The United States Court of Appeals for the Seventh Circuit has issued an opinion stating the availability of class arbitration is a threshold question for the courts, not an arbitrator, to decide. In Herrington v. Waterstone Mortgage Corp., No. 17-3609 (7th Cir. Oct. 22, 2018), a woman, Herrington, filed a proposed class action lawsuit against her former employer, Waterstone Mortgage Corporation (“Waterstone”) in a Wisconsin federal court. According to Herrington, Waterstone violated the Fair Labor Standards Act (“FLSA”) by failing to pay her and other similarly situated employees overtime and minimum wages.
Waterstone responded to Herrington’s lawsuit by filing a motion to compel arbitration based on the alternative dispute resolution provision included in Herrington’s signed employment contract. The provision required that all employment-related disputes between Herrington and Waterstone be resolved through binding arbitration proceedings pursuant to the rules of the American Arbitration Association (“AAA”). The clause also stated “arbitration may not be joined with or join or include any claims by any persons not party to this Agreement.”
Herrington countered Waterstone’s motion by claiming that the arbitral provision included in the contract was unenforceable and the ban on joint claims was invalid under the FLSA. It was undisputed, however, that Herrington’s claims fell within the scope of the arbitration provision.
The district court dismissed Herrington’s claim the arbitration agreement was unenforceable, but held the collective action waiver included within the provision was unlawful under the National Labor Relations Act. As a result, the court struck the ban on joint claims and ordered the parties to arbitration. Although the federal court instructed the arbitrator to allow Herrington to include other employees in her case, it left the method for accomplishing this up to the arbitrator.
Herrington demanded class arbitration and Waterstone opposed her request. Under Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., collective arbitration is only available in situations where the parties affirmatively consent to using such a procedure. Waterston argued the stricken waiver clearly indicated the parties did not affirmatively consent to class arbitration, but the arbitrator ruled he was required to ignore the existence of the waiver in its entirety. Instead, the arbitrator found the arbitration provision permitted collective arbitration because the contract incorporated the AAA rules, and by extension the organization’s “Supplementary Rules for Class Arbitrations.”
Following collective arbitration, the arbitrator issued an award of more than $10 million in favor of Herrington and 174 other members of the class. The federal district court confirmed the arbitration award and Waterstone filed an appeal with the Seventh Circuit Court of Appeals.
On appeal, the Seventh Circuit first addressed whether the district court incorrectly struck the collective action waiver from the parties’ arbitration provision. To decide this question, the appellate court relied on the Supreme Court’s recent opinion in Epic Systems:
Had we issued this opinion a year ago, the answer would be a simple “no.” The district court interpreted the National Labor Relations Act to prohibit agreements that require single-claimant arbitration of employment claims, and we later reached the same conclusion in an unrelated case. Lewis v. Epic Sys. Corp., 823 F.3d 1147, 1161 (7th Cir. 2016).
But the Supreme Court reversed our decision while Waterstone’s appeal was pending. Epic Sys. Corp. v. Lewis, – U.S. –, 138 S. Ct. 1612 (2018). After examining both the Federal Arbitration Act and the National Labor Relations Act, the Court held that an arbitration agreement does not violate the National Labor Relations Act’s protection of “other concerted activities for … mutual aid or protection” when it requires plaintiffs to pursue employment-related claims in single claimant arbitrations. Id. at 1624–29. Epic Systems means that the district court was wrong to treat the waiver in Herrington’s agreement with Waterstone as unlawful.
The choice between them turns on whether the availability of class or collective arbitration is a question of arbitrability, which the court decides, or a subsidiary issue, which goes to the arbitrator. Questions of arbitrability involve “gateway matters, such as whether parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy.” Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 569 n.2 (2013) (quoting Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 452 (2003) (plurality opinion)). Subsidiary questions “grow out of the dispute and bear on its final disposition.” John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 557 (1964). Whether the availability of class or collective arbitration is a gateway issue of arbitrability is an open question in our circuit. The Supreme Court has expressly reserved it, see Oxford Health, 569 U.S. at 569 n.2, and we have never addressed it. But every federal court of appeals to reach the question has held that the availability of class arbitration is a question of arbitrability. See Del Webb Cmties., Inc. v. Carlson, 817 F.3d 867, 877 (4th Cir. 2016); Reed Elsevier, Inc. ex rel. LexisNexis Div. v. Crockett, 734 F.3d 594, 599 (6th Cir. 2013); Catamaran Corp. v. Towncrest Pharmacy, 864 F.3d 966, 972 (8th Cir. 2017); JPay, Inc. v. Kobel, – F.3d –, 2018 WL 4472207, at *8 (11th Cir. Sept. 18, 2018); see also Eshagh v. Terminix Int’l Co., 588 F. App’x 703, 704 (9th Cir. 2014) (unpublished). We agree. And while Herrington’s arbitration with Waterstone was conducted as a collective rather than class proceeding, the forms are so closely related that the same analysis applies. See Opalinski v. Robert Half Int’l, Inc., 761 F.3d 326, 335 (3d Cir. 2014) (treating class and collective arbitration as interchangeable for purposes of arbitrability).
The appellate court then examined the facts of the case before it. The Circuit Court found although both parties agreed to arbitrate their claims against one another, it was unclear whether Waterstone agreed to engage in arbitration with each of the proposed class members. Similarly, the court said the agreement to arbitrate clearly covered the employment controversy between Herrington and Waterstone, but it was unknown whether this was also the case for the other class members. The Seventh Circuit also added:
Our final reason for treating the availability of a class or collective proceeding as a question of arbitrability is the most important. “Fundamental” questions belong in the “gateway” category, Reed Elsevier, 734 F.3d at 598, and the Supreme Court has repeatedly emphasized that the structural features of class arbitration make it a “fundamental” change from the norm of bilateral arbitration. Stolt-Nielsen, 559 U.S. at 686; AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 347–50 (2011).
But the availability of class or collective arbitration is either a threshold question of arbitrability or it isn’t; classifying an issue as a “gateway” question does not depend on case-by-case analysis. Nor, in any event, is this question susceptible to case-by-case resolution. The size of the class—and therefore the amount at stake—does not take shape until the class is certified, and deciding whether the parties agreed to class or collective arbitration is antecedent to certification.
After that, the Court of Appeals dismissed Herrington’s claim that Seventh Circuit precedent precluded treating the availability of collective arbitration as a question of arbitrability. The court stated:
Herrington misreads our precedent, which expressly recognizes the difference between consolidating bilateral arbitrations and authorizing class arbitration. We explained in Blue Cross Blue Shield that class actions “always have been treated as special” because of numerous characteristics not present in consolidated arbitration. Blue Cross Blue Shield, 671 F.3d at 640. In class and collective actions, a “self-selected plaintiff represents others”; the rules entitle the represented parties “to protection from the representative’s misconduct or incompetence”; there is often a costly process to notify individual class members; the lawyers are effectively in charge of the process because of the representative plaintiff’s small stake in the suit; and the class nature of the actions can dramatically increase the amount of money at stake. Id. We categorized the “[c]onsolidation of suits that are going to proceed anyway” as procedural precisely because it poses none of those same concerns. Id.; see also id. (“Consolidation of the plans’ claims would not change the fundamental nature of arbitration.”). Blue Cross Blue Shield therefore strongly supports rather than precludes our conclusion that the availability of a class or collective proceeding is a question of arbitrability.
Finally, the Seventh Circuit Court of Appeals held:
Because the district court erred in invalidating the waiver clause in the parties’ arbitration agreement, we vacate the district court’s order enforcing the arbitration award. On remand, the district court should conduct the threshold inquiry regarding class or collective arbitrability to determine whether Herrington’s agreement with Waterstone authorizes the kind of arbitration that took place. If the district court determines that the agreement allows such an arbitration, our decision leaves the district court free to confirm the award. If, however, the district court determines that Herrington’s agreement with Waterstone requires single-plaintiff arbitration, it should vacate the award and send the dispute to the arbitrator for a new proceeding.
It is interesting to note the Seventh Circuit’s opinion holding the availability of class arbitration is a question of arbitrability for the courts to decide is consistent with the decision of each of the Circuit Courts of Appeal that have previously addressed the issue.