The Supreme Court Declined to Further Address the Availability of Class Arbitration, So Make Sure Your Agreement Does

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Contracts Pen iStock_000005206508Small[1]The practice of restricting plaintiff access to class procedures through binding arbitration agreements has garnered significant attention over the last five years on the heels of several U.S. Supreme Court decisions validating companies’ use of class waivers.  One of the open questions remains, “who has the authority to determine whether class arbitration is available when the arbitration clause is silent – courts or arbitrators?”  The U.S. Supreme Court has not addressed whether the availability of class arbitration is a substantive “gateway” issue for the courts if the parties have not explicitly delegated the decision to the arbitrator or whether it is a procedural question to be decided by arbitrators.  We addressed the importance of this question in our discussion of the then-pending petition for certiorari review in Opalinski v. Robert Half Intern. Inc., 761 F. 3d 326 (3rd Cir. 2014), which held that courts have the authority to decide the availability of class arbitration.  Last week, the Supreme Court declined to review Opalinski, just as it previously denied a request to review the Sixth Circuit’s Reed Elsevier decision that similarly granted that authority to the courts.  In the absence of a decree from the Supreme Court on this issue, companies could find themselves facing unfavorable, but reviewable, court determinations in some jurisdictions, while being more tightly bound in other jurisdictions by arbitrator determinations subjecting them to class arbitration against their will.  There are, however, steps that companies can and should take to minimize the risk that this conundrum will manifest and derail their dispute resolution strategies.

If a company intends to limit exposure to class actions in court, as well as class procedures in arbitration, case law makes it clear that the generic arbitration agreement that merely requires the resolution of all disputes through arbitration should be a remnant of the past.  It also is not enough for an arbitration clause to explicitly prohibit class actions and to remain silent regarding class arbitration.  It is critical for companies to have precisely crafted arbitration clauses that will appropriately mitigate the risk of exposure to class procedures.  Several key takeaways from the Supreme Court’s class arbitration decisions drive this point home:

  • Class arbitration cannot be required without a contractual agreement. In Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758 (2010), the Supreme Court declared that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”
  • Silence on class arbitration can be (mis)interpreted as an agreement. The arbitrator in Oxford Health reasoned that the following generic arbitration clause exhibited an agreement to permit class arbitration: “No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration.”
  • Arbitration agreements have power under the FAA, so be careful what you agree to. Oxford Health emphasized the force given to arbitration agreements under the Federal Arbitration Act (“FAA”). The parties granted the arbitrator the power to decide whether class arbitration was permitted and, having done so, the Supreme Court held the arbitrator’s decision had to stand under the FAA.  The Supreme Court did not determine that the plaintiffs’ and arbitrator’s reading of the generic arbitration clause was correct.  The Supreme Court warned that “[t]he potential for those mistakes is the price of agreeing to arbitration.“  The High Court also noted that it was prevented from addressing whether the issue actually should have been resolved by a court, because the parties agreed to allow the arbitrator to decide.
  • The FAA limits opportunities to overturn an unfavorable arbitrator decision. Section 10 (a)(4) of the FAA severely limits a court’s ability to intervene and reverse an arguably erroneous decision of an arbitrator.  The only question the Supreme Court could consider in reviewing the arbitrator’s determination in Oxford Health was “whether the arbitra­tor (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.”  The Supreme Court noted, however, that a court’s determination of issues of arbitrability are reviewed de novo (“from the new”).  Therefore, if a court were to decide the availability of class arbitration, review of the determination would be de novo, without deference to the initial court determination, unlike the limited review of an arbitrator’s determination permitted under the FAA.

Recommendations

The trajectory of class waiver jurisprudence has leaned largely in favor of defendants, although it is not without plaintiff-friendly advances like Oxford Health and it is continuing to develop.  Just recently, for instance, the Consumer Financial Protection Bureau (“CFPB”) released its arbitration study, which strongly notes that these waivers serve as an impediment to consumer relief via class actions and foreshadows the promulgation of regulations seeking to curtail the use of class waivers in consumer finance contracts.  It is important for companies to stay abreast of developments and to assess the potential impact on their contracts and dispute resolution strategies.  Unless and until the Supreme Court decides to clarify whether it is within the purview of the courts or arbitrators to determine the availability of class arbitration, companies may face varying results depending upon the jurisdictions in which their disputes are pending.  As it stands, this clearly is a question for the courts in the Third and Sixth Circuits and there is the opportunity for a thorough de novo review of any undesirable court decision.  However, in other jurisdictions if the decision is to be made by an arbitrator, or if the parties agree to allow the arbitrator to decide, there will be little to no room for reversal.  While having a court decide the availability of class arbitration has the advantage of a more thorough review, it still is critically important that arbitration agreements use precise language to accomplish a company’s goals.  Silence on the issue opens the door to the possibility of facing class arbitration, no matter who makes the decision.  Accordingly, companies should consult with counsel regarding the arbitration clauses in existing and future contracts to determine whether the use of a class waiver is advisable in particular circumstances and the best approach to preclude class arbitration.  For companies already faced with the challenge of disputing the availability of class arbitration in a proceeding, consider carefully whether to agree to delegate that decision to the arbitrator, given the limited review of arbitrator determinations.  Optimally, a carefully crafted arbitration clause will avert the possibility of either a court or an arbitrator subjecting a company to class arbitration unwillingly.

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