Who decides whether a particular arbitration clause allows class
arbitration, and what are the parameters for making that
decision? Those questions were recently considered by the
Fifth Circuit in Reed v. Florida Metropolitan University,
Inc., No. 11-50509, 2012 U.S. App. LEXIS 10048 (5th
Cir., May 18, 2012).
In that case, Jeffrey Reed obtained a bachelor's degree in
paralegal studies from the defendant, incurring $51,000 in student
loan debt in the process. After discovering that neither law
schools nor prospective employers would recognize his degree, he
filed suit as a putative class action under the Texas Education
Code on behalf of "any person who contracted to receive
distance education from Everest University Online while residing in
Texas." The defendant moved to compel individual
arbitration. The district court compelled arbitration, but
held that the question of whether the parties' agreement
allowed class arbitration was "more appropriately decided by
the arbitrator." The arbitrator determined that the
arbitration clause allowed class arbitration and the district court
confirmed the award.
The Fifth Circuit reversed. It held that while the district
court correctly referred the question of whether the agreement
allowed class arbitration to the arbitrator, the arbitrator
exceeded his powers in allowing class arbitration and the district
court, therefore, erred in confirming the award.
When is the question of the propriety of class arbitration for the arbitrator?
It is well established that "[W]hether the parties have
submitted a particular dispute to arbitration, i.e. the
'question of arbitrability,' is 'an issue for judicial
determination unless the parties clearly and unmistakably provide
otherwise.'" Howsam v. Dean Witter Reynolds,
Inc., 537 U.S 79, 83 (2002). But is the availability of
class arbitration a "question of arbitrability" that
should ordinarily be decided by the court, or is it an issue for
the arbitrator? As the Fifth Circuit pointed out, that issue
has not been definitively decided by the U.S. Supreme
Court. The closest decision is Green Tree Financial Corp.
v. Bazzle, 539 U.S. 444 (2003), where a plurality of four
justices concluded that whether class arbitration is permitted is
not an "arbitrability" matter for the court, but is a
procedural matter for the arbitrator.
Ultimately, the Fifth Circuit in Reed found it unnecessary
to confront that legal issue because it found the parties
agreed to give the class arbitration issue to the
arbitrator. Specifically, the parties agreed to adopt the AAA
Commercial Rules, which two members of the panel interpreted to
include the Supplementary Rules for Class
Arbitration. Supplementary Rule 3 provides that "the
arbitrator shall determine as a threshold matter ... whether the
applicable arbitration clause permits the arbitration to proceed on
behalf of or against a class...". The Fifth Circuit
concluded that by agreeing to the AAA Commercial Rules, the parties
had explicitly agreed to allow the arbitrator to decide whether the
agreement allowed class arbitration. Thus, the Fifth Circuit
held that the district court did not err in submitting this issue
to the arbitrator.
When does class arbitration exceed the arbitrator's powers?
The Fifth Circuit next turned to the question of whether the
district court erred in confirming the arbitrator's award
authorizing class arbitration. It began by noting that one of
the most often litigated grounds for vacating an arbitration award
is whether the arbitrators have "exceeded their
powers." 9 U.S.C. § 10(a)(4). While courts give
a great deal of deference to arbitration awards, including an
arbitrator's interpretation of a contract, that deference is
not unlimited. An arbitrator cannot "dispense his own
brand of industrial justice." An arbitrator's award
must at least "draw its essence" from the agreement at
issue. But as long as the arbitrator is even arguably
construing or applying the contract and acting within the scope of
his authority, even "serious error" does not permit his
decision to be overturned. Despite this exceedingly
deferential standard of review, the Fifth Circuit held that the
arbitrator's ruling allowing class arbitration should not have
been confirmed.
In doing so, the Fifth Circuit relied first on Stolt-Nielsen
S.A. v. AnimalFeeds International Corp., 130 S.Ct. 1758
(2010), where the U.S. Supreme Court considered an arbitration
clause in a maritime contract, which the parties stipulated was
silent (in the sense that they simply had no agreement) on the
question of class arbitration. The parties agreed to submit
the question of whether their arbitration agreement allowed class
arbitration to a panel of arbitrators, which found that it
did. The district court vacated the panel's award on the
basis that the panel acted in "manifest disregard" of the
law. The Second Circuit reversed, concluding that because
there was no federal maritime rule of custom and usage
against class arbitration, and nothing in New York case
law establishing a rule against class arbitration, the
arbitrators' decision was not in manifest disregard of either
maritime or New York law.
The U.S. Supreme Court reversed the Second Circuit and held that
the arbitrators had "exceeded their powers" by allowing
class arbitration. The Supreme Court explained that where the
agreement is silent on the issue of class arbitration, the
arbitrator's task is to identify the governing rule of law and
whether it contains a "default rule" under which an
arbitration clause is construed as allowing class arbitration in
the absence of express consent. Instead of looking to
governing law, the panel exceeded its authority by acting as a
common law court to develop what it viewed as the best rule to
apply. The Supreme Court held that the panel was not permitted
simply to "impose its own conception of sound policy."
Rather the panel was bound by the parties' agreement regarding
what they agreed to arbitrate and with whom they agreed to
arbitrate. Thus the panel exceeded its powers by imposing
class arbitration on the parties when "the parties concurred
that they had reached 'no agreement' on that
issue." Id. at 1775.
Last year, the Court, in AT&T Mobility LLC v.
Concepcion, 131 S.Ct. 1740 (2011), went further and held that
a state law invalidating class action waivers in arbitration
agreements was preempted by the FAA. The arbitration clause in that
case required arbitration of all disputes between the parties, but
also explicitly required that all claims be brought in the
party's "individual capacity, and not as a plaintiff or
class member in any purported class or representative
proceeding." The common thread is that the court must
enforce the parties' agreement, at least when it comports with
the FAA.
After summarizing these two cases, the Fifth Circuit looked to the
arbitrator's rationale for allowing class arbitration. The
arbitrator noted that the arbitration clause provided that
"any dispute ... no matter how described, pleaded or styled
shall be resolved by binding arbitration" and that "any
remedy available from a court under the law shall be available in
the arbitration." These two provisions, the arbitrator
concluded, embodied an implicit agreement to class
arbitration. The Fifth Circuit disagreed and held that
"[n]one of the provisions the arbitrator identified ... even
remotely relates to or authorizes class arbitration." It
characterized the "any dispute" provision as a standard
provision that may be found in many arbitration agreements,
including the one found insufficient to authorize class arbitration
in Stolt-Nielsen. Similarly, it rejected the
arbitrator's reliance on the "any remedy"
provision. The court distinguished a "remedy" as
being anything a court can do for a litigant who has been
wronged," while a class action is a "procedural
device." The court concluded that "[a]t most, the
agreement in this case could support a finding that the parties did
not preclude class arbitration, but under Stolt-Nielsen
this is not enough."
Finally, the Fifth Circuit held that the Education Code provisions
on which the plaintiff in Reed based its claim could not
be read to establish a "default rule" allowing class
arbitration, as those provisions address only class litigation and
say nothing regarding arbitration.
But is the Fifth Circuit right?
The court in Reed itself pointed out both the Second
and Third Circuits have recently come to different
conclusions. In Jock v. Sterling Jewelers Inc., 646
F.3d 113 (2d Cir. 2011), cert. denied Mar. 10, 2012, the
district court, relying on Stolt-Nielsen, vacated a class
arbitration award. The Second Circuit reversed. It
distinguished Stolt-Nielsen as being narrowly based on the
parties' stipulation that there was no agreement regarding
class arbitration, which effectively eliminated any question about
the construction of the contract. On that basis, it held that
the district court erroneously focused on whether the arbitrator
correctly interpreted the arbitration agreement, and should instead
have restricted its analysis to whether the agreement or law
prohibited the arbitrator from reaching the class arbitration
issue. Taking a different view as to how the "exceeding
powers" ground for vacating an arbitration award is to be
applied, the court ruled that if the issue was correctly submitted
to the arbitrator for decision then "whether the arbitrator
was right or wrong in her analysis, she had authority to make the
decision" and did not exceed her powers by doing so. The
Third Circuit recently made a similar ruling. Sutter v.
Oxford Health Plans LLC, 675 F.3d 215 (3rd Cir.
2012).
In short, the Fifth Circuit's decision in Reed appears
to create a circuit split as to how Stolt-Nielsen is to be
applied. The ultimate answer as to when an arbitrator exceeds
its powers by engaging in class arbitration may have to await yet
another decision from the Supreme Court. More broadly,
Reed evidences the difficulty of determining how much
leeway arbitrators have in construing a contract before they
"exceed their powers."
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