Finding that the availability of class or collective arbitration is a threshold question of arbitrability, the Seventh Circuit ruled that a district court must evaluate an employee’s contract with her employer to determine whether it permitted class or collective arbitration. Although whether the availability of class or collective arbitration is a gateway issue of arbitrability has been an open question in the Seventh Circuit, the appeals court agreed with sister circuits that have held that the availability of class arbitration is a question of arbitrability. The district court erred in invalidating the waiver clause in the parties’ arbitration agreement because the Supreme Court’s ruling in Epic Systems Corp. v. Lewis upheld the validity of waiver provisions like the one in the employee’s agreement with her employer. On remand, the district court, rather than the arbitrator, will inquire into whether the employee’s agreement with her employer authorizes class or collective arbitration (Herrington v. Waterstone Mortgage Corp., October 22, 2018, Barrett, A.).
FLSA wage and contract claims. Asserting two claims, the employee first alleged that her employer failed to pay her minimum wages and overtime pay under the FLSA, a claim she brought as a collective action. Second, she claimed that the employer had breached its contract with her; she brought that claim as a class action under Rule 23. But the employee had signed an agreement to arbitrate her employment disputes, and the employer moved to enforce it. Based on the agreement, the employer asked the district court to either dismiss the suit for lack of jurisdiction, or stay it and compel arbitration.
Waiver of class or collective proceedings. Claiming that the arbitration clause was unenforceable because it required her to pay half of the arbitration costs, which imposed excessive costs on her, the employee also challenged the validity of a provision waiving her right to join the claims of others in the proceeding. According to the employee, this waiver violated both the FLSA, which permits collective actions, and the NLRA, which permits concerted activity. However, she did not contest the employer’s position that her claims were within the scope of the waiver of arbitration clause. The district court rejected the employee’s contention that the agreement to arbitrate was unenforceable. But relying on the NLRB’s decision in D.R. Horton, the district court struck the sentence waiving the employee’s right to bring class or collective proceedings in arbitration. It sent the parties to arbitration with an order instructing the arbitrator to allow the employee to join other employees to her case.
Arbitrator’s $10M award. The arbitrator conducted a collective arbitration over the employer’s objection and ultimately awarded more than $10 million in damages and fees to the employee and 174 similarly situated employees. The employer appealed from the district court’s final judgment enforcing the arbitrator’s award, arguing that because the waiver was valid, the collective arbitration violated the employer’s agreement with the employee.
Who interprets the waiver? The first issue was whether the district court incorrectly struck the waiver from the parties’ arbitration agreement. The Seventh Circuit pointed out that the Supreme Court’s ruling in Epic Systems Corp. v. Lewis upheld the validity of waiver provisions like the one in the employee’s agreement with her employer. Accordingly, Epic Systems meant that the district court was wrong to treat the waiver in the employee’s agreement as unlawful. While Epic Systems made clear that a waiver of the right to proceed in a class or collective arbitration is valid, it did not address the question of who interprets the arbitration agreement, including the waiver, to determine whether it authorized the collective arbitration that occurred.
Is availability of class or collective arbitration a question of arbitrbility? 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.” Subsidiary questions “grow out of the dispute and bear on its final disposition.” Whether the availability of class or collective arbitration is a gateway issue of arbitrability is an open question in the Seventh Circuit. However, courts of appeal that have reached the question, including the Fourth, Eighth, Eleventh, and Ninth Circuits, have held that the availability of class arbitration is a question of arbitrability. In this case, the Seventh Circuit agreed with its sister circuits.
With whom? The availability of class or collective arbitration involves a foundational question of arbitrability: whether the potential parties to the arbitration agreed to arbitrate. By proposing that the arbitration include additional employees, the employee raised the question whether those employees had agreed to submit their claims against the employer. Deciding whether the employee’s agreement with the employer permits class or collective arbitration requires the adjudicator to determine whether the employer agreed to arbitrate not only with the employee, but also with members of her proposed class. It thus resolves the foundational question of “with whom” the employer chose to arbitrate.
Invalidating arbitration clause erroneous. Deciding whether a contract permits class or collective arbitration involves a second question of arbitrability: whether the agreement to arbitrate covers a particular controversy. The employee’s contract required that arbitration of employment disputes arising from the employment relationship. But the employee requested that the arbitration also resolve disputes between the employer and many other employees. Determining whether the agreement reflects the parties’ consent to class or collective arbitration requires the decisionmaker to determine whether the parties agreed to arbitrate those disputes as well. And that is a gateway matter the court must decide.
The Seventh Circuit’s final reason for treating arbitrability of a class or collective proceeding as a question of arbitrability is that “fundamental” questions belong in the “gateway” category, 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. The size of the suit and its potential impact on absent class members cause class arbitration to diverge sharply from the bilateral model. Because of their distinct structure, class and collective arbitration require procedural rigor that bilateral arbitrations do not. The arbitrator must investigate a variety of issues incidental to the parties’ actual dispute.
Because the district court erred in invalidating the waiver clause in the parties’ arbitration agreement, the appeals court vacated the lower court order enforcing the arbitration award. On remand, the district court should conduct the threshold inquiry regarding class or collective arbitrability to determine whether the employee’s agreement with her employer authorizes the kind of arbitration that took place.
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