A former employee of Waterstone Mortgage Corporation filed a class action against Waterstone in Wisconsin federal court in 2011 alleging wage violations and breach of contract. The District Court for the Western District of Wisconsin compelled arbitration pursuant to an agreement between the plaintiff and Waterstone, but it struck as unlawful a waiver clause that appeared to forbid class or collective arbitration of her claims, reasoning that the plaintiff could not waive her right to bring a class action under the National Labor Relations Act. The arbitrator conducted a collective arbitration over Waterstone's objection and ultimately awarded more than $10 million in damages and fees to the plaintiff and 174 similarly situated employees. On appeal, the Seventh Circuit was faced with reconciling the district court's decision with a subsequently-decided U.S. Supreme Court case, Epic Systems Corporation v. Lewis. Specifically, Epic Systems upheld the validity of waiver provisions like the one at issue here, and therefore, if the district court's imposition of collective arbitration on Waterstone violated that waiver, the Seventh Circuit would be required to instruct the district court to vacate the award.

The primary issue on appeal was whether the district court incorrectly struck the subject waiver from the parties' arbitration agreement. Because the plaintiff did not concede that collective arbitration violated the waiver, the Seventh Circuit framed the issue as such: "If the availability of class or collective arbitration is a threshold question of arbitrability, the district court has to decide it. Otherwise, it falls to the arbitrator." Ultimately, the Panel concluded that the availability of class or collective arbitration is a threshold question of arbitrability. In so finding, the court reasoned that "[d]etermining whether [an] agreement reflects the parties' consent to class or collective arbitration requires the decisionmaker to determine whether the parties agreed to arbitrate those disputes as well. And that is a gateway matter for the court to decide." In addition, the court reasoned that such "fundamental" questions belong in the "gateway" category in part due to the Supreme Court's 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corporation, which found that class arbitration is available only if an arbitration agreement contains evidence that the parties affirmatively consented to that procedure. As such, the court noted that the structural features of class arbitration make it a "fundamental" change from the norm of bilateral arbitration. As such, the Seventh Circuit's ruling meant that on remand, the district court, rather than the arbitrator, must evaluate the plaintiff's contract with Waterstone to determine whether it permits class or collective arbitration.

Herrington v. Waterstone Mortgage Corp., No. 17-3609 (7th Cir. Oct. 22, 2018).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.