Seventh Circuit Finds Class Action Waivers in Arbitration Agreements are Illegal and Unenforceable under the NLRA

by Littler

On May 26, 2016, the U.S. Court of Appeals for the Seventh Circuit issued its decision in Lewis v. Epic-Systems Corp., finding that the company's arbitration agreement, which prohibits employees from participating in “any class, collective or representative proceeding,” violated the employees’ right to engage in concerted activity under the National Labor Relations Act (NLRA).  The Seventh Circuit became the first circuit court to agree with the NLRB’s position in D.R. Horton.1  The Second, Eighth, and most notably, the Fifth Circuit have rejected this stance, with the Ninth Circuit acknowledging that trend.2  The decision therefore creates a circuit split, and given the importance of the issue, sets the stage for potential Supreme Court review.  In the meantime, class and collective action waivers will not be enforced in federal courts sitting in Illinois, Indiana and Wisconsin, the states within the Seventh Circuit’s jurisdiction. The very same agreement should be enforced in federal courts sitting in the circuits that have rejected D.R. Horton, and federal courts sitting within circuits that have yet to opine on the matter will have a choice. Further muddling the matter, state courts will not necessarily feel bound by the NLRB, thus creating more opportunity for inconsistency and confusion in a high-stakes area of the law.3


Lewis, a technical writer, entered into an arbitration agreement with his employer, Epic-Systems.  In the agreement, Lewis waived his “right to participate in or receive money or any other relief from any class, collective, or representative proceeding.”  The agreement also provided that by continuing to work at Epic-Systems, Lewis was deemed to have accepted its terms.  Lewis later filed a suit in federal court in Wisconsin on behalf of himself and other technical writers alleging the company had violated the Fair Labor Standards Act (FLSA) by misclassifying and depriving them of overtime. 

Epic-Systems moved to dismiss Lewis’s claim and compel individual arbitration.  Lewis, however, responded that the agreement’s class and collective action waiver was unenforceable because it interfered with his right to engage in concerted activities under Section 7 of the NLRA.  The district court agreed with Lewis’s arguments and Epic-Systems appealed to the Seventh Circuit.

Seventh Circuit’s Decision

The Seventh Circuit began its analysis by adopting the NLRB’s reasoning—first promulgated in D.R. Horton—that engaging in class, collective or representative proceedings is “concerted activity” and a protected right under Section 7 of the NLRA, and thus it would be an unfair labor practice under Section 8 of the NLRA for an employer “to interfere with, restrain, or coerce employees in the exercise” of this right.  According to the court, the NLRA’s legislative history and purpose indicated that “concerted activity” unambiguously includes representative, class, joint and collective actions.  And even if the court were to find the term “concerted activity” ambiguous, it would then have to give deference to the NLRB’s interpretation of that term and find the class action waiver to be unlawful.

In reaching its decision, the Seventh Circuit rejected Epic-Systems’ three principal arguments.  First, the company argued that since class actions under Rule 23 of the Federal Rules of Civil Procedure did not exist when Congress enacted the NLRA in 1935, Congress could not have intended Rule 23 class actions to be “concerted activity” under the NLRA.  The court, however, held that “concerted activity” is not limited to what was “concerted activity” in 1935.  Also, the arbitration agreement not only waived Rule 23 class actions, it waived all forms of representative, collective or joint proceedings, and these types of proceedings, including collective actions under §216(b) of the FLSA, existed prior to 1935.

Second, the Seventh Circuit rejected the argument, supported by all the other circuits that had ruled on the matter, that the arbitration agreement must be enforced under the Federal Arbitration Act (FAA).  The court even went so far as to state that “it is not clear to us that the FAA has anything to do with this case.”  Still, the court proceeded to determine whether there was a conflict between the FAA’s mandate to place arbitration agreements on the same footing as any other contract and its interpretation of the NLRA.  In doing so, the court addressed the FAA’s “savings clause,” contained in 9 U.S.C. § 2, which provides that arbitration agreements are “enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  The court found the savings clause provided a way to harmonize the NLRA and FAA in finding the agreement’s class waiver to be unenforceable.  According to the court, the agreement is illegal under the NLRA, and because an illegal agreement is not enforceable under the FAA’s savings clause, there is no conflict between the FAA and NLRA.

Finally, Epic-Systems contended that even if Section 7 protects a right to class or collective actions, the right is merely procedural not substantive, and the FAA requires enforcement of the agreement since it does not involve the forfeiture of a substantive right.  The court rejected this argument because it found the right to engage in “concerted activity” through class or collective actions is a substantive right under the NLRA, even though the class action device itself is procedural.  Since the arbitration agreement required employees to relinquish a right that the NLRB has declared to be substantive, it was not enforceable under the FAA.

What Has Changed, What Remains the Same, and What Comes Next?

There are several takeaways from the Seventh Circuit’s decision.

First, what has changed: of most immediate concern, some class and collective action waivers are no longer enforceable in federal courts sitting in the Seventh Circuit.  A class action waiver contained in an arbitration agreement entered into by employees as a condition of continued employment will not be enforced by federal courts sitting in Illinois, Indiana and Wisconsin.  The court, however, did not extend its ruling to arbitration agreements that give employees a time period to opt out and do not require consent as a mandatory term of employment.  It is worth noting that the NLRB has not distinguished between “opt-out” agreements with class action waivers and others, finding all violate the NLRA.4

Second, two things remain the same.  The Board will continue to find that arbitration agreements with class or collective action waivers violate the NLRA.  But should the Board do so, employers can still seek redress from favorable circuits as long as the employer conducts business in the circuit or if the alleged unfair labor practice occurred in the circuit. Employers can also appeal to the D.C. Circuit.  Moreover, individual plaintiffs raising the D.R. Horton line of attack (as did the plaintiff in Epic-Systems) are likely to find success in the Seventh Circuit, failure in the circuits that have rejected D.R. Horton, and an uncertain outcome elsewhere. It is harder to anticipate how courts will respond in a nationwide class action involving identical arbitration agreements containing class action waivers.

The split in the circuits promises only more turmoil and expensive, time-wasting litigation, thwarting Congress's intent in passing the FAA "to move the parties to an arbitrable dispute out of court and into arbitration as quickly and easily as possible” so as not to “frustrate[] the statutory policy of rapid and unobstructed enforcement of arbitration agreements.”5 What comes next will most likely involve the input of the Supreme Court or even changes to the Board itself.  If the Board chooses to seek Supreme Court review of the Fifth Circuit’s Murphy Oil decision, it must do so before August 11, 2016.  It is not yet clear whether Epic-Systems will seek rehearing before the Seventh Circuit, which seems a doomed path as the court already announced that en banc review would not be available, or whether the company will file a petition for review with the Supreme Court. 

Moreover, what happens if the Supreme Court takes the case, decides it before a new Justice is approved, but is split 4-4? The answer is that the Seventh and Fifth Circuit opinions will stand, and nothing will be settled.  Also, there is another wild card to consider: the NLRB consists of five individuals who are political appointees, and a change in administration in January could mean a change in control of the Board. In this regard, the numerous NLRB decisions based on the D.R. Horton theory have included strong dissents by Board members in the minority. Much of the Seventh Circuit’s opinion depended heavily on its “deferral” to the Board’s interpretation of the NLRA, but what if the Board, and that interpretation, changes? Fasten your seatbelts for a bumpy ride (with apologies to Bette Davis).



1  D.R. Horton Inc., 357 NLRB 184 (2012).

2  See Murphy Oil U.S.A., Inc. v. NLRB, 808 F.3d 1013 (5th Cir. 2015); Richards v. Ernst & Young, LLP, 744 F.3d 1072, 1075 n.3 (9th Cir. 2013); D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013); Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297 n.8 (2d Cir. 2013); Owen v. Bristol Care, Inc., 702 F.3d 1050, 1052 (8th Cir. 2013).

3  See, e.g.,  Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014) (California Supreme Court rejecting D.R. Horton and enforcing mandatory arbitral class action waiver).

4  See, e.g.On Assignment Staffing Services, Inc., 362 NLRB No. 189 (2015).

5  Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 22-23 (1983).


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.

© Littler | Attorney Advertising

Written by:


Littler on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.