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The Seventh Circuit Split from the Circuits on Arbitration Agreements in Lewis

By Jon A. Bierman

In a unanimous decision on May 26, 2016, in Lewis v. Epic Systems Corporation, the United States Court of Appeals for the Seventh Circuit invalidated an individual arbitration agreement waiving class and/or collective actions and held that if such agreements are required by the employer as a condition of continued employment, then they necessarily interfere with employees’ exercise of their Section 7 rights under the National Labor Relations Act to engage in protected concerted activity, irrespective of whether the employees are represented by a union. The Seventh Circuit’s holding directly conflicts with the rulings of the Fifth, Eighth, and Eleventh Circuits on this issue, potentially setting up review by the United States Supreme Court.

It is common today for employers to enter into individual arbitration agreements with their employees that require the company and the employee to arbitrate wage and hour (and other employment) claims rather than litigate those claims in court. The agreements also commonly prohibit employees from bringing those claims, even in arbitration, on a class or collective – rather than individual – basis. Although the Lewis decision does not invalidate all individual arbitration agreements in the employment context, the decision applies to employers within the 7th Circuit’s jurisdiction and that have made entering into such agreements a condition of continued employment.  

Individual arbitration agreements can be valuable to an employer in that they discourage the filing of class and collective actions. In such actions, plaintiffs’ attorneys sometimes demand inflated and unsupportable damages on behalf of employees and former employees who have no intention of suing their employer. Those employers who have adopted individual arbitration agreements should understand that they may not be enforced in the 7th Circuit if they are conditioned on continued employment. For the past few years, the NLRB has invalidated individual arbitration agreements on the same rationale of the Seventh Circuit, although those rulings are not binding to other employers, and one such ruling was reversed by the Fifth Circuit. Given that other Circuits have disagreed with the Seventh Circuit and have affirmed individual arbitration agreements, the Supreme Court is likely to take up the issue in the 2016-2017 term. The ultimate resolution of the issue may hinge upon who fills the seat of the late Justice Scalia.