In a decision that reversed a $10 million “collective action” arbitration award, the Seventh Circuit Court of Appeals held that whether class or collective arbitration is authorized by an arbitration agreement is a “gateway” decision to be made by the district court, not the arbitrator. The case is Herrington v. Waterstone Mortgage Corp., No. 17-3609 (7th Cir. Oct. 22, 2018). This decision aligns the Seventh Circuit with all other federal courts of appeals that have addressed this issue, including the Fourth, Sixth, Eighth, Ninth, and Eleventh circuits.

Plaintiff Pamela Herrington filed a class action against her former employer, Waterstone Mortgage Corporation, for violations of the Fair Labor Standards Act. Waterstone moved to compel arbitration based on the arbitration clause in Herrington’s employment agreement. The arbitration clause contained the following limitation: “[s]uch arbitration may not be joined with or join or include any claims by any persons not party to this agreement.” Judge Barbara Crabb of the Western District of Wisconsin enforced the arbitration agreement but found the provision prohibiting class or collective action claims invalid based on Seventh Circuit authority that was subsequently overruled. See Lewis v. Epiq Sys. Corp., 823 F.3d 1147, 1161 (7th Cir. 2016) (holding that the National Labor Relations Act prohibits agreements that require single-claimant arbitration of employment claims); see also Epiq Sys. Corp. v. Lewis, 138 S. Ct. 1612 (2018) (holding that class action waivers in employment agreements did not violate the NLRA).

After the District Court ordered the case to arbitration, Herrington joined 174 other plaintiffs who pursued their claims as a collective action. The arbitrator awarded Herrington and the other joined plaintiffs more than $10 million in damages.

Waterstone appealed the District Court’s order compelling arbitration, and the Seventh Circuit vacated the award and remanded the case. In doing so, the Seventh Circuit explained that “the availability of class or collective arbitration is a threshold question of arbitrability.” Like the questions of whether the parties have a valid arbitration agreement and whether a dispute is covered by the agreement, the question of whether class or collective claims are authorized by an arbitration agreement is a “gateway issue” to be decided by the district court and not the arbitrator. In reaching this conclusion, the Court emphasized the importance of closely examining the parties’ express agreement to arbitrate. The Court acknowledged that “the structural features of class arbitration make it a ‘fundamental’ change from the norm of bilateral arbitration.”

Where parties intend to limit their arbitration agreement to bilateral arbitration, this decision highlights the importance of clearly expressing that intent in the language of the arbitration clause.