On the dotted line.

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Some Rights Can't Be Signed Away

Noah Feldman is a Bloomberg View columnist. He is a professor of constitutional and international law at Harvard University and was a clerk to U.S. Supreme Court Justice David Souter. His books include “Cool War: The Future of Global Competition” and “Divided by God: America’s Church-State Problem -- and What We Should Do About It.”
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Your credit card company can make you agree to arbitrate disputes as a condition of getting the card. But can an employer require workers to arbitrate rather than suing collectively as a condition of employment?

In recent years, all the federal courts of appeals to address the question have said there’s no difference between your credit card issuer and your employer: Both can make you give up legal remedies. This week that changed, when for the first time an appeals court said an employer can’t require employees to waive collective legal action. By creating a circuit split, this important opinion will almost certainly push the Supreme Court to consider the issue, and soon.

The case, decided by the U.S. Court of Appeals for the Seventh Circuit, involved the notoriously dominant health-care-software company Epic Systems. True to its reputation as a company willing to take advantage of its market position, Epic sent some employees an e-mail in April 2014 containing an arbitration agreement and stating that by continuing to work in their jobs, they would be deemed to have accepted the agreement.

The arbitration agreement said, among other things, that the employees waived “the right to participate in or receive money or any other relief from any class, collective, or representative proceeding.” In effect, this meant they could not bring class-action lawsuits against Epic.

Jacob Lewis, a technical writer at Epic, clicked the box accepting the agreement. But soon after, he ignored it, suing Epic in federal court under the Fair Labor Standards Act. Proceeding on behalf of himself and other similarly situated technical writers, Lewis alleged that Epic had misclassified them all and as a result had not paid them overtime they were owed by law.

Since Lewis had accepted the agreement -- he would’ve lost his job otherwise -- he needed a legal theory to explain why it didn’t apply. His argument was that the compelled arbitration agreement was illegal under the National Labor Relations Act.

This was a tricky argument to make. The Federal Arbitration Act has been interpreted by the Supreme Court to make arbitration agreements enforceable in a range of contexts. And the NLRA, governing labor, itself permits arbitration between unions and employers as part of collective bargaining agreements -- like the one under which Tom Brady was punished in connection with "Deflategate."

It was a tricky argument, but successful. The Seventh Circuit, in a unanimous opinion by highly respected Judge Diane Wood, agreed with Lewis.

Wood’s skillful, careful opinion explained first that forcing employees to waive collective action, as a condition of employment, violates the NLRA. Section 7 of the labor law says that employees “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.”

Wood explained that this doesn’t mean only that employees have the right to form unions. They also have the right to use collective means outside unions. The collective means include class-action lawsuits, she concluded.

Having argued that Epic’s forced arbitration clause effectively took away this right, Wood concluded that the clause was illegal.

Epic, of course, took a different view. Relying on a decision by the U.S. Court of Appeals for the Fifth Circuit, which has been followed by the Eighth and Second Circuits, the company said that the Federal Arbitration Act essentially trumps the labor laws. The logic is that if you can contract around other legal remedies under the arbitration law, employees and employers should also be able to contract around the right to bring class-action lawsuits. On this view, there’s nothing special about employment when it comes to arbitration.

Cleverly, Wood addressed this argument by saying that there was in fact no conflict between the federal labor law and the federal arbitration law. She pointed out that the Federal Arbitration Act says that arbitration agreements are valid “save upon such grounds as exist at law or in equity for the revocation of any contract.”

The so-called savings clause means that an arbitration agreement can’t violate the usual principles of contract law. One principle of contract law is that illegal agreements are void. Wood reasoned that since Epic’s arbitration agreement is illegal under the labor law, it isn’t valid or enforceable under the arbitration law.

The technical legal skill of this argument matters mostly because a split between the federal circuit courts of appeal makes it highly likely that the Supreme Court will take up the case. Wood was writing not just an opinion, but a brief for Lewis in the Supreme Court case that may well follow.

Of course Epic could choose not to seek Supreme Court review, worrying that it might get a bad result. But given the company’s profile, that seems relatively unlikely.

The eight justices would probably take the case, even in the court’s current hamstrung status. It’s potentially political, but not so political that it would seem to require a 5-4 vote.

Labor leaders will like the outcome, and employers won’t. Nevertheless, unions have no inherent objection to arbitration. And credit card companies won’t need to worry, since the legal issue only involves employers and employees.

The Seventh Circuit’s decision isn’t exactly a major blow against the ubiquity of arbitration agreements. But it does stand in the way of what has sometimes seemed like an inexorable trend in favor of more and more arbitration and less and less litigation.

That’s bad news if you think of courts as inefficient and politicized. It’s good news if you think courts, not arbitration tribunals, are where justice is supposed to get done.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Feldman at nfeldman7@bloomberg.net

To contact the editor responsible for this story:
Philip Gray at philipgray@bloomberg.net