Circuit Courts Weigh Employee Arbitration Waiver Agreements with Divergent Results

Ballard Spahr LLP

Conflicting decisions issued within one week of each other from the U.S. Courts of Appeals for the Seventh and Eighth Circuits exemplify the ongoing debate in circuit courts across the country about the enforceability of individual arbitration waiver agreements—agreements that prevent employees from filing or participating in class or collective actions against their employers—under the National Labor Relations Act (NLRA) and the Federal Arbitration Act (FAA).

The decisions, Lewis v. Epic Systems Corp. and Cellular Sales of Missouri LLC v. NLRB, both take on the validity of class action waivers in arbitration agreements, the effect of the National Labor Relations Board’s (Board) decision in D.R. Horton, Inc., 357 N.L.R.B. No. 184 (2012), enf. denied in relevant part, 737 F.3d 344 (5th Cir. 2013), and the interplay of the NLRA with the FAA. Because the Board's D.R. Horton decision and its progeny have not reached the U.S. Supreme Court, the Board considers itself free to continue to invalidate individual arbitration waiver agreements; it is up to each reviewing circuit court to determine the enforceability of the Board's decisions.

In Lewis, the Seventh Circuit agreed with the decision of the Board, not the Fifth Circuit, in D.R. Horton and more than 50 subsequent Board decisions, concluding that the NLRA Section 7's protection of "other concerted activities" includes the ability to pursue joint, collective, or class action legal proceedings. Thus, the court held that the employer had required employees to waive a substantive right protected by the NLRA and, therefore, the arbitration agreement was invalid under the NLRA. The court went on to hold that the FAA, a statute that generally requires that arbitration agreements be enforced according to their terms, did not compel a different result, because the agreement falls within the FAA's "savings clause"—a provision that prevents enforcement of illegal arbitration agreements. The Seventh Circuit expressly disagreed with the Fifth Circuit's decision in D.R. Horton, which had held that Section 7 of the NLRA conflicts with the FAA.

In contrast, the Eighth Circuit's Cellular Sales decision rejected the Board's finding that the class action waiver at issue restricted employee's substantive rights under Section 7, finding it both valid and enforceable. In so doing, the Eighth Circuit relied on the Fifth Circuit’s decision rejecting the Board's ruling in D.R. Horton, holding that the use of class or collective action procedures does not constitute a substantive right protected by Section 7, and arbitration waiver agreements are enforceable under the FAA.

While differing circuit opinions create uncertainty, employers can be sure that the debate is far from over. Cases raising this very issue currently are pending before the Second, Third, Fourth, Fifth, Sixth, Ninth, 11th, and D.C. Circuits. The acknowledged circuit split on this issue created by the Seventh Circuit also means that the debate likely will make its way to the Supreme Court. Until then, the Board will continue to invalidate these agreements, so employers should be prepared to take the fight to the courts.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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