In two recent precedential decisions, JPay, Inc. v. Kobel and Herrington v. Waterstone Mortgage Corp., the Eleventh and Seventh Circuits, respectively, held that whether an arbitration may proceed on a class-wide basis (or as a collective action when a claimant is seeking relief under the Fair Labor Standard Act) is a “question of arbitrability” to be decided by the courts, unless the parties specifically delegate that responsibility to an arbitrator. The Supreme Court previously noted the lack of a majority decision on the subject in Stolt-Nielsen S.A. v. AnimalFeeds International Corp. and declined to address this question in Oxford Health Plans LLC v. Sutter, leaving the decision to the circuits.
In JPay, the dispute arose when two plaintiffs, users of JPay’s fee-for-service amenities to send money to inmates, filed suit alleging the service dissuaded users from sending funds through free paper money orders, and that the fees charged by JPay were “exorbitant” and used to “fund kickbacks to corrections departments.” JPay’s Terms of Service included a provision that the American Arbitration Association (AAA) would arbitrate and govern any disputes, claims, or controversies that arose between the parties and “[t]he ability to arbitrate the dispute, claim or controversy shall likewise be determined in arbitration.” The plaintiffs filed a demand for arbitration on a class basis, and, in response, JPay filed a suit seeking to compel bilateral arbitration, claiming it never consented to class arbitration. The district court held that the question was one of arbitrability and granted summary judgment to JPay, reasoning that a class arbitration was not available because the agreement was silent as to class arbitration.
In Herrington, the plaintiff filed a suit against the defendant employer alleging, on a collective basis, the defendant failed to pay her minimum wages and overtime pay under the Fair Labor Standards Act and asserting, on a class basis, breach of contract. The plaintiff’s employment agreement contained an arbitration provision, but the parties disputed whether arbitration could be brought on a collective basis. The district court invalidated a waiver clause forbidding class or collective arbitration claims and sent the matter to an arbitrator for collective arbitration. The arbitrator awarded $10 million in damages to the collective claimants.
On appeal, both Circuits affirmed the district court’s holdings that the question was one of arbitrability, reasoning that the question of class or collective arbitration was a “gateway question” that determined the scope of the arbitration proceedings. However, in JPay, the Eleventh Circuit reversed the grant of summary judgment, reasoning that the arbitration provision overcame the default presumption to have courts make the arbitrability determination, and sent the matter to an arbitrator. In so holding, the panel recognized the ability of parties to “agree to arbitrate gateway questions of arbitrability because arbitration is a matter of contract.” Thus, the issue of class arbitrability is not to be considered delegated to an arbitrator “unless an agreement evinces a clear and unmistakable intent to send [it] to arbitration.” In JPay, the arbitration agreement expressed the parties’ intent to arbitrate because JPay’s broadly written Terms of Service referenced the AAA rules three times and included a provision that “[t]he ability to arbitrate the dispute, claim or controversy shall likewise be determined in the arbitration.”
In Herrington, the Seventh Circuit reversed the invalidation of the waiver, remanding to the district court to make the arbitrability determination. In reaching its decision that the waiver was invalid, the district court applied a previous Seventh Circuit precedent that the National Labor Relations Act prohibited agreements requiring bilateral arbitration. However, while the current appeal was pending, the Supreme Court overruled this Seventh Circuit precedent in Epic Systems Corp. v. Lewis, which “makes clear that a waiver of the right to proceed in a class or collective arbitration is valid.” Due to this ruling, the Seventh Circuit directed the district court on remand to “conduct the threshold inquiry regarding class or collective arbitrability” and determine whether the agreement authorized the collective arbitration that occurred.
These cases are significant, as the Eleventh and Seventh Circuits now join every other federal court of appeals that has faced this question anew since Stolt-Nielsen, making the Fifth Circuit an outlier as the only circuit to stand by an earlier decision holding that class arbitration is a “procedural question.” For defendants, the outcome of the arbitrability determination can result in defending either costly, complex, and time consuming class or collective arbitration or a simple bilateral arbitration, which are costly and a deterrent to plaintiffs. Now, defendants can be confident that the court will almost certainly be the one to determine whether the arbitration can proceed on a class or collective basis, unless the parties specify otherwise.