Federal appeals court decision could reverse employees’ $10M arbitration award

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The U.S. Seventh Circuit Court of Appeals handed down a decision Monday clarifying that disputes over the interpretation of class-action waivers in employment agreements must be decided by a district court – not an arbitrator.

The decision in Herrington v. Waterstone Mortgage Corp. comes on the heels of the U.S. Supreme Court’s decision in Epic Systems Corp. v. Lewis, in which the justices ruled class-action waivers are enforceable in employment agreements.

Class-action waivers are contract provisions that require all disputes between parties to be resolved individually in court or in arbitration. In other words, the provisions prevent employees from banding together to sue an employer in a class action.

The decision in Epic reversed decisions handed down by both the Seventh Circuit and federal District Court Judge Barbara Crabb, who was also the presiding judge in the Herrington case.

In the Herrington case, which arose from a dispute between a Wisconsin mortgage company and a former loan officer, Pam Herrington alleged she and other loan officers had not been paid overtime wages. Herrington filed a class-action lawsuit against Waterstone in 2011 in the Western District of Wisconsin, alleging that the company had failed to pay overtime wages owed to both her fellow loan officers and her and had breached her employment contract.

Waterstone countered by noting that Herrington had voluntarily signed an agreement calling on her to arbitrate employment disputes individually. Because of that agreement, Waterstone argued the court should either dismiss the case or put it on hold and send the parties to arbitration.

In a decision handed down before the U.S. Supreme Court decided the Epic case, Crabb found the trial waiver was enforceable but nonetheless struck a provision in it preventing employees from banding together in arbitration proceedings. She also ordered the parties to head to arbitration, a process that eventually resulted in Herrington and 174 other claimants receiving $10 million worth of damages and fees.

Waterstone challenged that decision, contending that its class-action waiver was valid and that the plaintiffs’ collective arbitration had violated their employment agreement.

An appeal was filed in that case. While it was still pending, the U.S. Supreme Court meanwhile handed down its decision in Epic Systems Corp. v. Lewis.

The Seventh Circuit Court of Appeals judges said on Monday that the ruling in Epic made the first part of their decision easy. Writing for the court, Judge Amy Coney Barrett said:

“Epic Systems makes clear that a waiver of the right to proceed in a class or collective arbitration is valid,” Barret wrote. “But someone has to interpret the arbitration agreement—time, including the waiver—to determine whether it authorized the collective arbitration that occurred.”

That “someone” can be one of two things: either a district court or an arbitrator. To decide which it should be, the court had to figure out if an agreement authorizing collective arbitration involves “arbitrability” questions or “subsidiary questions.”

Arbitrability questions involve “gateway matters,” such as a whether an agreement or waiver applies to a given dispute. These matters are typically decided by courts.

Subsidiary questions, on the other hand, often involve matters that depend on the specific facts of a given dispute. These many times are decided by arbitrators.

On Monday, the 7th Circuit Court of Appeals held that the question of whether the agreement in the Herringon v. Waterstone case authorized collective arbitration was a question to be answered by a court.

The decision is important for both employers and other litigants, said Spencer Skeen of the San Diego office of Ogletree Deakins, one of Waterstone’s attorneys.

“It’s a critical issue because if class waivers are enforceable but we don’t have a right to have courts review them, then what’s the end result?” said Skeen.

He noted that arbitration decisions, even if they contain legal errors, are rarely appealable. The Federal Arbitration Act, he noted, provides few grounds for challenging arbitrators’ decisions.

Skeen noted that the U.S. Supreme Court has not yet weighed in on the dispute, meaning the 7th Circuit’s decision is not the law of the land. Other circuits, though, have reached similar conclusions.

“The case gives clear guidance on the duties that the district court has with respect to gateway issue of whether an arbitration agreement contemplates class or collective arbitration,” he said. “It clearly indicates that that is something that has to be resolved first before it’s sent to arbitration.”

Yet, from the plaintiffs’ perspective , the decision in the Herrington case appears to change little.

Summer Murshid, of the Milwaukee-based firm Hawks Quindel said on Tuesday that the decision is not a far-reaching one. It involves a case, she noted, that was initially decided before the Epic case was resolved and then appealed after the high court had ruled in Epic. If her clients have had to adapt to any recent ruling, she said, it has been the one in the Epic case.

“I don’t think it has broad-reaching consequences,” she said. “From our perspective, we still live in a post-Epic world, and we are going to arbitrate these cases as necessary.”

The Seventh Circuit’s decision on Monday cancelled the district court’s order enforcing the arbitration award and sent the case back to the district court to decide whether the employment agreement that Waterstone and Herrington had entered into authorized arbitration. Should the district court find that the arbitration wasn’t authorized by the agreement, that court is under instructions from the appeals court to cancel the award and send the dispute back to an arbitrator for a new proceeding. Follow @erikastrebel