On May 26, 2016, a three-judge panel of the U.S. Court of Appeals for the Seventh Circuit unanimously ruled that an employer’s mandatory arbitration agreement, requiring some of its employees to waive their rights to “participate in or receive money or any other relief from any class, collective, or representative proceeding[,]” was illegal, and hence unenforceable, because it violated Section 7 of the National Labor Relations Act, 29 U.S.C. § 157 (“NLRA”). Lewis v. Epic Systems Corp. (Case No. 15-2997, May 26, 2013). Specifically, the Seventh Circuit found that the class action waiver in employer-Epic’s arbitration agreement, if enforced, would prohibit employee-Lewis’s exercise of his substantive right to engage in class or collective action against his employer.

In Epic Systems, the Seventh Circuit acknowledged that its ruling would create a split with Fifth Circuit precedent. Given these inconsistent federal circuit court decisions, many believe that the U.S. Supreme Court may ultimately decide whether mandatory class action waivers in arbitration agreements are lawful in the employment context. A U.S. Supreme Court ruling that embraces the legality of mandatory class action waivers would encourage employers, nationwide, to prohibit their employees, especially low-wage workers, from bringing class or collective actions against them. In turn, employees’ inability to bring class actions against their employers would effectively result in the loss of a highly significant and powerful deterrent against employers’ wage theft practices.

A key distinction in the Fifth and Seventh Circuit split decisions are the conflicting premises concerning whether an employee’s right to engage in “concerted activity” is a substantive right under the NLRA. On the one hand, the Fifth Circuit found that engaging in a class action was merely a procedural mechanism but not a substantive right. On the other hand, the Seventh Circuit found that engaging in a class action was indeed a substantive right. From these markedly different interpretations of Section 7, the Fifth Circuit and Seventh Circuit proceed to analyze the confluence between the NLRA and the FAA, reaching markedly different results.

Unlike the Seventh Circuit, the Fifth Circuit in D.R. Horton v. NLRB, 737 F.3d 344 (5th Cir. 2013) held that because the use of class action procedures are merely the use of a procedural mechanism – and not the exercise of a substantive right – mandatory class action waivers in employment arbitration agreements do not violate the NLRA. The Fifth Circuit justified its holding, in large part, by citing the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq (“FAA”) and the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 346 (recognizing the FAA’s “embod[iment] of a national policy favoring arbitration and a liberal federal policy favoring arbitration agreements,” (internal quotation marks and citations omitted)). The Fifth Circuit found that requiring a class mechanism would actually impede arbitration and would, hence, violate the FAA.

The Seventh Circuit’s alternative interpretation of Section 7 of the NLRA, as a substantive right, is consistent with the interpretation offered by the National Labor Relations Board (“NLRB”). According to the NLRB, Section 7 is a substantive right, which provides that “[e]mployees shall have the right to self-organization, 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.” See e.g., D.R. Horton, 357 N.L.R.B. No. 184 (2012); Murphy Oil USA, Inc., 361 N.L.R.B. No. 72 (2014). In D.R. Horton and Murphy Oil USA, Inc., the NLRB took the position that although the FAA may trump contrary state laws that are hostile to arbitration, the FAA does not divest employees of their rights to engage in concerted activities, including class actions, under Section 7.

Remarkably, in Epic Systems, the Seventh Circuit found no actual or inherent conflict between the NLRA and the FAA and ruled that Seventh Circuit district courts could enforce both laws harmoniously. Chief Judge Diane Wood, who authored the Epic Systems opinion, forecasted the Seventh Circuit’s analysis during oral argument stating, “Arbitration is fine, but they have a right to do it collectively, [and] [t]hat’s what you’re shutting off.”

Indeed, in analyzing Epic’s mandatory arbitration agreement, the Seventh Circuit purports to follow the FAA and its pro-arbitration policy insofar as it provides that any arbitration contract “shall be valid, irrevocable, and enforceable, save upon grounds as exist at law or in equity for the revocation of any contract.” However, Epic Systems concomitantly recognizes that mandatory prohibitions of class arbitrations are illegal under Section 7 of the NLRA. Accordingly, because Epic’s mandatory arbitration agreement required a class action waiver in violation of Section 7, illegality existed in the agreement constituting grounds for revocation of the contract.

On June 15, 2016, the NLRB cited to Epic Systems in NLRB v. Countrywide Financial Corp. et al., Case Number 15-7322, in the U.S. Court of Appeals for the Ninth Circuit. In its Countrywide brief, the NLRB wrote, “The right to engage in collective action for mutual protection is not only critical to the NLRA, but also a ‘basic premise’ of national labor policy generally[.]” A forthcoming Ninth Circuit ruling addressing Epic Systems and whether employees have the right to engage in class or collective action against employers under Section 7 would undoubtedly increase the probability of the U.S. Supreme Court’s review of this important question.

The U.S. Supreme Court’s ruling on this split decision issue may ultimately determine whether employers may completely bar their employees’ ability to resolve employment-related disputes in both class actions and class arbitrations. Accordingly, advocates on both sides of the employment bar are watching this issue closely.