Class Action Litigation Update: Who Should Decide Whether an Arbitration Clause Permits Classwide Arbitration: the Court or the Arbitrator?

Over the past two years, a series of court cases has renewed the debate over the availability of classwide arbitration in agreements that lack an express class waiver provision. Specifically, these cases raise the critical question of who—the court or an arbitrator—may construe whether an arbitration agreement permits class arbitration when the parties have not expressly agreed to a procedure.

The United States Supreme Court has yet to definitively address this issue and, this past month, declined to review a decision holding that a court, and not an arbitrator, determines the availability of classwide arbitration. Opalinski v. Robert Half International Inc., 761 F.3d 326 (3d Cir. 2014), cert. denied No. 14- 625, — S. Ct. —-, 2015 WL 998611 (U.S. Mar. 9, 2015). The Supreme Court’s decision to decline certiorari was surprising since there is a split of authorities in this gateway function among courts. Indeed, several district courts have relied on a plurality decision by the Supreme Court in holding that this issue is a procedural question, and not an arbitrability question. (Procedural questions are decided by arbitrator, whereas the core issue of arbitrability is reserved for the courts to decide.) On the other hand, two federal circuit courts held that this determination should be reserved for the court.

In light of the Supreme Court’s denial of certiorari in Opalinski, circuit courts are left without adequate direction, and continue to leave open this gateway issue. For example, if a circuit court rules that an arbitrator should determine the availability of classwide arbitration, the decision would create a circuit split on the issue and could present a better opportunity for the Supreme Court to address this specific question.

It remains to be seen whether any future circuit court cases will align with or contradict the decisions reached in the United States Courts of Appeals for the Third and Sixth Circuits. Until the Supreme Court offers guidance on this issue, companies using consumer arbitration agreements will need to defer to court decisions in the circuits where they operate to discern who should decide the availability of classwide arbitration.

Background

In Green Tree Financial Corporation v. Bazzle, 539 U.S. 444, 452-3 (2003), the Supreme Court evaluated whether the Federal Arbitration Act permits class-wide arbitration hearings, and concluded that an arbitrator should determine whether a contract forbids class arbitration. In support of this decision, the Court explained that the question of who should decide this issue “is a procedural one for arbitrators” because it concerns the procedure to be used in arbitrating the parties’ dispute, not whether they agreed to arbitration or whether the agreement applied to the underlying dispute. The opinion goes on to explain that this issue is not an arbitrability question because it “concerns neither the validity of the arbitration clause nor its applicability to the underlying dispute between the parties,” and does not ask “whether the parties wanted a judge or an arbitrator to decide whether they agreed to arbitrate a matter.” For these reasons, the Supreme Court determined that the matter of contract interpretation should be left for an arbitrator and not the courts.

Subsequent Supreme Court decisions, however, have cast doubt on Bazzle. In Stolt-Nielson, S.A. v. Animal Feeds International Corp., 559 U.S. 663, 680 (2010), the Supreme Court emphasized that “only a plurality” in Bazzle reached a conclusion on the issue. Thus, the Bazzle decision should be treated as non-binding. Then, in a note in the opinion for Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2069 n.2 (2013), the Supreme Court expressly stated that “this Court has not yet decided whether the availability of class arbitration is a question of arbitrability.”

Court Decisions that Follow the Bazzle Rationale

Since its decision in Oxford, the Supreme Court has not addressed the issue of who should decide whether an arbitration clause permits classwide arbitration. Although no federal circuit courts of appeal have decided this question, some federal district courts have opted to follow Bazzle. See Guida v. Home Sav. of Am. Inc., 793 F. Supp. 2d 611, 615-19 (E.D.N.Y. 2011); Hesse v. Sprint Spectrum L.P., No. C06–0592JLR, 2012 WL 529419 (W.D. Wash. Feb. 17, 2012); Lee v. JPMorgan Chase & Co., 982 F. Supp. 2d 1109, 1112-14 (C.D. Cal. 2013); In re A2P SMS Antitrust Litig., No. 12-CV-2656 (S.D.N.Y. May 29, 2014); Sandquist v Lebo Auto. Inc., 228 Cal. App. 4th 65, 78-79 (2014).

These courts have concluded that the class arbitration question is for arbitrators to decide because it determines the procedures the parties will use to arbitrate their dispute. These courts have dismissed arguments pointing out the differences between individual and class arbitration, finding those differences to be insignificant because they are “more relevant to the issue of whether the parties agreed to class arbitration…than to the issue of whether the court or the arbitrator decides if an agreement contemplates class arbitration.” See Sandquist v. Lebo Automative, Inc. at 78-79. In Sandquist, the court reasoned that this issue is a procedural one because “a class action is a procedural device.” It is important to note that while these cases follow the Bazzle rationale, they do not provide an explanation or analysis to support this argument.

Court Decisions that Reject the Bazzle Rationale

            In the last two years, some courts have expressly rejected the Supreme Court’s rational in Bazzle. Most notably, the United States Courts of Appeals for the Third and Sixth Circuits have held that the issue of who should decide whether classwide arbitration applies is an arbitrability question for courts to decide because it determines whose claims the parties must arbitrate and, therefore, fundamentally affects both the nature and scope of the parties’ arbitrations.

In Reed Elsevier, Inc. ex rel. LexisNexis Div. v. Crockett, 734 F.3d 594, 597-99 (6th Cir. 2013), the Sixth Circuit held that the “question [of] whether an arbitration agreement permits classwide arbitration is a gateway matter, which is reserved ‘for judicial determination unless the parties clearly an unmistakably provide otherwise.’” Upon review, the Sixth Circuit determined that the agreement at issue in Reed Elsevier was at best “silent or ambiguous as to whether an arbitrator should determine the question of classwide arbitratability; and that is not enough to wrest that decision from the courts.” The Sixth Circuit made clear that the “principal reason to conclude that this arbitration clause does not authorize classwide arbitration is that the clause nowhere mentions it.”

In 2014, the Sixth Circuit again held that courts should decide the issue of classwide arbitration. In Huffman v. Hilltop Companies, LLC, 747 F.3d 391, 398-99 (6th Cir. 2014), the Sixth Circuit held that “[a]s was the case in Reed Elsevier, here the parties’ agreement is silent as to whether an aribtrator or a court should determine the question of classwide arbitrability.” In its opinion, the Sixth Circuit went on to reiterate that “the determination [of whether an arbitration agreement permits classwide arbitration] lies with this court” and not arbitrators.

Similarly, in Opalinski v. Robert Half Inc., 2014 U.S. App. LEXIS 14538 (3d Cir. July 30, 2014), the Third Circuit held that absent a clear agreement otherwise, a court and not an arbitrator, must decide if an agreement to arbitrate also authorizes classwide arbitration. The Third Circuit’s opinion explained that “questions of arbitrability” are limited to a narrow range of gateway issues. For example, they may include “whether the parties are bound by a given arbitration clause” or “whether an arbitration clause in a concededly binding contract applies to a particular type of controversy.” Id. at 84. On the other hand, however, questions that the parties would likely expect the arbitrator to decide are not “questions of arbitrability.” Questions that fall into the category of non-arbitrability include ‘“procedural’ questions that grow out of the dispute and bear on its final disposition” as well as allegations of waiver, delay, or similar defenses to arbitrability. In reaching this decision, the Third Circuit relied on the Supreme Court’s opinion in Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002), and explained that the crucial consideration in its analysis should be the contracting parties’ expectations because courts should not “forc[e] parties to arbitrate a matter they may well not have agreed to arbitrate.” On March 9, 2015, the Supreme Court denied the petition for certiorari.

Since the Third Circuit’s Opalinski decision in July 2014, there has not been much judicial activity on this issue. No other federal circuit courts have issued opinions regarding the question of who should decide issues of classwide arbitration. In the last few months, California appellate courts have also relied on the Third and Sixth Circuits’ reasoning in finding that this issue is an arbitrability question for the courts and not arbitrators.

For example, the California Court of Appeal for the Fourth District held that it was “not persuaded by Bazzle and its rationale for concluding the Class Arbitration Question is a procedural matter for arbitrators” and decline[d] to follow Bazzle, Sandquist, or similar cases adopting Bazzle’s rationale. Network Capital Funding Corporation v. Papke, 230 Cal.App.4th 503, 511-14 (2014). Instead, the court explicitly stated that “we agree with Opalinski, Huffman, and Reed Elsevier, and conclude the Class Arbitration Question is an arbitrability question for courts.” Id. The opinion further explained:

The Class Arbitration Question also is not analogous to issues the Supreme Court has found pose a procedural question for arbitrators to decide. For example, whether the parties agreed to arbitrate on an individual or class basis is not analogous to whether the claimant satisfied all prerequisites to arbitration established by the parties’ agreement. Similarly, the Class Arbitration Question is not analogous to whether the statute of limitations bars a party’s claims or ’allegation[s] of waiver, delay, or a like defense to arbitrability,’ all of which the Supreme Court has found to be procedural matters. Neither Bazzle nor any of the cases adopting its rational provides an explanation or analysis of how the Class Arbitration Question grows out of the parties’ underlying dispute or bears on the dispute’s final disposition.

Id.; see also Garden Fresh Restaurant Corp. v. Superior Court, 231 Cal.App.4th 678 (2014)(holding that, where an arbitration agreement does not “clearly and unmistakably” provide for class and/or representative arbitration, the issue of whether a collective arbitration is allowed is a “gateway issue” for the court to determine).

A Potential Circuit Split?

A recent case that could turn the tide in this debate was decided in the Southern District of New York earlier this month. In In re A2P SMS Antitrust Litig., No. 12-CV-2656 (AJN), 2015 WL 876456, at *2-7 (S.D.N.Y. Mar. 2, 2015), the Southern District of New York held that an arbitrator should decide the availability of classwide arbitration and certified the question for an interlocutory appeal to the Second Circuit. In its decision, the court relied on the Supreme Court’s opinion inBazzle and found that determining the availability of classwide arbitration is a procedural one for arbitrators. If the Second Circuit grants the petition for review, it will be in the position to decide whether to follow the Third and Sixth Circuits’ rationale or follow the Supreme Court’s opinion inBazzle and effectively create a circuit split on this issue.

Conclusion

With the exception of the recent California and New York cases, the law in this area appears to be at a standstill. It remains to be seen whether the circuit courts will adopt differing jurisprudential opinions and create a circuit split on this issue. Thus, in the absence of a clear decision by the Supreme Court, the question of whether the court, or the arbitrator,  determines the availability of classwide arbitration where an arbitration agreement lacks an express class waiver provision continues to be an unresolved issue.

In order to avoid the uncertainty posed by agreements that are silent on this issue, parties entering into arbitration agreements can insert a provision into the agreement that expressly allows or disallows class arbitration. Furthermore, in anticipation of a possible dispute over whether an agreement authorizes classwide arbitration, parties should include clear and unambiguous language specifying whether a court or an arbitrator should decide the question of arbitrability. By including these types of provisions into the agreement’s terms, parties can avoid the possibility of being forced to arbitrate a matter that they did not expressly agree to at the outset.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in all areas of complex litigation, including pre-litigation and arbitration. Should you have any questions or need further assistance, please contact us via email at contact@fidjlaw.com or via telephone at 305-350-5690.