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7th Cir. Vacates $10 Million FLSA Award Against Mortgage Company

The U.S. Court of Appeals for the Seventh Circuit recently joined the Fourth, Sixth, Eighth, Ninth, and Eleventh Circuits, in ruling that class or collective arbitrability is a gateway question that is presumptively for the court to decide, rather than the arbitrator.

In so ruling, the Court vacated the trial court’s order enforcing a $10 million federal “wage and hour” Fair Labor Standards Act arbitration award against the defendant.

A copy of the opinion in Herrington v. Waterstone Mortgage Corporation is available at:   Link to Opinion.

The plaintiff filed a putative class and collective action against her former employer.  She alleged wage and hour violations under the Fair Labor Standards Act, and breach of her employment contract.

The plaintiff’s employment agreement contained an arbitration clause and class action waiver:

In the event that the parties cannot resolve a dispute by the [alternative dispute resolution] provisions contained herein, any dispute between the parties concerning the wages, hours, working conditions, terms, rights, responsibilities or obligations between them or arising out of their employment relationship shall be resolved through binding arbitration in accordance with the rules of the American Arbitration Association applicable to employment claims.  Such arbitration may not be joined with or join or include any claims by any persons not party to this Agreement.

The trial court held that the arbitration clause was enforceable but struck the sentence waiving the plaintiff’s right to bring a class or collective proceeding in arbitration.  The court sent the parties to arbitration.

The arbitrator certified a class for two reasons.  First, he determined that he was required to ignore the class action waiver because the trial court had invalidated it.  Second, he determined that the parties agreed to class arbitration because the agreement incorporated the Rules of the American Arbitration Association for employment claims.

The arbitrator awarded $10 million in damages and fees in favor of the plaintiff and the class.  The trial court entered judgment enforcing the arbitration award.

This appeal followed.

The first issue addressed on appeal was whether the class action waiver was enforceable.

While this case was on appeal, the U.S. Supreme Court issued its ruling in Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612 (2018), which upheld the validity of class action or collective action waiver provisions like the one in the plaintiff’s employment agreement.  Consequently, the Seventh Circuit held that the trial court erred in striking the class action waiver.

The second issue on appeal was whether it is for the court or an arbitrator to decide if an arbitration agreement permits class or collective arbitration.  The plaintiff argued that, notwithstanding the class action waiver, the arbitration agreement reflected the parties’ affirmative consent to class and collective arbitration.

The Seventh Circuit began its analysis by observing that “every federal court of appeal to reach the question has held that the availability of class arbitration is a question of arbitrability.”

Joining the Fourth, Sixth, Eighth, Ninth, and Eleventh Circuits, the Seventh Circuit determined that whether the availability of class or collective arbitration is a gateway issue is presumptively for the court, rather than the arbitrator.

The Seventh Circuit reasoned that whether the agreement permits class or collective arbitration required the adjudicator to determine: (1) whether the employer agreed to arbitrate not only with the plaintiff, but also with members of her proposed class; and (2) whether the agreement to arbitrate covered a particular controversy.

In the Seventh Circuit’s view, these issues are typically reserved for the court.

The Seventh Circuit also found that class and collective arbitration involve the threshold decision of whether to certify a class.  The arbitrator must investigate a variety of issues incidental to the actual dispute, including whether the putative class meets the requirements in Rule 23(a).

Noting that class and collective arbitration require procedure rigor that bilateral arbitrations do not, and the stakes for the defendant due to the loss of appellate review are significant, the Seventh Circuit concluded that “the district court should conduct the threshold inquiry regarding class or collective arbitrability.”

Accordingly, the Seventh Circuit vacated the trial court’s order enforcing the arbitration award, and remanded the case for further proceedings consistent with its opinion.

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Eric Tsai practices in Maurice Wutscher’s Commercial Litigation and Consumer Credit Litigation groups, and in its Regulatory Compliance group. He concentrates his practice primarily on the defense of consumer and commercial financial services companies, including mortgage lenders and servicers, mortgage loan investors, third party debt collectors, and other financial services providers. He also counsels clients on regulatory compliance, licensing, and other consumer protection matters. Eric earned his undergraduate degree from the University of California, Irvine. Prior to attending law school, he worked as a loan officer for national direct lenders. He earned his Juris Doctor from California Western School of Law and thereafter obtained a Master of Laws (LLM) in Taxation from the University of San Diego School of Law. Eric publishes extensively on various issues affecting consumer lending and litigation, including both federal and California-specific developments. He is licensed to practice law in California, Nevada, and Oregon, and is admitted in all United States District Courts in the State of California, the United States District Court for the District of Oregon, the United States District Court for the District of Nevada, the U.S. Tax Court, and the Ninth Circuit Court of Appeals. He is also a licensed real estate broker in the State of California.

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