coerce employees in the exercise of [their Section 7] rights.” 29 U.S.C. § 160(a).

In holding the waiver unenforceable, the court reasoned that “filing a collective or class action suit constitutes ‘concerted activit[y]’ under Section 7,” and that agreements purporting to waive an employee’s rights under the NLRA “are unlawful and may be declared to be unenforceable by the [National Labor Relations] Board.” Slip op. at 3-4. The court further noted that the NLRB had found such waivers unenforceable, and reasoned that the NLRB’s interpretation was entitled to Chevron deference. Slip op. at 6-7 (citing D.R. Horton, Inc., 357 N.L.R.B. No. 184 (2012)).

The court then went on to hold that the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 et seq., did not change the analysis. The court began by noting that the arbitration agreement itself specified that “if the collective-action waiver is unenforceable, then any collective claim must proceed in court, not arbitration.” Slip op. at 11-12. Because of this language, and because the court earlier held the collective action waiver invalid, there was no basis to compel arbitration. Slip op. at 11-12.

The court further held that there was no conflict between the FAA and the NLRA, because the saving clause of the FAA (Section 2) permits courts to decline to enforce an arbitration agreement on the grounds of illegality, and the court concluded that Section 7 of the NLRA rendered the arbitration clause unlawful. Slip op. at 14. Thus, rather than conflict with one another, the court held that “[h]ere, the NLRA and FAA work hand in glove.” Id.

The court criticized other circuits that had enforced class and collective action waivers in individual employee arbitration agreements, holding that those opinions were not persuasive because “none has engaged substantively with the relevant arguments.” Id. at 14-18.

The court further held that the right to proceed collectively was substantive, not merely procedural, and that the class and collective action waiver in the arbitration agreement was unenforceable for the additional reason that “[a]rbitration agreements that act as a ‘prospective waiver of a party’s right to pursue statutory remedies’—that is, of a substantive right—are not enforceable.” Slip op. at 19-20 (emphasis in original). The court held that this right to proceed collectively came from the NLRA, not the Fair Labor Standards Act. Slip op. at 21.

Because Lewis creates a circuit split on the issue, it is likely to lead to forum shopping by employees who entered into arbitration agreements containing class and collective action waivers, and may create complications for nationwide employers seeking to enforce such agreements. It also means the Supreme Court could be called upon to decide the issue.