(Reuters) - American corporations love arbitration agreements. Can’t get enough of them! In the past several years, with the blessing of the U.S. Supreme Court, businesses have forced tens of millions of employees and untold numbers of consumers into unilateral agreements in which they surrender their right to go to court and instead submit to the authority of a private arbitrator. Businesses will tell you that arbitrators can resolve disputes more cheaply and efficiently than the courts. It’s in everyone’s interest, they say, to steer cases out of the court system and into the streamlined arbitration process.
So it’s interesting to see what happens when private arbitrators interpret arbitration agreements in ways businesses don’t like. In August, for instance, I told you about a Florida paving contractor that forced employees who had filed wage-and-hour class actions into individual arbitration – but went back to court for relief when the arbitrator ordered expensive discovery. And then there’s the story I wrote in September about JPay, a company that facilitates money transfers to prison inmates. When two customers filed for classwide arbitration, claiming fee overcharges, JPay sued its customers in federal court in Miami to shut down their collective arbitration. There’s a sort of heads-I-win, tails-you-lose quality to these scenarios: Corporations compel consumers and employees to rely on arbitrators, yet turn to courts to construe ambiguities that arbitrators might decide against them.
Want more On the Case? Listen to the On the Case podcast.
This week offers another example of a corporation going to court to ward off the ill effects of an arbitration gone awry. In Herrington v. Waterstone Mortgage, Judges William Bauer, Amy Barrett and Amy St. Eve of the 7th U.S. Circuit Court of Appeals undid a collective arbitration judgment of more than $10 million for 174 employees of Waterstone, a mortgage lending company, citing the U.S. Supreme Court’s ruling last June in Epic Systems v. Lewis. But more broadly, the appeals court agreed with Waterstone that it’s up to a federal district court judge – not the arbitrator – to decide whether the class waiver in its arbitration agreement with employees is enforceable.
The 7th Circuit joined at least five other federal circuits – including the 11th Circuit in the JPay case just last month – to hold that the enforceability of a classwide arbitration waiver is a threshold arbitrability issue that must be decided in court. (The Supreme Court, as both the 7th and 11th Circuits noted in their recent decisions, reserved the question of whether courts or arbitrators should determine the availability of classwide proceedings in its 2013 ruling in Oxford Health Plans v. Sutter (133 S.Ct. 2064).
“‘Fundamental’ questions belong in the ‘gateway’ category,” wrote Judge Barrett. “The Supreme Court has repeatedly emphasized that the structural features of class arbitration make it a ‘fundamental’ change from the norm of bilateral arbitration.” The 7th Circuit also said the collective arbitration implicated the threshold questions of whether Waterstone and employees other than lead plaintiff Pamela Herrington had agreed to arbitrate with one another; and whether the agreement between Waterstone and Herrington allows for the resolution of disputes not just between them but between Waterstone and other employees. (Yes, I know: It’s all rather mind-bending.)
You may be wondering how the Herrington case, which was initially filed as a class action in federal court in Madison, Wisconsin, wound up as a class arbitration. The answer lies in the timing of the case. Waterstone moved to compel arbitration of Herrington’s overtime claims after the National Labor Relations Board staked out a position that employers cannot compel workers to waive the right to classwide proceedings because the National Labor Relations Act protects collective action.
The trial court judge, U.S. District Judge Barbara Crabb of Madison, struck the class waiver from the arbitration agreement. And when she sent the case to arbitration, she included an order instructing the arbitrator to allow other employees to join the proceeding. The arbitrator eventually concluded that when Waterstone designated the American Arbitration Association as an arbitration forum and agreed to abide by AAA rules, it had authorized a class proceeding. He also intimated, according to the 7th Circuit, that even if Judge Crabb hadn’t struck the class waiver he still would have considered the waiver ambiguous and would have construed the ambiguity against Waterstone.
That intimation highlights why companies are so keen to have courts decide the enforceability of classwide waivers. As the 7th Circuit points out in its decision, once a case is in arbitration, the arbitrator’s power is nearly absolute. There’s no appellate review. An arbitrator’s decision to strike a class waiver drastically magnifies the exposure for companies like Waterstone, which has no effective means to rebut the arbitrator’s decision. That’s especially worrisome for defendants when arbitrators have a financial incentive to prolong and expand the cases they’re overseeing.
Herrington counsel Dan Getman of Getman Sweeney Dunn didn’t respond to my email but Waterstone lawyer Spencer Skeen of Ogletree Deakins Nash Smoak & Stewart said the 7th Circuit made the right call. “The purpose of arbitration is to promote the cost-effective, speedy resolution of disputes,” he said in an email. “That purpose is undermined when arbitrators are allowed to determine whether they want to allow class or collective arbitration and litigants are forced to appeal the arbitrator’s decision on that issue, after the fact.”
So far, every appellate court to have looked at the issue agrees.