7th Circuit: Courts Decide Threshold Question Whether Class Arbitration is Available

The Seventh Circuit has held that whether class or collective arbitration is available under one or more arbitration agreements is a threshold question of arbitrability which must be decided by a court rather than the arbitrator.

The plaintiff filed a proposed collective action against her former employer for alleged wage and hour violations under the Fair Labor Standards Act, which also included a proposed class action for breach of contract.  The district court compelled arbitration pursuant to an agreement between the employee and the employer, but rejected a waiver clause in that agreement forbidding collective arbitration, reasoning that it was a violation of the National Labor Relations Act to restrict an employee’s right to pursue claims collectively.  The arbitrator conducted a collective arbitration and issued a multi-million dollar award in damages and in fees in favor of the plaintiff and the other employees.

While the appeal was pending, the Supreme Court, in Epic Systems Corp. v. Lewis, upheld the validity of waiver provisions like the one found in this case, and held that a waiver of the right to arbitrate collectively does not violate the National Labor Relations Act in requiring plaintiffs to pursue employment-related claims in single-claimant arbitrations.  Applying that decision and recognizing the validity of the waiver in the arbitration agreement, the Seventh Circuit here analyzed whether the district court should have allowed the arbitrator to decide whether collective arbitration was permitted under the agreement; that is, whether the availability of class or collective arbitration is a threshold question of arbitrability, which the court decides, or a subsidiary issue, which goes to the arbitrator.

The court of appeals concluded that the availability of class or collective arbitration is a question of arbitrability because it raises the issues of whether the parties, specifically the class members, have agreed to arbitrate and whether the agreement to arbitrate covered the particular controversy, both which are questions considered to be “gateway matters” for the courts to decide.  Further, the court found that because collective arbitration causes a significant change from the norm of bilateral arbitration and because it has a distinct structure that requires additional procedural rigor, it is a “fundamental” question that a district court should decide.

Thus, the court of appeals vacated the district court’s order enforcing the arbitration award and remanded the case for the district court to conduct a threshold inquiry to decide whether the arbitration agreement between the parties authorizes collective arbitration (that is, whether the claims fall within the waiver that the district court had previously held to be invalid).

With this decision, the Seventh Circuit joins the Fourth, Sixth, Eighth, Ninth, and Eleventh Circuits in deciding that the availability of class or collective arbitration is a question of arbitrability.