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Gateway Keeping: The Third Circuit Joins the Sixth in Holding that Courts get to Decide whether Parties Consented to Class Arbitration

August 28th, 2014 American Arbitration Association, Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Authority of Arbitrators, Awards, Class Action Arbitration, Class Action Waivers, Consent to Class Arbitration, Consolidation of Arbitration Proceedings, Drafting Arbitration Agreements, Existence of Arbitration Agreement, Judicial Review of Arbitration Awards, Practice and Procedure, Stay of Litigation, United States Court of Appeals for the Sixth Circuit, United States Court of Appeals for the Third Circuit, United States Supreme Court Comments Off on Gateway Keeping: The Third Circuit Joins the Sixth in Holding that Courts get to Decide whether Parties Consented to Class Arbitration By Philip J. Loree Jr.

On June 10, 2013 the U.S. Supreme Court in Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013) considered whether an arbitrator exceeded his powers under Federal Arbitration Act (“FAA”) Section 10(a)(4) by finding that a fairly run-of-the-mill arbitration agreement authorized class arbitration. Applying the deferential, manifest-disregard-of-the-agreement outcome-review standard authorized by FAA Section 10(a)(4), the Court upheld an arbitrator’s determination that an arbitration agreement authorized class arbitration because the arbitrator had, at least arguably, interpreted the arbitration agreement, albeit in a highly creative and doubtful way. (See Loree Reins. & Arb. L. Forum posts here, here, here & here.)

In a footnote, the Court explained that it “would face a different issue if Oxford had argued below that the availability of class arbitration is a so-called ‘question of arbitrability.’” 133 S. Ct. at 2068 n.2. The Court said that Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 680 (2010), “made clear that this Court has not yet decided” whether class-arbitration-consent presents a question of arbitrability. But “Oxford agreed that the arbitrator should determine whether its contract with Sutter authorized class procedures[,]” and “Oxford submitted that issue to arbitrator not once, but twice—and the second time after Stolt-Nielsen flagged that it might be a question of arbitrability.” 133 S. Ct. at 2068 n.2. (emphasis added)

Had Oxford opted to request the Supreme Court to determine whether class- arbitration consent presented a question of arbitrability, and had the Court determined that it was such a question, then the Court would have determined independently—that is, without deferring to the arbitrator’s decision—whether the parties consented to class arbitration. See BG Group plc v. Republic of Argentina, No. 12-138, slip op. at 6 (U.S. March 5, 2014); First Options of Chicago, Inc. v. Kaplan, 543 U.S. 938, 942 (1995). And we doubt that a majority of the Supreme Court would have upheld the Oxford award had it reviewed the class-arbitration-consent determination de novo. See, e.g., Oxford, 133 S. Ct. at 2071 (Alito, J., concurring) (“If we were reviewing the arbitrator’s interpretation of the contract de novo, we would have little trouble concluding that he improperly inferred “[a]n implicit agreement to authorize class-action arbitration … from the fact of the parties’ agreement to arbitrate.”) (quoting Stolt-Nielsen, 559 U.S. at 685).  

Those who have been tracking developments in class and consolidated arbitration since the turn of this century no doubt recall that, after a plurality of the Court determined in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 452-53 (2003), that a class-arbitration-consent-related dispute did not present a question of arbitrability, but merely a procedural question, parties began to submit routinely and unreservedly class-arbitration-consent questions to arbitration.

But after Stolt-Nielsen, and, no doubt with renewed vigor after Oxford, class arbitration opponents began to argue that class-arbitration-consent presented a question of arbitrability for the Court to decide. And U.S. Circuit Courts of Appeals are beginning to rule on those challenges.

The first one to do so was the U.S. Court of Appeals for the Sixth Circuit in Reed Elsevier, Inc. v. Crockett, 734 F.3d 594 (6th Cir. 2013), where the Court in November 2013 held “that the question whether an arbitration agreement permits classwide arbitration is a gateway matter, which is reserved for judicial determination unless the parties clearly and unmistakably provide otherwise.” 734 F.2d at 599 (quotation and citation omitted).

The second, and most recent Circuit Court of Appeals to rule on the issue, was the U.S. Court of Appeals for the Third Circuit in Opalinski v. Robert Half Int’l Inc., ___ F.3d ___, No. 12-4444, slip op. (3rd Cir. July 30, 2014), which on July 30, 2014 “join[ed] the Sixth Circuit Court of Appeals in holding that.  .  .  “the availability of” class arbitration “is a substantive gateway question rather than a procedural one[,]” and thus “is a question of arbitrability.” Slip op. at 15, 16-17.  The Court’s decision turned on “the critical differences between individual and class arbitration and the significant consequences of that determination for both [a] whose claims are subject to arbitration[;] and [b] the type of controversy to be arbitrated.” Slip op. at 15 (emphasis added). Where, as in Opalinski, the arbitration agreement did not “mention” class arbitration, the Court “believ[ed] the parties would have expected a court, not an arbitrator, to determine the availability of class arbitration[,]” and that was “especially so given the critical differences between individual and class arbitration and the significant consequences” of the class-arbitration-consent determination as respects “whose claims are subject to arbitration and the type of controversy to be arbitrated.” slip op. at 16-17.

The Third Circuit’s Opalinski decision, like the Sixth Circuit’s in Reed Elsevier, is well reasoned and reaches the conclusion we likewise think is required by the Supreme Court’s long-line of arbitrability jurisprudence, and by its post-Bazzle class-arbitration cases, beginning with Stolt-Nielsen. We suspect that other circuits will, for largely the same reasons, that class-arbitration-consent presents a question of arbitrability.

Let’s have a look at what transpired in Opalinski.  .  .  .

 Opalinski: Background

Opalinski was a Fair Labor Standards Act (“FLSA”) collective action, which two employees (the “Employees”) commenced against their employer (the “Employer”) in the United States District Court for the District of New Jersey. The Employees sued as individuals and alleged representatives of a class of similarly-situated employees. The Employees contended that the Employer had misclassified them as overtime-exempt employees, and consequently had unlawfully denied them overtime pay.

Both Employees had signed employment contracts containing arbitration agreements that required them to submit to arbitration “[a]ny dispute or claim arising out of or relating to Employee’s employment, termination of employment or any provision of this Agreement.” The agreements said nothing about class arbitration.

The Employer moved to stay litigation and compel bilateral arbitration. On October 11, 2011, the Court granted the motion to compel arbitration with the proviso that the arbitrator had to decide the class-arbitration-consent issue. The case was administratively closed and the parties proceeded to arbitration.

After the arbitrator made a partial final award ruling that Employer had consented to class arbitration, the Employer moved the district court to vacate the award under FAA Section 10(a)(4). The district court denied the motion and Employer appealed.


The Third Circuit’s Decision

Before the Court could decide the merits of the appeals it had to address some preliminary procedural and jurisdictional matters which, while interesting, are outside the scope of this already lengthy post. Having done its housekeeping, the Court was able to consider “whether, in the context of an otherwise silent contract, the availability of classwide arbitration is to be decided by a court rather than an arbitrator.” Slip op. at 6. Resolution of that issue required the Court to: (a) “decide.  .  . whether the availability of classwide arbitration is a question of arbitrability[;]” and (b) if so, whether the parties clearly and unmistakably agreed to submit arbitrability questions to an arbitrator. Slip op. at 6-7 (citations and quotation omitted).

Class-Arbitration-Consent a Question of Arbitrability?

The Court concluded that neither the U.S. Supreme Court nor the Third Circuit had decided the Arbitrability Issue. Oxford and Stolt-Nielsen left no room for doubt on that score as far as the Supreme Court was concerned, but the Third Circuit’s decision in Quilloin v. Tenett Health Sys. Philadelphia, Inc., 673 F.3d 221, 232 (3d Cir. 2012) raised the question whether the Third Circuit had previously decided the issue. Quilloin explained that “[s]ilence regarding class arbitration generally indicates a prohibition against class arbitration, but the actual determination as to whether class action is prohibited is a question of interpretation and procedure for the arbitrator.” The Court was able to dismiss what Quilloin said as “dictum because at the district court level the parties in Quilloin had already agreed that the arbitrator should be the one to determine whether the contract provided for class action arbitration.” Slip op. at 8-9.

The Court also said Quilloin’s reliance on Stolt-Nielsen as support for that dictum “falls short: not only does Stolt-Nielsen expressly state that the Supreme Court has not yet resolved the ‘who decides’ issue, but.  .  .  the opinion also indicates that the availability of classwide arbitration is a question of substance rather than procedure.” Slip op. at 9.

Having determined that the Class-Arbitration-Consent Arbitrability Issue was open, the Court explained that “arbitrability” questions generally concern either: (a) whether a party is bound by an arbitration agreement, which concerns “whose claims the arbitrator may adjudicate” and sometimes whether a valid arbitration agreement exists; or (b) whether a valid arbitration agreement applies to a particular type of controversy. “The crucial consideration” in determining whether an arbitrability question is presented “is the expectation of the contracting parties: We do not ‘forc[e] parties to arbitrate a matter that they may well not have agreed to arbitrate.’” Slip op. at 9 (quoting Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002)).

The Court held “that whether an agreement provides for classwide arbitration is a ‘question of arbitrability’ to be decided by the District Court[,]” because whether or not the parties consented to class arbitration “implicates whose claims the arbitrator may resolve[]” and “the type of controversy submitted to arbitration.” “Since Bazzle,” said the Court, “the Supreme Court has not directly decided whether the availability of class arbitration is a question of arbitrability.” Slip op. at 10, 11, 15. But post-Bazzle Supreme Court decisions “indicate[] that,  because of the fundamental differences between classwide and bilateral arbitration, and the consequences of proceeding with one rather than the other, the availability of classwide arbitrability is a substantive gateway question rather than a procedural one.”  Slip op. at 15.

Class-Arbitration-Consent Implicates Whose Claims the Arbitrator may Resolve” 

Citing and quoting John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543 (1964), the Court pointed out that “[t]he Supreme Court has long recognized that a district court must determine whose claims an arbitrator is authorized to decide.” Slip op. at 10. In John Wiley, said the Court, the Supreme Court said “‘there was no doubt’” that the issue whether a successor company was bound to an arbitration agreement entered into by its corporate predecessor, and what issues, if any the successor company had to arbitrate, “‘is a matter to be determined by the Court.  .  .  .’” Slip op. at 10 (quoting John Wiley, 376 U.S. at 546-47). The Court also explained that the Supreme Court in First Options, and the Third Circuit in a number of cases, have likewise recognized that questions concerning “whose claims an arbitrator may decide” are ordinarily questions of arbitrability because those questions concern who is bound by the arbitration agreement. See slip op. at 10 (citations omitted; emphasis added).

The Employer had “moved to compel bilateral arbitration” with each of the two Employees. “By seeking classwide arbitration,” the Employees, said the Court, “contend that their arbitration agreements empower the arbitrator to resolve not only their personal claims but the claims of additional individuals not currently parties to this action.” Slip op. at 10-11. Accordingly, “[t]he determination whether [the Employer] must include absent individuals in its arbitrations with” the Employees “affects  whose claims may be arbitrated and is thus a question of arbitrability to be decided by the court.” Slip op. at 11. The Court further noted Associate Justice Samuel A. Alito, Jr.’s “warn[ing] in his concurrence in [Oxford]” about the need for Courts to “be wary of concluding that the availability of classwide arbitration is for the arbitrator to decide, as that decision implicates the rights of absent class members without their consent.” Slip op. at 11 (citing Oxford, 133 S.Ct. at 2071-72 (Alito, J. concurring)).

Class-Arbitration-Consent Question “Implicates the type of Controversy Submitted to Arbitration”

The “second, independent reason” the Court concluded class-arbitration-consent presented a question of arbitrability was that it concerned the scope of the arbitration agreement, that is, the types of controversies that must be submitted to arbitration. See slip op. at 11.

The Employees argued that “because class actions in the context of traditional litigation are a procedural construct, the availability of classwide arbitration is also a procedural question.” Slip op. at 12. But that argument was foreclosed by Stolt-Nielsen, which “expressly” rejected the notion that consent-to-class-arbitration was “simply” a “procedural” matter. Slip op. at 12 (citing Stolt-Nielsen, 559 U.S. at 687). The Court “read” Stolt-Nielsen “as characterizing the permissibility of classwide arbitration not solely as a question of procedure or contract interpretation but as a substantive gateway dispute qualitatively separate from deciding an individual quarrel.” Slip op. at 13. Bilateral arbitration “and class arbitration are so distinct that a choice between the two goes, we believe, to the very type of controversy to be resolved[,]” and thus the Court concluded the class-arbitration-consent question was one of arbitrability. Slip op. at 13.

In support of its conclusion the Court quoted extensively from Stolt-Nielsen, which explained that “‘class action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.’” Stolt-Nielsen, the Court said, pointed out “numerous differences between bilateral and class arbitration, notably that ‘[(1) a]n arbitrator . . . no longer resolves a single dispute between the parties to a single agreement, but instead resolves many disputes between hundreds or perhaps even thousands of parties . . . [? (2)] the presumption of privacy and confidentiality that applies in many bilateral arbitrations [does] not apply in class arbitrations[,] thus potentially frustrating the parties’ assumptions when they agreed to arbitrate[? (3) t]he arbitrator’s award no longer purports to bind just the parties to a single arbitration agreement, but adjudicates the rights of absent parties as well[? and (4)] the commercial stakes of classaction arbitration are comparable to those of class action litigation, even though the scope of judicial review is much more limited.’” Slip op. at 12 (quoting Stolt-Nielsen, 559 U.S. at 686-87) (brackets in original).

The Court also explained that in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), the U.S. Supreme Court “similarly emphasized that the ‘changes brought about by the shift from bilateral arbitration to class action arbitration are fundamental,’ concluding that ‘[a]rbitration is poorly suited to the higher stakes of class litigation’ and that classwide arbitration ‘is not arbitration as envisioned by the FAA.’” Slip op. at  12-13 (quoting Concepcion, 131 S. Ct. at 1750, 1751-53) (emphasis added by Third Circuit).

The Sixth Circuit’s Reed Elsevier Decision 

The Court explained that it was “join[ing] the Sixth Circuit Court of Appeals[,]” “the only other Circuit to have squarely resolved the ‘who decides’ issue[,]” “in holding that the availability of class arbitration is a ‘question of arbitrability’.” Slip op. at 13, 15 (citing Reed Elsevier, 734 F.3d at 598-99). In Reed Elsevier the Sixth Circuit “reviewed the the differences between classwide and bilateral arbitration and noted that ‘recently the [Supreme] Court has given every indication, short of an outright holding, that classwide arbitrability is a gateway question rather than a subsidiary one.’” Slip op. at 13 (quoting 734 F.3d at 598).

The Court found the Sixth Circuit’s reasoning and analysis to be “persuasive” and quoted it with approval:

‘[g]ateway questions are fundamental to the manner in which the parties will resolve their dispute – whereas subsidiary questions, by comparison, concern details. And whether the parties arbitrate one claim or 1,000 in a single proceeding is no mere detail. Unlike the question whether, say, one party to an arbitration  agreement has waived his claim against the other – which of course is a subsidiary question – the question whether the parties agreed to classwide arbitration is vastly more consequential than even the gateway question whether they agreed to arbitrate bilaterally. An incorrect answer in favor of classwide arbitration would ‘forc[e] parties to arbitrate’ not merely a single ‘matter that they may well not have agreed to arbitrate’ but thousands of them.’

Slip op. at 14 (quoting Reed Elsevier, 734 F.3d at 598-99 (quoting Howsam, 537 U.S. at 84)).

The Employees argued that the First, Second and Eleventh Circuits had decided the Arbitrability Issue in its favor, citing Southern Comm. Services, Inc. v. Thomas, 720 F.3d 1352 (11th Cir. 2013); Fantastic Sams Franchise Corp. v. FSRO Ass’n Ltd., 683 F.3d 18 (1st Cir. 2012); and Jock v. Sterling Jewelers Inc., 646 F.3d 113 (2d Cir. 2011). But the Court disagreed, noting that “none of those Circuits ruled, or even expressed a view, on the issue before us.” Slip op. at 14.

Fantastic Sams “involved associational arbitration [i.e., arbitration brought by a trade or industry association on behalf of its members], not class arbitration, and expressly recognized that an ‘associational action . . . is [not] equivalent to a class action.’ Slip op. at 14-15 (quoting 683 F.3d at 23). Jock was a case where the parties had submitted the class-arbitration-consent issue to arbitration, and in Southern Comm., the Eleventh Circuit expressly noted that “‘[l]ike the Supreme Court, we also have not decided whether the availability of class arbitration is a question of arbitrability.’” Slip op. at 15 (quoting Southern Comm., 720 F.3d at 1359).   

No Evidence Rebutting the Presumption that Courts Decide Arbitrability Questions  

The presumption that courts get to decide arbitrability questions can be rebutted if the parties clearly and unmistakably submitted (or agreed to submit) arbitrability questions to arbitrators. As a practical matter that means the party seeking to arbitrate an arbitrability question must show that the parties unambiguously: (a) agreed to submit questions of arbitrability (or questions concerning the arbitrators’ “jurisdiction”) to the arbitrators; or (b) submitted an arbitrability to arbitration without reservation, something that usually requires more than simply arguing that the arbitrator has no authority to decide a particular issue or dispute. See First Options, 543 U.S. at 944-46.

While the notion of agreeing to arbitrate arbitrability questions may seem odd to the uninitiated (which is why the clear and unmistakable requirement exists in the first place), such agreements are not uncommon. For example, an unambiguous agreement to arbitrate according to an arbitration-provider’s rules that clearly provide for arbitration of arbitrability questions generally satisfies the clear and unmistakable requirement, and the rules of the three leading arbitration providers unambiguously provide that arbitrators decide such questions. See American Arbitration Association, Commercial Rules and Mediation Procedures, Including Procedures for Large, Complex Commercial Disputes, R. 7(a); JAMS Comprehensive Arbitration Rules and Procedures, R 11(c); International Institute for Conflict Prevention & Resolution (“CPR”) 2007 Non-Administered Arbitration Rules, R. 8.

But in Opalinski there was no clear and unmistakable agreement to arbitrate arbitrability and the Employer asked the district court—not the arbitrator—to decide whether class-arbitration-consent was a question of arbitrability, and if so, to decide whether Employer consented to class arbitration. The Employees’ arbitration agreements “provide[d] for arbitration of any dispute or claim arising out of or relating to their employment but [were] silent as to the availability of classwide arbitration or whether the question should be submitted to the arbitrator[,]” and “[n]othing else in the agreements or record suggests that the parties agreed to submit questions of arbitrability to the arbitrator.” Slip op. at 16. Thus, the “strong presumption in favor of judicial resolution of questions of arbitrability [was] not undone, and the District Court had to decide whether the arbitration agreements permitted classwide arbitration.” Slip op. at 16.

Whatever the ultimate resolution of the Class-Arbitration-Consent Arbitrability Issue may be, it seems to us that opponents of class arbitration appear to be better off including clearly-drafted class-arbitration waivers in their arbitration agreements, a practice that was common even before Concepcion and American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), made such waivers much more difficult to challenge. We haven’t looked for or happened across any statistics about current use of class-arbitration-waivers, but we wouldn’t be at all surprised if their use has increased substantially over the last few years.

Irrespective of whether class-arbitration-consent is or is not a question of arbitrability, an arbitral decision finding consent to class-arbitration in the face of such a waiver would, absent extraordinary circumstances, be subject to vacatur as not drawing its essence from the parties’ agreement. See, e.g., Stolt-Nielsen, 559 U.S. at 672-73, 675-77; Oxford, 133 S. Ct. at 2068-70. Of course, an even more effective way of avoiding unnecessary and costly litigation and arbitration would be to expressly withhold from arbitral resolution disputes about the class-arbitration-consent, including the enforceability of class-arbitration waivers, and to do so irrespective of whether the parties have agreed to delegate all other arbitrability-related questions to the arbitrators.



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