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Jun
2016
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Class Act: Big 7th Circuit Court Decision Protects Workers from Predatory Arbitration Clauses

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The Seventh Circuit Court has ruled that workers cannot be prohibited from bringing class action lawsuits against their employers, even if they signed a “forced arbitration clause” as a term of their employment.  The decision is the result of a case against medical software company Epic Systems, which forced its employees to sign over the right to go to court either individually or collectively.  The Circuit Court ruled that such clauses violate a worker’s protected right to take collective action.  Breaking the precedent set by lower courts of enforcing such clauses, the Circuit Court’s decision means that forced arbitration clauses are now unenforceable.  

Benjamin Sachs, a professor of labor law at Harvard Law School, explained the impact of the decision:

“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.”

Sachs further analyzed the decision in a piece for the website OnLabor.org:

As the seventh circuit correctly observes, Section 7 of the NLRA protects not only collective bargaining but also “other concerted activities.” These “other concerted activities,” moreover, have for decades been held to include “resort to administrative and judicial forums.”  Thus, courts and the NLRB have long concluded that filing collective or class action legal proceedings constitutes protected “concerted activity” under the NLRA.  By prohibiting workers from pursuing class proceedings, a mandatory arbitration clause with a class action waiver therefore requires workers to waive their section 7 rights, something no employment agreement can do.

As the seventh circuit also correctly concluded, the Federal Arbitration Act does not save such an arbitration agreement.  That Act “permits agreements to arbitrate to be invalidated by ‘generally applicable contract defenses’” of which illegality is clearly one such defense.  Thus, the seventh circuit concludes:

The NLRA prohibits the enforcement of contract provisions like Epic’s, which strip away employees’ rights to engage in ‘concerted activities’.  Because the provision at issue is unlawful under Section 7 of the NLRA, it is illegal, and meets the criteria of the FAA’s saving clause for nonenforcement.

Finally, even under the Supreme Court’s recent arbitration cases, no arbitration agreement can require the waiver of substantive statutory rights – procedural rights may be waived, but not substantive ones.  So, for example, although you might be required to waive your (procedural) right to bring an age discrimination claim in court, you can not be required to waive your (substantive) right to be protected against age discrimination.

The case began when an employee, Jacob Lewis, attempted to take Epic Systems to court over their failure to properly pay him for overtime hours.  Using the arbitration clause as its basis, the company sought to have the case thrown out of court.  Epic eventually took the cause to the Court of Appeals.  The firm later paid $5.4 million to settle the 2013 lawsuit, which appears to have prompted the new arbitration clauses at issue this year.

The timing of the decision is important, according to Talking Points Memo, as the Consumer Financial Protection Bureau (CFPB) is getting ready to wipe out the other main category of arbitration clauses. The bureau announced this month that it intends to seek an outright ban on forced arbitration language from all consumer financial products ranging from credit cards, to checking accounts, to nearly every type of loan a person can pursue.

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