In a not surprising decision, the U.S. Court of Appeals for the Seventh Circuit recently held that the determination of whether class arbitration is authorized by a particular arbitration agreement is for courts and not arbitrators to decide. Herrington v. Waterston Mortgage Corp., ___, No. 17-3609 (7th cir.Oct.22, 2018.) The decision draws into question a $10 million-dollar award, leaving it to the District Court to decide the issue. The award was rendered and affirmed before Epic Systems Corp. v. Lewis, -U.S.-, 138 S.Ct 1612 (2018) which upheld the validity of waiver provisions similar to the arbitration agreement in Herrington.
Herrington commenced the litigation in federal court. Waterston sought enforcement of the arbitration provision which required binding arbitration in accordance with the rules of the American Arbitration Association applicable to employment claims. The language notably provided that such arbitration may not be joined with or join or include any claims by an persons not party to the agreement. The District Court enforced the arbitration agreement over Herrington’s objection, also striking the sentence of the agreement arguably waiving Herrington’s right to bring a class proceeding in arbitration, unequivocally instructing the arbitrator that Herrington must be allowed to join other employees to her case, leaving it to the arbitrator how to accomplish same.
Herrington asked for an opt-out proceeding. Waterston argued before the arbitrator that the waiver sentence disallowed such a proceeding citing Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp., 559 U.S. 662, 68 (2010) which requires evidence that the parties affirmatively consented to arbitration. The Arbitrator rejected Waterston’s argument, reasoning that the district court had invalidated the waiver, further reasoning that all parties had agreed to class arbitration when they agreed to the American Arbitration Association rules, which the arbitrator determined included the Supplementary Rules for Class Arbitrations.
The Court of Appeals, relying on Epic Systems, determined that the district court was wrong to invalidate the class waiver provision. However, the Court of Appeals, although noting that the argument to defeat the waiver is weak, rightly noted that the arbitration agreement must be interpreted and determined, and whether that determination shall be made by the arbitrator or the district court.
The Court of Appeals then determined that the issue is foundation and a gateway question of arbitrability and not one of procedure, noting that the Supreme court has expressly reserved on such issue, but noting that five federal court of appeals have so held the determination to be a gateway matter. Accordingly, the next stop for Herrington and Waterstone is the federal district court.
It will be interesting to see whether the district court revisits the American Arbitration rules. If the pertinent rules are the Employment Arbitration Rules and Mediation Procedures (eff. 11/1/09), it is noted that they include the provision that “the arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” Additionally, the American Arbitration Association Supplementary Rules for Class Arbitration allow “upon appointment, the arbitrator shall determine as a threshold matter, …whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class.”
Perhaps the final query may be whether incorporation of the AAA rules rises to the level of a clear and unmistakable intent to imbue the arbitrator with the authority to determine the gateway issue. See Rent-A-Center, West, Inc., v. Jackson, 561 U.S. 63, 68-69 (2010).