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 (5^th 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 (3^rd 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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