Judge Barrett on Arbitration

Before reading this summary, please read the overview for context.

Wallace v. Grubhub Holdings, Inc. (2020)

Judge Barrett lists this decision as number 7 of her ten (actually eleven) most significant cases. She describes the case as follows:

This appeal required us to decide whether food delivery drivers for Grubhub are exempt from the Federal Arbitration Act as “any other class of workers engaged in foreign or interstate commerce.” Drivers who worked for Grubhub in cities including Chicago, Portland, and New York had sued, alleging, among other things, that Grubhub violated the Fair Labor Slandards Act by failing to pay them overtime. But these drivers had each signed an agreement to submit to arbitration any and all claims arising out of their relationship to Grubhub. The Federal Arbitration Act required enforcement of those agreements unless they fell within the exemption for “contracts of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Writing for a unanimous panel, I explained that the residual clause of that exemption applies only to transportation workers who are actually engaged in the movement of goods in interstate commerce. Plaintiffs had not even tried to demonstrate that the interstate movement of goods was a central part of the job description of the class of workers to which they belong, and accordingly their contracts with Grubhub were not exempt from the Federal Arbitration Act.

[2020 Questionnaire at 43-45]

Grubhub drivers from across the United States sued Grubhub for failing to pay them overtime, as required under the Fair Labour Standards Act. Grubhub claims that the drivers are independent contractors, not employees, so the FLSA doesn’t apply. Be that as it may, all the drivers had signed an agreement calling for the arbitration of “any and all claims” arising out of their relationship with Grubhub. Both district courts judging the case applied the Federal Arbitration Act and compelled the parties to arbitrate their cases.

The issue before the Court of Appeals was the same as before both courts of the district courts: did the Federal Arbitration Act apply to the drivers? If so, they would have to arbitrate their claims. The drivers argued that, like “seamen” and “railroad employees,” they belonged to a “class of workers engaged in foreign or interstate commerce” and so were exempt from the FAA under 9 U.S.C. § 1. Both district courts had rejected this argument and compelled arbitration. [2]

Judge Barrett wrote that the statutory text, referring to a “class of workers,” compelled the Court of Appeals to look at what workers of a given class did rather than what an individual worker did. Judge Barrett referred to the Supreme Court decision Circuit City Stores, Inc. v. Adams, in which the Court held that this exemption only applied to those who transport goods between states. [4-5] Judge Barrett then explained that the framework in the Seventh Circuit was to consider whether a class of employees is actively engaged in moving goods across state lines as a central part of a member’s job description and, if so, whether the plaintiff actually belongs to that class. [5-7]

Barrett found that the drivers’ argument was not compatible with that framework. They argued that they were engaged in interstate and international commerce because they transported food that had moved across state or national lines, not because they themselves transported the food across those lines. The Court of Appeals did not accept this argument. [7-8]

The drivers also argued that, if they were not exempt from the FAA as “engaged foreign or insterstate commerce” under section 1, then their contract with Grubhub was not “evidencing a transaction involving commerce” as required by section 2 of that act. Judge Barrett cited Supreme Court authority rejecting this argument. [8-9]

Therefore, the drivers will be forced to arbitrate their claims.

Goplin v. WeConnect, Inc. (2018)

Brooks Goplin signed an arbitration agreement when he began working for WeConnect. That agreement did not expressly refer to WeConnect, however. Instead, the agreement Mr. Goplin signed was with an entity named Alternative Entertainment, Inc. or AEI. Later, Goplin tried to bring a class action suit against WeConnect. WeConnect tried to have the suit dismissed, arguing that the arbitration was required.

In support of its motion to compel arbitration, WeConnect included an affidavit that stated in passing the affiant’s employment by WeConnect, formerly known as AEI. [2] WeConnect’s website, however, indicated that AEI had combined with a separate entity (WeConnect Enterprise Solutions) in 2016 to form the current WeConnect. [3] Goplin argued that this indicated that AEI was a separate entity from WeConnect, which meant his agreement with AEI was not with WeConnect. If that was true, under Wisconsin law, WeConnect could not enforce the contract. WeConnect argued that WeConnect was AEI, it had just changed its name, but it didn’t introduce any new evidence. [3-4]

Chief Judge James Peterson thought Goplin had the better argument. The affidavit was conclusory, whereas WeConnect’s own website stated that AEI had been a different entity that no longer existed. [4] Therefore, WeConnect could not enforce the arbitration agreement. WeConnect moved for reconsideration, this time submitting evidence that WeConnect was AEI after a name change, but introducing new evidence on a motion for reconsideration is permissible only if the party did not know and could not reasonably have found out about the evidence earlier. Neither was true here, so the court denied the motion. [4]

WeConnect appealed, arguing that the district court should not have looked at WeConnect’s website. Judge Barrett, writing for the Court of Appeals, disagreed. She found no reason why the district court should not have looked at the website, which a party had cited and which WeConnect could have rebutted in its reply brief. [6] More importantly, the trial court’s opinion made clear that WeConnect would have lost with or without the website, because its conclusory affidavit failed to prove – as WeConnect had to – that it was entitled to enforce the agreement. [5-6] WeConnect should have introduced its best evidence when it was supposed to.

Therefore, Goplin’s lawsuit could proceed.

Herrington v. Waterstone Mortgage Corp. (2018)

Pamela Herrington worked for Waterstone Mortgage Corp. Her employment agreement included an arbitration clause that prohibited class claims. [2] When she tried to bring a class action against Waterstone, alleging violations of the Fair Labour Standards Act and breach of contract, Waterstone inevitably relied on that clause to compel individual arbitration. The district court did compel arbitration but, relying on a recent decision by the National Labour Relations Board, held that the prohibition on group activity violated the National Labour Relations Act. It therefore ordered the arbitrator to let Ms. Herrington join her claim to other employees’. [4-5] The arbitrator held collective proceedings, requiring parties to opt-in rather than opt-out (as would be the case for a class action), and ultimately awarded $10 million to 175 claimants. [6]

After the arbitrator had issued this award, however, the Supreme Court of the United States considered whether the prohibition on group activity really did violate the National Labour Relations Act. In Epic Systems Corp. v. Lewis, it decided that the answer was no. Therefore, while the district court’s opinion had been right at the time, it had now become wrong. [7] If that meant that imposing collective action had violated the arbitration agreement, the court would have to vacate the award. [2] Herrington tried to save the award by arguing that, despite what she’d previously said to the contrary, the arbitration agreement did provide for collective action. The question before the Court of Appeals was whether that argument should be evaluated by the district court or the arbitrator. [8]

The district court decides on questions of arbitrability, that is, “gateway” questions about whether the suit is amenable to arbitration in the first place. Examples given by Judge Barrett were whether the parties have a valid arbitration agreement and, if so, whether it applies to a given controversy. Arbitrators decide on “subsidiary questions,” which (despite the usual meaning of the term subsidiary) means everything else. [8] The Supreme Court had not decided whether class and collective arbitration was a gateway question but every other court of appeals to consider the question (although for opt-out class rather than opt-in collective arbitrations) had decided that it was indeed a gateway question. [9 and note 4 on pages 9-10]

Judge Barrett, writing for the Court of Appeals, agreed. The availability of class or collective arbitration involved issues of whether the parties had to agreed to arbitrate, with whom, and whether that agreement covered the dispute in question. [10-12] Additionally, the difference between bilateral and collective arbitration was so extreme that the two were fundamentally different, requiring a court to decide whether a warrant for one form of arbitration would necessarily call for the other. [12-15] Although 7th Circuit precedent allowed arbitrators to consolidate multiple arbitrations into a single proceeding, Judge Barrett considered that a different kettle of fish from authorising class arbitrations. [15-17] The arbitrator could decide if the arbitration agreement specifically delegated the question to the arbitrator but, in that case, the agreement must do so “clearly and unmistakably.” [Note 3 on page 9]

Therefore, the district court was to instructed to decide whether or not the arbitration agreement permitted the collective arbitration or not and, accordingly, to confirm or vacate the award. [17] For the sanity of all concerned, I hope the district court didn’t issue an opinion until after the Supreme Court decided Lamps Plus, Inc. v. Varela.

Webb v. Financial Industry Regulatory Authority, Inc. (2018)

The subject matter of this suit is actually contract rather than arbitrability, and the subject matter of the decision is civil procedure, but I include it here fore the sake of convenience.

Nicholas Webb and Thad Beversdorf were brokers employed by Jeffries & Co., Inc. Their employment agreement included a clause to arbitrate disputes before Financial Industry Regulatory Authority, Inc. (abbreviated to “FINRA” rather than “FIRA”). Jeffries fired Messrs. Webb and Beversdorf, they decided to contest their termination, and they filed an arbitration submission agreement with FINRA. Two and a half years later, they withdrew their claims, which FINRA considered a dismissal with prejudice.

Webb and Beversdorf then sued FINRA in state court, alleging breach of contract because of numerous deficiencies that had prevented FINRA from properly arbitrating their dispute. [2] Although they sought a declaratory judgment recognising the flaws in specific aspects of FINRA’s Code of Arbitration Procedure, they also requested money damages, including legal fees incurred during the arbitration and in preparing the subsequent lawsuit. [2, 4] The parties were indisputably citizens of different states. [3] The question was whether, as required, the amount in controversy exceeded $75,000. The district court rejected FINRA’s first argument, that this requirement was satisfied because the plaintiffs had sought over $1,000,000 from Jeffries in the arbitration, but accepted the calculation of the damages sought as exceeding $75,000. [3-4] FINRA then moved to dismiss, which Judge Andrea Wood granted on grounds of arbitral immunity. [2-3]

Neither party raised any jurisdictional issues when the plaintiffs appealed. Judge Barrett, writing for the Court of Appeals, brought up the subject. The plaintiffs’ contract with FINRA did not specifically provide for FINRA paying their legal fees and the American Rule, that a party bears its own legal costs, prevented them from recovering the fees for the lawsuit itself. [5] Therefore, the only way that the amount in controversy could meet the jurisdictional threshold is if the plaintiffs could recover their legal fees from arbitration under Illinois law. Illinois law did recognise a “third party litigation exception” to the American Rule, under which a party can recover attorneys’ fees from the entity that forced it to incur them. Judge Barrett held that the exception would apply only to those who forced a party to endure litigation, however, and not to those who increased the fees of a proceeding that the party voluntarily initiated. [5-9] Judge Barrett argued that causation was less clear in the latter case and that to apply the doctrine there would be inconsistent would be inconsistent with how Illinois courts had presented it. [9 and note 3 on the same page] As a result, it was a “legal certainty” that the damages could not meet the jurisdictional threshold.

FINRA also argued that because the SEC had approved its Code of Arbitration Procedure, which the plaintiffs were trying to change, the case implicated federal securities laws. It could not identify any specific provisions of federal law that the court would have to interpret, however, so Judge Barrett rejected this argument. [10-12]

Therefore, the case was remanded to state court.

Judge Ripple dissented from the denial of diversity jurisdiction. He first argued that courts should not get too far into the merits at the jurisdiction stage, which was why a “legal certainty” typically referred to insurmountable limitations on damages imposed by statute or contract. [14] Judge Ripple then emphasised the difference between seeking damages for a breach of contract, as the plaintiffs were doing, and attempting to recover attorneys’ fees. He cited Illinois case law to argue that Illinois law might permit recovery of fees paid to the arbitrator during the arbitration, because the payment of those fees was itself caused by the arbitrator’s breach of contract. [14-18] Judge Ripple opined that the Illinois courts had not yet permitted a recovery in such a situation but had not rejected the possibility, either, and the federal courts should not guess how Illinois courts would address the issue. [16-17, 19] He would have held that the court possessed diversity jurisdiction and, when necessary, “employ[ed] other federal practice devices that are far better suited to addressing . . . the ‘Erie guess.'”