On February 1, 2017, a federal district court in South Carolina ruled that a standard arbitration agreement between a national homebuilder and purchaser does not permit the purchaser to pursue class arbitration. This appears to be the first decision in South Carolina ruling that when an arbitration agreement does not address class arbitration, class arbitration is not available.

Whether a consumer can force class arbitration has been hotly contested for the past 15 years. In 2003, the Supreme Court of the United States took up the issue in Green Tree Financial Corp. v. Bazzle, but failed to reach a majority decision, instead issuing an opinion joined by only four of nine justices that an arbitrator, rather than a judge, should decide whether class arbitration is available. Since then, many businesses have been forced to defend class arbitration attempts, even though class arbitration was never intended or agreed to. Many of these cases had questionable underlying merits, but resulted in exorbitant settlements because of the inherent risks involved in class arbitration. More recently, the Supreme Court has released opinions recognizing some of the marked differences between ordinary two-party arbitration and class arbitration, casting doubt on the validity of the Bazzle plurality opinion.

Following these more recent cases, Del Webb and PulteGroup argued to the U.S. Court of Appeals for the Fourth Circuit, the regional court of appeals hearing cases from South Carolina, that because arbitration can only be required upon prior consent, a judge not an arbitrator should decide whether parties agreed to allow for class arbitration. The Fourth Circuit agreed. In an opinion last year, Del Webb Communities, Inc. v. Carlson, the Fourth Circuit held the Court, not an arbitrator, must decide whether class arbitration is permitted. Plaintiffs sought review by the Supreme Court of the United States, which declined to hear the case. The Fourth Circuit remanded the case to the district court with specific instructions to decide whether the underlying arbitration agreement allowed for class arbitration.

On remand, Del Webb and PulteGroup argued to the district court that the lack of any reference to class arbitration, together with the agreement’s otherwise bilateral language, signaled the parties did not agree to class arbitration. The Court agreed and held Del Webb could not be forced to submit to class arbitration. The Court, therefore, compelled the purchaser to arbitrate individually with Del Webb, not on a class action basis.

Vic Rawl, Jr., lead counsel for Del Webb and chair of McNair Law Firm’s Class Action Practice Group, stated “the Fourth Circuit’s opinion and the district court’s decision in Carlson are major victories for homebuilders and other businesses that regularly contract for arbitration with consumers because they decline to subject such businesses to class arbitration unless the businesses clearly agreed to it.” As the Supreme Court has noted, the primary benefits of arbitration-low-cost, speed, efficiency, and confidentiality-are lost if consumers are permitted to bring class actions in arbitration, as class actions are by necessity lengthy, expensive, and public. Moreover, because arbitrators’ decisions are generally insulated from appellate review, a class action arbitrator can order staggeringly large arbitration awards without any effective means of review. Indeed, in the Carlson case, the plaintiff sought to represent a class of thousands of homeowners purportedly claiming over five hundred million dollars in damages.

The federal courts’ decisions in Carlson firmly reject the notion that class arbitration can be imposed on a defendant without their express consent. While these rulings are a victory for businesses that utilize consumer arbitration provisions, it remains best practice to update all arbitration clauses to expressly provide that arbitration may only proceed on a bilateral basis and that class arbitration is expressly not permitted.

Vic Rawl, Jr., Hal Frampton, and Robert Widener of McNair Law Firm, P.A. represented Del Webb Communities, Inc. and PulteGroup, Inc. in the Carlson cases. Mr. Rawl and Mr. Frampton regularly defend large builders and other businesses in class actions in South Carolina courts and in arbitration, and they consult regarding class action strategy nationally. Mr. Widener regularly consults on appellate matters in South Carolina.