United States: The Current State Of 'Class Arbitration' Law

Last Updated: June 14 2017
Article by Gilbert Samberg

Law360,  New  York  (June 12,  2017, 12:02 PM EDT)  --  We recently  began a series of articles in which we ask whether "class arbitration" - meaning the utilization of a  Federal Rule of Civil Procedure 23 class action protocol in an arbitration  proceeding  -   is   ultimately  viable,  considering  arbitration's essential  nature,  or is it  an oxymoron?  Here,   we examine  several  elements of the current  law, muddled  as it  is,  regarding  class  arbitration.

Thus far the U.S. Supreme Court has addressed a few issues concerning "class arbitration,"  including (1) the fundamental significance of  the arbitration agreement; (2) the enforceability of  a purported  contractual waiver of class arbitration; and (3) the extent of and criteria for  judicial review of an arbitrator's award concerning the permissibility of class arbitration.

On the other hand, the Supreme Court has not yet focused on the ultimate viability and  enforceability, or the res judicata effects, of  a  class  arbitration  award  (a)  vis-a-vis  a  noncontracting, nonparticipating "class" member, or (b) vis-a-vis a  party  to  an  arbitration  agreement who made no bilateral agreement with such a class member to arbitrate. Thus, the ultimate   viability  of class arbitration has not been addressed  squarely  by  the  Supreme Court.

1.  FAA Neither Authorizes Nor Prohibits Class Arbitration

The Federal Arbitration Act (FAA), 9 U.S.C. §§1, et seq., says nothing about class arbitration. It  does not permit or prohibit such a procedure, nor does any other statute expressly  prohibit  or  create a right to employ  such a  procedure.

2. The  Arbitration Agreement is King

Contracting  parties  are "generally  free  to  structure  their  arbitration agreements  as they  see fit," and to  "specify  with  whom  they  choose  to  arbitrate  their  disputes." Stolt-  Nielsen  S.   v. AnimalFeeds International Corp., 559 U.S. 662, 130 S. Ct. 1758, 1774 (2010). Therefore, "a party  may not be compelled under the FAA to submit to a class arbitration unless there is a contractual  basis for concluding that the party agreed to do so." Id. at 1775. Generally, class arbitration is  effectively prohibited unless (a)  it  is  clearly  and  unmistakably  permitted  by  an  arbitration agreement, or (b) some governing rule of law or decision under which the parties are  arbitrating creates a default rule permitting  it.  Oxford Health Plans  v.  Sutter, 133 S. Ct.   2064,  2066 (2013).

Regarding  the  first  basis,  the  parties' incorporation  by  reference  in  an  arbitration   agreement  of rules that permit class arbitration could suffice. In that regard, there has been  significant litigation concerning the incorporation by reference of the American Arbitration  Association's Supplementary Rules for Class Arbitration  (eff. Oct. 8,  2003)  (SRCA).  Those   rules  provide  procedures  for determining (a) who  will  decide  whether  class  arbitration  is   permitted  (the  arbitrator);  and  (b) whether  the arbitration  agreement  permits  class  arbitration  (incorporation of  the SRCA is not to  be a factor  in that regard, however,  see SRCA  3).

Incorporation  of the SRCA "by  reference" does not require  much,  nor  is  it determinative. The AAA's announced  policy  is that it  will administer  a class arbitration  if  the arbitration   agreement  (a) is  silent  concerning  "class  claims," consolidation  or  joinder  of  claims;   (b)  adopts  any  arbitration rules of the AAA; and (c) does not (expressly or implicitly) exclude  the SRCA. Thus, parties who expressly agree  to  any  of the  sets of arbitration  rules  of  the   AAA, including  its  Commercial Arbitration  Rules,  and are  otherwise  silent  regarding  class  arbitration,  are  deemed  to  have consented to the AAA's SRCA. See, e.g., Reed v. Florida  Metropolitan University, 681 F.3d 630, 635 (5th Circuit 2012), citing 1 Oehmke, Commercial  Arbitration  § 16:16 (April  2012).  However,  that consent and incorporation  does not constitute   an agreement  to  class arbitration,  which is  a matter to be adjudicated  by the arbitrator.  See  SRCA § 3.

As to  the second  basis  (a  governing  rule of law), the Supreme  Court has rejected  the  argument that "federal law  secures  a non-waivable  opportunity  to  vindicate  federal  policies"   by  class arbitration  using  the  procedures  in  Federal  Rule  of  Civil  Procedure  23 or  "some  other  informal class  mechanism  in  arbitration."  American  Express  Co.  v.  Italian  Colors  Restaurant.,  133 S.Ct. 2304, 2310 (2013), citing AT&T Mobility v. Concepcion, 563 U.S.  333, 131 S.Ct. 1740 (2011). Thus, the fact that the parties would be able to litigate via class  action in the absence of an arbitration agreement  is not a basis  to  conclude that they  agreed   to  class arbitration  when they  entered  into an arbitration agreement. See, e.g., Reed v.  Florida  Metropolitan Uniersity.,  681 F.3d 630,  641-43 (5th Cir. 2012). Moreover, "class  arbitration, to the extent it  is manufactured  by  [state  law]  rather than consensual,  is  inconsistent  with the FAA." Concepcion, 131 S.Ct. at 1751-52.

Nevertheless, as a possible example of that second basis (a governing rule of law), the Fair Labor  Standards Act provides that an action to recover unpaid minimum wages or  overtime  may  be  maintained against an employer by any one or more employees "for and on behalf of himself or  themselves and other employees similarly situated." 29 U.S.C. § 216 (2012).  Many  employee­  claimants  arbitrating  FLSA disputes  have contended  on this basis that they have a right to  conduct a class arbitration,  whether  the arbitration clause  in  question  is silent  concerning   class arbitration or even if it prohibits or purports to waive it. The federal circuit courts are  split on this issue, but U.S. Supreme Court appears set to address it during its current term, when it takes up three  consolidated  cases concerning  this matter.

3. Courts Must Enforce Arbitration  Agreements According  to Their Terms

The FAA requires courts to enforce arbitration agreements in accordance with their terms. See,  e.g., 9 U.S.C. § 4. The interpretation of such clauses is typically a matter of state contract law.  See Stolt-Nielsen, 559 U.S. at 681 ("interpretation of an arbitration agreement is generally a  matter of state law"); Greentree Financial Corp. v. Bazzle, 529 U.S. 444 (2003) (where class  arbitration is not clearly prohibited in an arbitration clause, whether it  is permissible  in a  particular arbitral proceeding is a matter of contract interpretation applying state law); 2 Domke  on Commercial Arbitration§ 32:32 (June 2016); see also, FAA§ 2.

That is, however, subject to the condition that state law must treat an arbitration agreement no  differently than any other agreement. See, e.g., Kindred Nursing Centers LP v. Clark, 2017 U.S.  LEXIS 2948 (May 15, 2017).

4.  Silence is Not a Basis For Finding Agreement  to Class Arbitration

One takeaway from Stolt-Nielsen has been that under the FAA, a party may  not be compelled  to  submit to class arbitration unless "there is a contractual  basis for  concluding  that the party   agreed  to do so ... " 559 U.S. at 648-85, and the parties' mere agreement to arbitrate  is not a  basis  upon which to infer that they authorized class arbitration, id. Therefore, silence  in  an  arbitration clause about class arbitration cannot be construed to  indicate  an agreement  to  it.

The U.S. Supreme Court ... held that the differences between bilateral and class-action arbitration  are too great for arbitrators to presume that the parties' mere silence on the issue of  class-action arbitration constitutes a consent to class-action arbitration ...

1 Oehmke, Commercial Arbitration §16: 1; see also, 2 Domke, Commercial Arbitration § 32:32. Put  another way, it is not enough under Stolt-Nielsen that the terms of an arbitration agreement could  support  a finding that the  parties  did not preclude  class arbitration.  E.g., Reed  v.  Florida  Metropolitan  University,  681 F.3d 630,  644 (5th Cir. 2012).

5.  Parties Can Agree to Class Arbitration

A few years after Stolt-Nielsen, the Supreme Court reviewed a similar but crucially distinguishable  situation in Oxford Health Plans v. Sutter, 133 S. Ct. 2064 (2013). As in Stolt-Nielsen, the  parties in Oxford Health had agreed to have an arbitrator decide whether their arbitration  agreement permitted class arbitration notwithstanding that it was silent in that regard. Id. at  2067. In Oxford Health, however, the arbitrator indicated that he was interpreting the arbitration  clause in deciding that class arbitration was indeed permitted. The Supreme Court refrained from  second guessing the arbitrator, in accordance with established jurisprudence concerning such  judicial review, and thus affirmed the confirmation of the award, which determined that the  parties' agreement authorized class arbitration. See, id. at 2071. (Both the Oxford Health and  Stolt-Nielsen decisions could also be said to support the proposition that class arbitration is  permitted if an arbitrator interprets the governing arbitration agreement as allowing it.)

Thus, as evidenced  by the Stolt-Nielsen  and Oxford  Health opinions,  the Supreme  Court has  focused  more  on  maintaining  the  integrity  of  the  analytical  framework  for  judicial   review  of arbitral awards (in the context of a petition to vacate or confirm an award) than on  addressing the question  of  the  fundamental  legal viability  of a class arbitration award.

6.  Class Arbitration Waiver

A class arbitration waiver in an arbitration agreement is generally enforceable under the FAA.  American Express Co. v. Italian Colors Restaurant,  133 S. Ct.  2304,  2312 (2013).

7.  Who Decides if  Class Arbitration is Permitted? It Depends.

The basic rules are as follows. Questions of arbitral procedure  are presumptively  for  an  arbitrator, not for the court to decide. Howsom v. Dean Witter Reynolds Inc., 537 U.S. 79, 84, 123  S. Ct. 588 (2002). On the other hand, "arbitrability" questions - including "certain gateway  matters,  such  as whether parties have a valid arbitration agreement ... or whether  a concededly   binding arbitration clause  applies  to  a certain type of controversy  -   are presumptively  for   the courts" to decide. Oxford Health,  133 S. Ct. at  2068 n. 2.

However, even gateway questions of arbitrability are for the arbitrator,  rather  than for  the  court, where the parties "clearly and unmistakably [so] provide" in their arbitration agreement.  AT&T Technologies Inc. v. Comm'ns Workers of Am., 475 U.S. 643, 649, 106 S. Ct. 1415 (1986). "The  agreement to arbitrate a gateway issue is simply an additional,  antecedent  agreement  the party  seeking arbitration asks the federal court  to enforce,  and the FAA operates  on this  additional  arbitration agreement just as it does  on any other." Rent-A-Center, West Inc.  v.  Jackson,  561  U.S. 63, 130 S. Ct. 2772,  2778 (2010).  Thus, the parties  could agree that the  class arbitration   issue should be decided by an arbitrator, see Oxford Health, 133 S. Ct. at 2070-71,  and that  would  be binding.

Such a "clear and unmistakable" agreement might include, for example,  the effective  adoption of  the AAA's Supplementary  Rules for Class Arbitration,  as previously described.

Furthermore, in at  least the Eleventh Circuit,  the  parties  are  deemed  to  have  clearly  and  unmistakably agreed  that  an arbitrator  should  determine  whether  class  arbitration  is   permitted based merely  on the parties' adoption  of the Commercial  Arbitration  Rules  (CAR)  of   the  AAA without  more. The reasoning is that CAR 8(a)  is a sufficient  basis for  that. Rule 8(a)   provides  that:

The arbitrator shall have the power to rule on his or her own jurisdiction, including  any  objections  with respect  to the existence,  scope or validity of arbitration agreement.

See Terminix International Co. v. Palmer Ranch Ltd. Partnership, 432 F.3d  1327,  1332 (11th  Cir.  2005);  CFL Pizza  LLC v.  Hammack,  2017 U.S. Dist.  LEXIS 14081 at  *8  (M.D.  Fla. Feb.  1,  2017).

The question of whether class arbitration is permitted in effect determines the parties to an  arbitration proceeding - a gateway issue. It is therefore arguable that, in the absence of an  agreement otherwise, the court, rather than an arbitrator, should decide that question of party  arbitrability in the first instance. Howsam v. Dean Witter Reynolds Inc., 537 U.S. 79, 83 (2002);  First Options of Chicago Inc. v. Kaplan, 514 U.S. 938, 943-46 (1995).

That would, however, be contrary  to the  2003 plurality  decision  in  Greentree  Financial  Corp.   v. Bazzle,  529  U.S.  444 (2003),  that  the  permissibility  of  class  arbitration  is  a   procedural (nongateway) issue for the arbitrator. Bazzle, 539 U.S. at  454 (Breyer,  J.  for  a  plurality  of  four justices). Thus in Bazzle, the Supreme  Court vacated  the arbitral  award  in   question  and sent the matter back to the arbitrator to  decide  whether  a "class  arbitration"  had  been  permitted  by  the pertinent arbitration agreement. The dissent in Bazzle (Chief Justice  William Rehnquist, joined by Justices Anthony Kennedy and Sandra Day O'Connor), on the other hand,  considered that threshold question  to  be  for  the court,  rather  than  for  an arbitrator.  Id.   at 455.  (Furthermore,  they  opined that the arbitration clause language was clear enough so that  a court could determine that class arbitration  was not  permitted,  id.  at 458-59.)

Subsequently,  the court  in  Stolt-Nielsen  confirmed  that  Bazzle "did  not yield  a  majority   decision" on this issue. Stolt-Nielsen, 130 S.Ct.  at  1772.  Thus,  it  arguably  remained  open  at  the Supreme Court level, Reed v. Florida Metropolitan University, 681 F.3d 630, 634 (5th Cir.   2012),  whether,  in the absence of agreement by  the parties  regarding  who  should decide,  the  relevant  issue  is a gateway matter for courts to decide or a procedural matter for the arbitrator  to decide. See Stolt­ Nielsen,  559 U.S. at 679; Oxford,  133 S. Ct. at  2068 n.  2; In  re A2P SMS  Antitrust  Litigation, No. 12-CV-2656 (AJN),  2014 U.S. Dist. LEXIS 74062 (S.D.N.Y. May 29, 2014)(analyzing precedent).

After Stolt-Nielsen, lower federal courts split on this issue and then seemed to gravitate toward a  recognition that the determination is one of party arbitrability  -  i.e., whether  a person (for  example, a nonsignatory "class" member) is bound by an arbitration agreement - which is for the  court in the first instance. See, e.g., DiMartino v. Dooley, No. 08 CIV 4606, 2009, at *4, *3  (S.D.N.Y. Jan. 6, 2009); see also, Sarhank Group v. Oracle Corp., 404 F3d 657, 661 (2d Cir. 2005)  ("arbitrability is not arbitrable in the absence of the parties' agreement"). This is consistent  with  the requirement of Section 4 of the FAA (9 U.S.C. § 4) - that is, "[t]he question [of]  whether a person is a party to [an] arbitration agreement ... is included within the statutory  issue of the making of the arbitration agreement." McAllister  Bros. Inc. v. A&s Transportation  Co., 621 F2d 519, 524 (2d Cir. 1980) (citation and internal quotation marks omitted).

8.  Persons Who May Be Compelled  to Arbitrate

A court is not authorized by the FAA to compel arbitration by parties who are not bound by an  arbitration agreement. EEOC v. Waffle House Inc., 534 U.S. 279, 289 (2002); see 9 U.S.C.  § 4. If  parties have not agreed to arbitrate, the courts have no authority to mandate that they do so. Cf.,  United Steel Workers of America  v.  Warrior  & Gulf Navigation Co., 363 U.S.  574, 582 (1960).

Conversely, a person who may have a claim against "X," but who is not party to a relevant  arbitration agreement with "X," generally may not arbitrate that claim, notwithstanding that  another person with a similar claim and an arbitration agreement with "X" may do so. See, Moses H. Cone Memorial  Hospital  v.  Mercury  Construction Corp., 460 U.S. 1, 19-20 (1983).

Persons who are bound by an arbitration agreement are (1) the party-signatories to the agreement  and (2) those deemed bound by it in accordance with contract and/or agency law principles. Among  the legal bases for compelling (or enabling) a nonsignatory of an arbitration agreement to  arbitrate against a signatory are veil piercing, estoppel, incorporation of an arbitration  agreement by reference, assumption, agency, etc. E.g., Thomson-CSF SA v. American Arbitration  Association, 64 F.3d 773, 776-778 (2d Cir. 1995).

9.  Parties Bound By a Class Arbitration Award

The Supreme Court indicated in Concepcion that noncontracting, nonparticipating class members are  not bound by a purported class arbitration award unless they had had notice, an opportunity to opt  out, and adequate representation. Concepcion, 131 S.Ct. at 1751. The Supreme Court subsequently  indicated that class members who have not opted into a class arbitration proceeding are not bound  by a purported class arbitration award. See, Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064,  2072 (2013).

However, the Supreme Court does not appear to have identified precisely when a noncontracting,  nonparticipating class member is bound by a class arbitration award. Nor has the Supreme Court  indicated when a party to an arbitration agreement is bound by an award in favor of (or against) a  noncontracting, nonparticipating class member. Currently, therefore, we cannot infer that a class  arbitration award adjudicates  not just the rights of parties to a bilateral  arbitration  agreement, "but ... the rights of the absent parties as well." Stolt-Nielsen v. AnimalFeeds  International Corp., 559 U.S. 662, 686 (2010).

10.  Vacatur of Award If  Arbitrator's  Powers Exceeded

The FAA provides that a court must confirm an arbitral award "unless the  award  is  vacated,  modified,  or corrected  as prescribed in  Sections  10 and 11 [of  the FAA]." See FAA§  9 (9  U.S.C. §9). One of the specified grounds for vacatur of an award is "where the arbitrators exceeded their  powers."  FAA§ 10(a)(4).

Arbitration is a creature of contract, and the scope of  an arbitrator's  powers  are generally   set by the terms of the arbitration agreement, on which his jurisdiction is founded. The parties'  bilateral agreement  effectively  identifies the parties,   the dispute(s)  and the  procedures  in  the arbitration.

Logically,  if  an arbitrator  goes  beyond  the  authority  given  him  by  the  arbitration   agreement,  he has exceeded his powers. And an arbitration award that reflects that overstepping   may  in principle  be vacated under FAA § 10(a)(4).

Arguably, an arbitrator exceeds his  powers  if  his  award  purports  to  bind  -  i.e., to burden   or benefit,  and to  have a preclusive  effect on - (a)  any  person  who has not agreed to   arbitrate  or (b) a contracting party relative to a person with whom that party is not bound by agreement to  arbitrate.

One might expect, therefore, that "[a]n arbitrator may exceed his powers by ordering class  arbitration without authorization." Sutter v. Oxford Health Plans, 675 F.3d 2125, 220 (3d Cir.  2012), affirmed on other grounds, Oxford Health Plans v. Sutter, 133 S. Ct. 2064 (2013); see, Reed  v. Florida Metropolitan University 681 F.3rd 630 (5th Cir. 2012) (Clause Construction Award under  SCRA). But, as noted earlier, the U.S. Supreme Court has not yet made an analysis in such terms.  Rather, it has focused on the limits of judicial review of an arbitrator's award. For example,  Stolt-Nielsen concerned vacatur of an award where the arbitrators had ordered class arbitration  notwithstanding that there was no evidence that parties had agreed to it. Stolt-Nielsen, 130 S. Ct.  at 1770.

However, the Stolt-Nielsen court did not address the implications of an arbitrator's potential  auto­ expansion of his jurisdiction by issuing  an award that binds  noncontracting persons,  but  rather focused on the mode of analysis by the arbitrator. So did the court  in Oxford  Health.  There,  the Supreme Court determined that the  arbitrator's  decision that the  arbitration   agreement  permitted class arbitration survived the limited judicial review permitted under FAA§  10(a)(4)  because  the question  for  a  judge  on review  is not  whether  the  arbitrator   construed  the  parties' contract correctly, but whether he construed it  at  all. In Oxford   Health,  the  court  determined  that  the arbitrator's method of  analysis  met  that test,  and  therefore  affirmed  the Third  Circuit's  affirmance of the district  court's  refusal  to  vacate   an arbitration  award that authorized  class arbitration.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Gilbert Samberg
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