Sixth Circuit Is First To Find Availability Of Class Arbitration Is Gateway Issue To Be Decided By Courts

by Stinson Leonard Street - Arbitration Nation
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LawJournalsJust four months ago, SCOTUS suggested (but did not hold) that the decision to allow class arbitrations might be a “gateway” issue of arbitrability that defaults to courts.  This week, the Sixth Circuit was the first to take the bait and declare the availability of class actions a gateway question that a court decides unless the parties clearly assign the question to the arbitrator.

In Reed Elsevier, Inc. v. Crockett, __ F.3d __, 2013 5911219 (6th Cir. Nov. 5, 2013), a lawyer filed an arbitration demand with the AAA against LexisNexis on behalf of himself, a putative class of law firms, and a putative class of law firm clients.  The lawyer alleged that LexisNexis misrepresented its subscription services and sought damages of over $500 million.  In response, LexisNexis brought a declaratory judgment action in federal court, asking the court to find that the arbitration clause did not authorize class arbitration.  The clause itself said nothing explicit about the availability of class arbitration — it did not preclude or allow class actions.  It provided that “any controversy, claim or counterclaim…arising out of or in connection with this Order…will be resolved by binding arbitration…”

The district court granted summary judgment in favor of LexisNexis and the Sixth Circuit affirmed.  The critical analysis related to whether the courts even had the power to decide whether the arbitration clause authorized class actions.  The court started by dividing questions of arbitrability into “gateway disputes” and “subsidiary questions.”  (I have never heard the latter group called subsidiary questions, have you?  I have heard of substantive v. procedural, and gateway v. other, but not this new paradigm.)  It recited the two universally recognized gateway issues — whether a valid arbitration agreement exists and whether it applies to the controversy at hand.  Those two questions are reserved for judges, unless the parties have “clearly and unmistakably” given the arbitrator the power to decide them.  On the other hand, it defined the “subsidiary” questions as those that bear on the dispute’s final disposition, including waiver, delay, and any failure to satisfy a condition precedent.  It characterized the subsidiary questions (unfairly) as “mere details.”

The Sixth Circuit then had to decide whether class arbitration falls into the “gateway” or “subsidiary” camp.  It acknowledged that the Supreme Court has not held that the availability of class arbitration is a gateway issue to be reserved for the courts, but instead has hinted strongly in recent years that this issue belongs in the courts.  Those hints began with Stolt-Nielsen, continued in Concepcion, and grew louder in Sutter this summer.  Therefore, even though a plurality of the Supreme Court concluded in Bazzle that classwide arbitration is a question for arbitrators, the Sixth Circuit held this week that it is a gateway question that is presumptively for judges.  Furthermore, in this case the parties had not clearly and explicitly authorized arbitrators to determine the availability of class action, so the default rule governed.

Once the court gave itself permission to decide the issue, it quickly found the parties’ arbitration agreement did not allow a class action.  “The principal reason to conclude that this arbitration clause does not authorize classwide arbitration is that the clause nowhere mentions it.”  The court also noted that the agreement provided for arbitration of claims arising out of “this Order,” suggesting the arbitration was limited to the two parties to that agreement.  Finally, applying AmEx, the court found the arbitration was not unconscionable, even if it “favors LexisNexis at every turn.”

This is a significant decision.  It allows parties who want a court to decide whether class arbitration is available to cite to a published opinion from a federal appellate court, instead of just hints and whispers from the Supreme Court.  It also suggests that at least the Sixth Circuit will require fairly specific language in an arbitration agreement to support the parties’ intent to allow class arbitration.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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