The Seventh Circuit recently clarified that courts should determine whether an arbitration agreement provides for or permits class-action claims. The decision in Herrington v. Waterstone Mortgage Corp. is instructive on many levels, not the least of which is its clarity.

Background

Herrington involved an employment arbitration agreement that included a class action waiver. The plaintiff initially sued in federal court, alleging wage hour violations. The district court granted the employer’s motion to compel arbitration. While the matter was pending before the arbitrator, the National Labor Relations Board (NLRB) issued its infamous D.R. Horton decision invalidating class action waivers. The arbitrator invalidated the class action waiver, certified the class, held the employer liable and imposed damages of $10 million.

The Seventh Circuit followed suit by invalidating class-action waivers, which was overruled by the Supreme Court in Epic Systems Corp. v. Lewis. After Epic Systems, the employer moved to vacate the arbitration award. The district court concluded the arbitrator could decide the class question and refused to vacate the award. The appeal to the Seventh Circuit followed.

The Appellate Court’s Opinion

To determine whether the arbitrator could allow class claims to proceed, the Seventh Circuit focused on two questions: (1) “with whom had the parties agreed to arbitrate” and (2) whether the arbitration agreement covered that issue.

The court explained that threshold issues of arbitrability are for courts to decide. 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.” Next, the court turned to the arbitration agreement itself to see whether the agreement covered the particular controversy (that is, whether it reflected the parties’ consent to arbitrate class or collective claims). It did not. Accordingly, whether the parties agreed to arbitrate class / collective claims was a gateway matter for the court to decide. The matter was thereafter remanded to the district judge to determine whether the parties had agreed to arbitrate on a class-wide basis.

If anything good can be said about the NLRB’s decision in D.R. Horton, it is that it gave the Seventh Circuit the opportunity to clearly and emphatically delineate who decides what.

Key Takeaways

The question of whether an arbitration agreement that is silent to class arbitration permits employees to arbitrate their claims on a class-wide basis is a hot topic, especially after Epic Systems. The Seventh Circuit has now joined the majority of federal courts (including the Third, Fourth, Sixth, Eight, and Eleventh Circuits) that have determined this issue is for courts, not the arbitrator, to decide (unless the parties’ agreement expressly delegates this authority to the arbitrator). The Supreme Court recently heard arguments in Lamps Plus Inc. v. Varela, which will re-examine the second part of this issue: whether silent agreements permit class-wide arbitration.

In the meantime, consider whether adding a class and collective waiver is right for your organization and check to see whether your arbitration agreements delegate questions of arbitrability to the arbitrator.

For more information, please contact your Baker McKenzie employment lawyer.