Nov. 6, 2018 – An arbitrator awarded $10 million in damages to 174 employees in a class arbitration action for wage and hour violations originating in Wisconsin. But the U.S. Court of Appeals for the Seventh Circuit now says that award must be revisited.

The U.S. District Court for the Western District of Wisconsin compelled arbitration under an arbitration clause an employee signed with Waterstone Mortgage Corporation, but the court struck a waiver clause that prohibited class or collective claims in arbitration.

That was before the U.S. Supreme Court decided Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), in which a majority upheld the enforceability of class arbitration waivers that prevent employees from banding together in arbitration against employers.

In Herrington v. Waterstone Mortgage Corp., No. 17-3609 (Oct. 22, 2018), a three-judge panel for the Seventh Circuit Court of Appeals said the Epic decision puts the $10 million award in doubt, and the district court, not the arbitrator, must decide a threshold question of whether the arbitration clause permits class or collective arbitration.

District Court Said Class Allowed

Pamela Herrington asserted two claims against her employer, Waterstone Mortgage, including failure to pay minimum and overtime wages under the Fair Labor Standards Act and a breach of contract claim. She wanted other employees to join by opting-in.

But Herrington’s employment agreement contained an arbitration clause that said any dispute between the employee and the employer must be resolved through arbitration. It also said no other party could join in the arbitration or include any claims.

Because Herrington filed the claims in federal court, Waterstone Mortgage asked the district judge, Barbara J. Crabb, to dismiss the lawsuit or compel arbitration.

Herrington argued that the entire arbitration clause was invalid and unenforceable because it required her to pay half the costs of arbitration and thus imposed excessive costs on her ability to file claims. She also challenged the collective arbitration waiver.

Judge Crabb said the case must go to arbitration but struck the arbitration waiver, which allowed Herrington and other similarly situated employees to arbitrate collectively.

At the time of that decision, the National Labor Relations Board had ruled that collective action was protected as a right to engage in concerted activity for mutual aid and protection, under the National Labor Relations Act. The district court’s order compelled arbitration and directed the arbitrator to allow class or collective action in some form.

Herrington asked for class arbitration. Waterstone argued that class arbitration requires the assent of both parties, and Waterstone never assented to it. The arbitrator rejected Waterstone’s argument because the district judge invalidated the waiver clause.

Waterstone argued that its assent to class arbitration was not apparent, even absent the arbitration waiver. The arbitrator said the parties agreed to class arbitration by agreeing to proceed under rules by the American Arbitration Association, and any ambiguity on whether “supplementary rules” applied must be construed in favor of Herrington.

Ultimately, the arbitrator awarded the class $10 million in damages, and the district court issued an order to enforce that award. Waterstone appealed the final judgment to the Seventh Circuit Court of Appeals, which reviewed the case post-Epic.

District Court Must Revisit

“Epic Systems makes clear that a waiver of the right to proceed in a class or collective arbitration is valid,” wrote Seventh Circuit Court of Appeals Judge Amy Barrett. “The lawfulness of the waiver is the easy part of this appeal.”

“But someone has to interpret the arbitration agreement – this time, including the waiver – to determine whether it authorized the collective arbitration that occurred.”

The panel doubted that the arbitration agreement, with a valid waiver, allowed class or collective arbitration claims but said the district court must make that decision as a question of arbitrability involving a “gateway matter” that district courts must decide.

“Whether the availability of class or collective arbitration is a gateway issue of arbitrability is an open question in our circuit,” Judge Barrett explained.

“But every federal court of appeals to reach the question has held that the availability of class arbitration is a question of arbitrability. We agree.”

The panel said the district court will have to decide “whether Waterstone agreed to arbitrate not only with Herrington, but also with members of her proposed class,” construing the employment contract with a valid collective arbitration waiver clause.

“If the district court determines that the agreement allows such an arbitration, our decision leaves the district court free to confirm the award,” Judge Barrett wrote.

“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.”