In Huge Victory for Workers’ Rights, Federal Court Decision Strikes Down Mandatory Arbitration Agreement
The 7th Circuit Court of Appeals in Chicago issued a major decision on Thursday that’s already being called a “huge blow” to mandatory arbitration agreements and victory for workers’ rights. In the decision, Lewis v. Epic Systems Corp., the federal appeals court struck down an arbitration agreement that prevented employees from pursuing class action lawsuits against their employers.
The decision by the 7th Circuit is a big victory for proponents of economic justice, who generally oppose mandatory arbitration as it prevents workers from seeking justice in court. The court’s decision is also in direct conflict with a 2013 decision by the 5th Circuit Court of Appeals that upheld such arbitration agreements, creating a “circuit split” and setting up the Supreme Court to settle the conflict.
Ultimately, the decision is about access to justice, and protecting the right of workers to band together to seek redress for illegal employment practices through the courts.
Background: What Makes Mandatory Arbitration Bad for Workers?
A bedrock principle that our legal system is built on is the idea that “everyone gets their day in court.” Unfortunately, the reality is often very different.
In mandatory arbitration agreements, a company will require an employee to accept an arbitration agreement as a condition of getting or keeping their job. The arbitration agreement will then require the employee to submit legal complaints they have against the company to private arbitration, rather than bring them in court. As a result, the employee is forced to choose between losing their job or surrendering their right to bring legal action in court against their employer.
Companies prefer arbitration to litigation in court because it saves them time and money, limits the extent to which employees can obtain evidence from the company, and preserves the company’s confidentiality, as arbitration awards are generally not public like court decisions are. In a broader sense, arbitration also helps companies avoid setting bad legal precedents for themselves- private arbitrators are not bound to uphold precedent from earlier cases like judges are, so there is less risk for companies in losing an arbitration decision.
Thanks to these advantages, the use of mandatory arbitration agreements by employers has risen dramatically over the past twenty years, from an estimated 2.1% of employers in 1992 to 25% of employers in 2014. Incidentally, a second area where mandatory arbitration has become commonplace is consumer contracts; last year, the New York Times published an extensive report on the practice of credit card companies and retailers inserting mandatory arbitration clauses into the fine print of their contracts with customers. The Times found that when consumers were blocked by arbitration agreements from pursing litigation in court through a class-action, most dropped their claims entirely.
There is similar evidence in the employment world: faced with the prospect of bringing claims individually in arbitration, many employees simply drop their claim. This has further helped arbitration policies become firmly entrenched in the workforce as a means of resolving disputes that normally would give the employee a legal cause of action.
How the 7th Circuit Struck a Blow to Mandatory Arbitration
In the Lewis case, an employee named Jacob Lewis was working as a technical writer for Epic Systems Corp. when the company sent out an e-mail containing a mandatory arbitration agreement for its workers. The arbitration agreement contained two rules: if an employee had a wage-and-hour complaint against the company, the employee (1) had to bring the claim individually and (2) had to bring the claim in arbitration. Epic Systems gave the employees no option to decline the agreement if they wanted to keep their jobs; Lewis signed the agreement the next day.
Lewis later came to believe that he and other technical writers at Epic Systems had been illegally deprived of overtime pay. Rather than follow the mandatory arbitration agreement, he brought a class-action lawsuit on behalf of himself and his fellow technical writers in federal court. Epic Systems moved the court to compel arbitration in accordance with the arbitration agreement; the federal district ruled in Lewis’ favor, and Epic Systems appealed.
This brought the case to the 7th Circuit, which issued its major decision on Thursday affirming Lewis’ victory. The 7th Circuit held that, by mandating that employees bring claims individually, the arbitration agreement was in violation of the National Labor Relations Act (NLRA), and was therefore unenforceable.
The decision sent instant waves across the employment law world. Speaking to the New York Times, Professor Benjamin Sachs of Harvard Law School said that “the increasing use of mandatory arbitration agreements and the prohibition on workers proceeding as a class has been one of the most major developments in employment the last decade. Most of the court decisions have facilitated this development. This is a major move in the opposite direction.”
Understanding the 7th Circuit’s Decision, and What it Means for Workers
The 7th Circuit’s decision is grounded in Section 7 of the National Labor Relations Act, which guarantees various rights to employees. An employee’s Section 7 rights include:
- The right to form, join, or assist a union
- The right to bargain collectively with their employer
- The right to engage in other “concerted activities” for the purpose of the employees’ own “mutual aid or protection.”
It is in that final right that the court found a violation in Epic Systems’ mandatory arbitration agreement. The right of employees to engage in concerted activities for mutual aid or protection includes filing a collective or class action legal proceeding. Thus, by preventing employees from pursuing collective legal action, Epic Systems’ mandatory arbitration agreement forced the employees to waive their Section 7 rights, making the arbitration agreement illegal and unenforceable.
Epic Systems tried to argue that the arbitration agreement was legal under the Federal Arbitration Act (FAA), another federal statute, and that the FAA overrode the NLRA on the matter. The 7th Circuit, however, held there was no conflict at all between the FAA and the NLRA, since the holding that the arbitration agreement was illegal under the NLRA meant it was also invalidated under the FAA’s provisions.
Writing for OnLabor, Professor Sachs discussed the implications of this decision (emphasis added):
“It would be hard to overstate the importance of this decision for the evolving law of mandatory arbitration agreements. Unless and until the Supreme Court intervenes, the decision calls into question the legality of all mandatory employment arbitration agreements in the seventh circuit (Illinois, Indiana, and Wisconsin) that contain class action waivers. It also raises the possibility that other circuits will follow suit.”
Whether other federal courts will follow suit is a big question. As stated above, the Lewis decision directly conflicts with a 2013 decision of the 5th Circuit Court of Appeals, D.R. Horton, Inc. v. NLRB. The Supreme Court will usually take a case when there is a major “circuit split” like this, so as to settle the matter.
Which circuit would the Supreme Court agree with? That will likely depend on who fills the seat of the late Antonin Scalia, which in turn will depend on who wins the Presidential election this November. A Hillary Clinton appointee would likely side with the 7th Circuit in favor of workers’ rights; a Donald Trump appointee would likely side with the 5th Circuit in favor of mandatory arbitration. (Barack Obama’s current nominee, Merrick Garland, has a reputation for administrative deference, which in this case would likely mean agreement with the 7th Circuit, as the National Labor Relations Board does).
Conclusion
It is important to keep the court’s decision in context: notice, for example, how despite the significance of the court’s decision, it does not actually settle Jacob Lewis’ original case. Lewis’ case is a class action lawsuit over unpaid overtime wages. His victory in overcoming the mandatory arbitration agreement simply means that his lawsuit can now move forward to the meat of the case, which is obtaining justice over those unpaid wages.
That, ultimately, is what the battle against mandatory arbitration agreements is all about: removing barriers to justice that prevent people from pursuing their rightful claims. The 7th Circuit’s decision reaffirms the principle that every person deserves their day in court.
Thus, the 7th Circuit’s decision is a major victory for workers’ rights, and, given the proliferation of mandatory arbitration agreements in other fields, will hopefully help turn the tide against the rise of arbitration elsewhere in the law.
