The Seventh Circuit issued an opinion last week that sounded like it would be a big deal. The case, Herrington v. Waterstone Mortgage Corp., 2018 WL 5116905 (7th Cir. Oct. 22, 2018), dealt with the fallout from SCOTUS’s Epic Systems, and addressed a class arbitrability issue of first impression, which meant it could have been epic indeed. But instead, the decision is a fizzle that punts all the truly exciting issues back to the district court.
Herrington began in court as a collective action for minimum wages and overtime pay under the Fair Labor Standards Act. The named plaintiff had an arbitration clause which included this statement “Such arbitration may not be joined with or join or include any claims by any persons not party to this Agreement.” So, the defendant moved to compel individual arbitration. But, based on the 7th Circuit’s precedent finding that class waivers in employment agreements violated federal labor laws (the NRLA), the court sent the parties to arbitration with an order instructing the arbitrator to allow the plaintiff “to join other employees to her case.”
In arbitration, the parties continued to fight over what type of suit could proceed. The arbitrator concluded that the arbitration agreement evinced the parties’ intent to allow class arbitration, because it incorporated AAA employment rules, which the arbitrator interpreted to also include the supplementary rules for class arbitration. In the end, however, the group proceeded as a collective arbitration with 175 members, and the arbitrator awarded them $10 million.
While the issue was on appeal, SCOTUS overruled the 7th Circuit’s precedent (in Epic Systems), which upended this entire proceeding. On its face, it seemed as if the initial decision not to enforce the arbitration clause precluding joinder should be un-done, which would vacate the entire award. However, the plaintiffs argued that despite the language precluding joinder, the arbitration clause still contained other language that authorized the collective arbitration. At that, the 7th Circuit pivoted and framed the question as: who decides whether the arbitration clause allows collective arbitration? The court or the arbitrator?
Noting it was “an open question in our circuit,” the 7th Circuit agreed with “every federal court of appeals to reach the question” that the “availability of class arbitration is a question of arbitrability” and therefore presumptively for courts to decide. But, the 7th Circuit did not address the next logical question that must be answered to resolve the case: does or does not the parties’ choice of AAA rules delegate even the availability of class arbitration to an arbitrator? Because that is not only an open question in the 7th Circuit, but one on which the other federal circuits are split.
That issue is important because if the parties validly delegated that question to the arbitrator, then the arbitrator’s decision finding the parties’ arbitration clause allowed collective action is entitled to deference. At that point, isn’t it just like Sutter? The arbitrator allowed the class action, and the courts have to live with that construction, “good, bad or ugly”?
Well, all those issues will have to be worked out by the district court. The 7th Circuit found “the district court should conduct the threshold inquiry regarding class or collective arbitrability to determine whether [plaintiff’s] agreement with [defendant] authorized the kind of arbitration that took place.”
Happy Halloween! (Or, by the time most of you read this, Day of the Dead. Can you believe my husband carved this cool pumpkin?)