United States: Yet Another Opinion Addresses The Availability Of Class Or Collective Arbitration And Whether It Is A ‘Gateway Issue' For The Court – Herrington v. Waterstone Mortgage Corp.

Last Updated: October 30 2018
Article by John B. Lewis

We didn't expect to be discussing class or collective arbitration issues so soon, but we have repeatedly underestimated the resilience of these aggregate arbitration questions. (See our Nov. 11, 2013, March 12, 2015, Sept. 9, 2015, March 23, 2016, May 3, 2017, and May 2, 2018, blog articles dealing with "gateway issues" and the availability of class arbitration.)

Hopefully, the upcoming Lamps Plus, Inc. opinion will shed some light on what language in an arbitration agreement can properly authorize class arbitration. See Lamps Plus, Inc. v. Varela, No. 17-988, oral argument scheduled Oct. 29, 2018.

Now, in Herrington v. Waterstone Mortgage Corp. (Case No. 17-3609, decided Oct. 22, 2018), a Seventh Circuit panel, led by Judge Amy C. Barrett, has addressed the class arbitration and gateway issues in the context of an arbitrator's award of over $10 million in damages for Pamela Herrington and 174 similarly situated mortgage company employees asserting wage and hour violations.

The Background

The district court for the Western District of Wisconsin had compelled arbitration in accordance with an agreement between Herrington and Waterstone, but based on In re D.R. Horton, Inc., 357 NLRB 2277, 2289 (2012), struck the waiver clause as unlawful. The district court instructed the arbitrator that Herrington be allowed to join other employees in her case. The arbitrator thereafter conducted a collective arbitration and issued a sizeable award. The Supreme Court's decision in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), then entered the picture, casting a pall over the multimillion-dollar award.

Rather than accept defeat, Herrington argued that the arbitration agreement permitted class or collective resolution of her claims despite the agreement's express waiver language. The arbitration agreement's language stated:

In the event that the parties cannot resolve a dispute by the [alternative dispute resolution] provisions contained herein, any dispute between the parties . . . shall be resolved through binding arbitration in accordance with the rules of the American Arbitration Association applicable to employment claims. Such arbitration may not be joined with or join or include any claims by any persons not party to this Agreement. (Emphasis added).

Despite the obvious weakness of Herrington's argument, the appellate court recognized it must be resolved – but by whom? The legality of the class waiver was a non-issue after Epic Sys. Corp. v. Lewis, which reversed the prior Seventh Circuit position. But who determines whether the agreement authorizes class or collective arbitration ‒ the arbitrator or the court? While the Seventh Circuit had not previously addressed the issue, the panel noted that every federal court of appeals to consider the issue found it one 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).

The court also acknowledged that the parties could agree to delegate the issues of class or collective arbitration to an arbitrator, but the agreement must "clearly and unmistakably provide for it." Given the language of the arbitration agreement, that exception did not apply.

Judge Barrett's opinion described the vast difference between bilateral and class arbitration. The differences include: (1) Sacrificing the "principal advantage of arbitration – its informality – and [making] the process slower, more costly, and more likely to generate procedural morass than final judgment," citing AT&T Mobility v. Concepcion, 563 U.S. 333, 348 (2011); and (2) Class or collective arbitration clauses reduce efficiency but more problematically, provide "drastically narrowed ability to seek error correction through appellate review." When a "whopping claim is arbitrated, the defendant might find itself 'bet[ting] the company with no effective means of review' of either class certification or final judgment." AT&T Mobility, 563 U.S. at 351.

Herrington's primary argument was that Seventh Circuit precedent precluded treating the availability of class or collective arbitration as a question of arbitrability. Herrington maintained that in essence consolidating multiple arbitrations into a single proceeding (which the court had permitted) was the same as class or collective arbitrations.

The panel disagreed. Consolidation of claims that would have proceeded anyway is not the same as class representations where a "self-selected plaintiff represents others," citing Blue Cross Blue Shield of Mass., Inc. v. BCS Ins. Co., 671 F.3d 635, 640 (7th Cir. 2011).

The panel vacated the district court's order enforcing the arbitral award, and remanded the case to the lower court to conduct a "threshold inquiry" regarding class arbitrability to determine whether Herrington's agreement with Waterstone authorizes it. The district court could confirm the award if it was based on agreement language, or vacate the award and send the claim to the arbitrator for a new proceeding.

Given the language of the agreement, it is difficult to imagine that the district court could find class arbitration authorized. Indeed, merely incorporating the American Arbitration Association Rules should not be sufficient to override the agreement's plain language prohibiting joinder with claims of persons not a party to the agreement. As the panel noted, the putative class as well as the opt-in class "included employees who had not signed arbitration agreements with Waterstone." (Slip Op. at 11 n. 6).

The bottom line:

The Seventh Circuit concluded that the availability of class or collective arbitration was a threshold question of arbitrability for the district court to evaluate based on the terms of the arbitration agreement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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