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In labor arbitration class action, 7th Circuit asks, ‘What happens next?’

November 28, 2018

A wage and hour lawsuit that would have followed precedent became a case of first impression in the 7th Circuit Court of Appeals with a ruling that held that while employers can prohibit class action arbitration, the district court, not the arbitrator, answers the questions about what can be arbitrated.

However, employment attorneys say the important lesson from this case is that employment agreements need to be written clearly and explicitly. These contracts between employers and their workers that send disputes to arbitration are becoming more common, and even those agreements already in place should be reviewed to avoid arguments over the specifics.

The price for confusion over the language can be very high. In the matter that reached the 7th Circuit, Pamela Herrington v. Waterstone Mortgage Corp., 17-3609, the employees were awarded more than $10 million in the class arbitration.

sweeney-brendan-mug Sweeney

Brendan Sweeney, of counsel in the Jackson Lewis P.C. Long Island office, reiterated that the case shows “how important it is to be careful when drafting these agreements.”

The dispute in Herrington began in November 2011, when Herrington, who had worked for Waterstone as a loan officer, filed a complaint in the U.S. District Court for the Western District of Wisconsin. She asserted the mortgage company did not pay minimum wages and overtime as required by the Fair Labor Standards Act.

While the district court told Herrington she had to arbitrate as her employment agreement required, the judge found the waiver forbidding class or collective arbitration was unlawful. The arbitrator was instructed to let other Waterstone employees join Herrington’s case, but was given the freedom to choose the type of multiparty arbitration.

In the end, 174 other Waterstone employees were allowed to join in the class arbitration and were awarded more than $10 million in damages and fees. The district court affirmed the award and Waterstone appealed.

tschanz-peter-mug Tschanz

Peter Tschanz, an associate at Bingham Greenebaum Doll LLP in Indianapolis, observed that Waterstone has a lot at stake in this case. The award is substantial and would be considerably more modest if the plaintiffs had to arbitrate individually, Tschanz said. Moreover, being able to challenge the arbitrator’s decision in this dispute to enable others to join is critical because appealing issues from arbitration can be very difficult, he said.

Echoing Sweeney’s point, Tschanz noted the importance of making sure the waiver of class arbitration in the employment agreement is done “clearly and unmistakably.”

‘What happens next?’

At the 7th Circuit, the mortgage company argued the class arbitration should not have been allowed in the first place because the agreement contained a waiver forbidding individuals to join together and arbitrate as a group. In contrast, Herrington had successfully asserted in district court that the National Labor Relations Act prohibited individual arbitration of employment claims. The 7th Circuit reached a similar conclusion in Lewis v. Epic Sys. Corp., 823 F.3d 1147, 1161 (7th Cir. 2016) and was poised to rule that the district court had properly struck the class waiver from the employment agreement.

However, things got upended when the Supreme Court of the United States reversed the 7th Circuit in the Epic Systems case. The justices ruled in a 5-to-4 decision this year that waivers against class or collective arbitration in employment agreements are enforceable.

With that precedent, the 7th Circuit found the district court should have upheld the waiver in Herrington’s employment agreement and not allowed the other Waterstone workers to join the case.

But that still did not bring about a conclusion. As Judge Amy Coney Barrett wrote in the opinion, “The lawfulness of the waiver is the easy part of this appeal. The hard part is the question that Epic Systems does not address: what happens next?”

The question is being asked because, according to the appellate panel, Herrington “changed her tune.” She argued that even with the waiver, the agreement indicates Waterstone consented to class and collective arbitration because the company incorporated the American Arbitration Association’s rules into the agreement, which includes provisions for multiparty arbitration.

Although the 7th Circuit described the argument as “implausible,” it still remanded the dispute and ordered the district court to decide if the employment contract does allow for individuals to join together and arbitrate as a group.

In finding the courts — not the arbitrators — should decide the question of arbitrability, the 7th Circuit joined the 3rd, 4th, 6th, 8th and 11th Circuits.

Including waivers

Sweeney, who has experience as in-house legal counsel, described this case as a “worst nightmare.” It provides the lesson, he said, for clearly drafting employment agreements.

The agreements should be “extraordinarily clear” that multiparty arbitration is waived, Sweeney said, and expressly state that any questions about the waiver are to be decided by the district court. He maintained that a “well-drafted agreement is going to be enforceable.”

Tschanz agreed. He said the takeaway from the case is that employers must be very clear in their employment agreements that the parties are precluded from class and collective arbitration. If companies are not crystal clear, they could end up in costly litigation.

In its supplement brief to the 7th Circuit, Waterstone contended that the cases that have fostered the “what happens next” question all involved employment agreements that were silent as to class arbitration and did not include a class arbitration waiver like Waterstone did. The Supreme Court’s ruling in Epic, Waterstone argued, held the wavier must be enforced according to the terms, including those that require individual arbitration.

“I believe the U.S. Supreme Court gave clear instruction in the Epic decision that courts must enforce class waivers,” said Spencer Skeen, a shareholder at Ogletree Deakins who was the lead attorney representing Waterstone on appeal. “There is no ‘who decides’ question when the agreement speaks to the issue of class arbitration and clearly precludes it.”

As an alternative position, Skeen and Waterstone argued the issue of class arbitration was a gateway issue for the courts to decide. Gateway matters address whether the parties’ action is governed by the arbitration agreement or whether the arbitration clause applies to a particular issue.

In reaching its ruling, the 7th Circuit adopted the latter reasoning.

Herrington’s petition for a rehearing was denied. Attorneys from Getman Sweeney & Dunn, PLLC in New York, who are representing Herrington, did not return a call seeking comment.•

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