June 01, 2016 Articles

Young Lawyers: Does Adoption of the AAA Rules Grant an Arbitrator the Authority to Decide Whether Class-Wide Arbitration Is Authorized?

By P. Jean Baker

Prior to 2013, most federal appellate courts agreed that whether the parties authorized class-wide arbitration is normally a question for the arbitrator where the parties adopt American Arbitration Association (AAA) rules. Recent decisions by the Sixth and the Third Circuits found that adoption of the AAA rules does not constitute "clear and unmistakable" evidence that the parties delegated to an arbitrator the right to make that determination.

Supreme Court Establishes the "Clear and Unmistakable" Rule
In First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995), the Supreme Court established the general rule that courts—not arbitrators—decide gateway questions unless there is "clear and unmistakable" evidencethat the parties delegated that authority to an arbitrator. The AAA's Commercial Arbitration Rules, effective January 1, 1999, include a provision that delegates to the arbitrator the power to decide issues regarding jurisdiction and arbitrability. The issue before subsequent courts has been whether adoption of a version of the AAA Commercial Rules effective after January 1, 1999, constituted "clear and unmistakable" evidence that the parties agreed that issues of arbitrability and jurisdiction be decided by an arbitrator.

What Constitutes Clear and Unmistakable Evidence?
In a case of first impression, the Second Circuit found that incorporation of AAA rules with a delegation provision constituted "clear and unmistakable" evidence of the parties' intent to arbitrate whether a non-signatory can compel a signatory to arbitrate. Contec Corp. v. Remote Solution Co. LTD, 398 F.3d 205 (2005). That same year the Eleventh Circuit—in a case that cited Contec—held that by incorporating in their agreement the AAA rule that delegates to the arbitrator the power to rule on his or her own jurisdiction, the parties "clearly and unmistakably" agreed that the arbitrator should decide whether the arbitration clause is valid when the clause allegedly contains unenforceable remedial restrictions that are not severable from the remainder. Terminix Int'l Co. LP v. Palmer Ranch Ltd. P'ship, F.3d 1327 (2005).

The third court to address this issue was the Federal Circuit. In Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366 (2006), the question before the court was how to reconcile an agreement to delegate arbitrability decisions to an arbitrator with the language of section 3 of the Federal Arbitration Act, which specifies that a district court must be "satisfied" as to the arbitrability issue before ordering a stay of litigation. The court concluded that in order to be "satisfied" as to the arbitrability of an issue pursuant to section 3 of the act, the district court should first inquire who has the primary power to decide arbitrability under the parties' agreement. If the district court determines that the parties "clearly and unmistakably" intended for an arbitrator to decide arbitrability issues, the court should perform a limited inquiry to determine whether the assertion of arbitrability is "wholly groundless." If the court finds the assertion of arbitrability is not "wholly groundless," the court should stay the trial pending a ruling on arbitrability by an arbitrator. Citing Contec, the court found that incorporation in their agreement of the AAA rule delegating issues of arbitrability and jurisdiction to the arbitrator demonstrated the clear and unmistakable intent of the parties, and the Federal Circuit remanded the matter to the district court to conduct a limited inquiry as to whether the assertion of arbitrability was "wholly groundless."

In Fallo v. High Tech Institute, 559 F.3d 874 (2009), the Eighth Circuit adopted the reasoning of the Second, the Eleventh, and the Federal Circuits. The court held that incorporation of the AAA delegation provision evidenced a clear and unmistakable intent by the parties that the arbitrator should determine whether the arbitration agreement required arbitration of tort claims. In reaching its decision, the court addressed the impact of a choice-of-law provision that as a matter of law required that questions of arbitrability be decided by a court. In reaching its conclusion, the court relied on Preston v. Ferrer, 128 S. Ct. 978 (2008). In that case, the Supreme Court held that an arbitration provision's incorporation of the AAA rules governing arbitration of arbitrability issues supersedes a choice-of-law provision contained in the same agreement.

In Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671 (2012), the Fifth Circuit refused to overturn the decision by the district court to confirm the arbitration award. "We agree with most of our sister circuits that the express adoption of these (AAA) rules presents clear and unmistakable evidence that the parties agree to arbitrate arbitrability." In its decision the court did note that the Tenth Circuit had reached a contrary conclusion. But the case before the Tenth Circuit did not involve AAA rules with a delegation provision.

Contrary Opinion
In Riley Manufacturing Co. v. Anchor Glass Container Corp., 157 F.3d 775 (1998), the Tenth Circuit held that adoption of AAA rules did not constitute a clear and unmistakable intent by the parties to delegate arbitrability to an arbitrator. A key factual difference between this case and the cases discussed above is the fact that the AAA rules in effect prior to January 1, 1999, did not include a provision delegating questions of jurisdiction or arbitrability to an arbitrator.

Joining the Majority
In 2015 the Ninth Circuit joined the majority, holding that adoption of the AAA delegation rule constitutes a clear and unmistakable intent by the parties. Brennan v. Opus Bank, 796 F.3d 1125. The plaintiff in the case argued that his claims should be litigated in court because the arbitration clause was both procedurally and substantively unconscionable. The defendants argued that the question of whether the arbitration clause was unconscionable had to be decided by the arbitrator instead of the court because the clause expressly incorporated the AAA rules, one of which states that the arbitrator has the power to address any objections to jurisdiction with respect to the "validity of the arbitration agreement." Applying the Supreme Court's decision in Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010), the court held that a provision incorporating the AAA rules was a delegation provision severable from the rest of the arbitration clause. Because the plaintiff failed to make any arguments specific to the delegation provision, the issue of unconscionability of the arbitration clause as a whole was an issue to be decided by the arbitrators.

Carving Out Decisions Addressing the Availability of Class-Wide Arbitration
Two circuits have recently decided that whether an arbitration agreement permits class-wide arbitration is a gateway question that district courts must ordinarily decide. In approaching the question of who decides, the Sixth Circuit in decided that the law is clear that an arbitrator may decide whether an agreement provides for class-wide arbitration only if authorized by the parties to do so. Reed Elsevier, Inc. v. Crockett, 734 F.3d 594 (2013), cert. denied, 134 S. Ct. 229 (2014). Less clear is what constitutes "clear and unmistakable" evidence that the parties have authorized an arbitrator to make that determination.

The court approached its analysis by noting there are gateway questions and secondary questions. Gateway questions are fundamental to the manner in which the parties will resolve their dispute. In contrast, secondary questions grow out of the dispute and bear on the details of final disposition. The presumption is that secondary issues, such as waiver, delay, or conditions precedent, shall be resolved by an arbitrator absent clear language to the contrary in the parties' agreement. The presumption is reversed when determining who decides gateway issues.

Because the Supreme Court had not definitively decided whether the availability of class arbitration is a gateway question (Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013)), the court sought guidance from Supreme Court decisions that addressed the fundamental differences between bilateral and class-wide arbitration. First, arbitration's putative benefits, such as lower costs and greater efficiency and speed, are much less certain with class-wide arbitration. Second, confidentiality is far more difficult to achieve. Third, the potential monetary outcome is comparable to high-stakes class action litigation without the safety mechanism of full court review. Four, there are significant due process concerns when an arbitration award affects the rights of absent parties, especially where absent class members have not been required to opt in. The court concluded that whether an arbitration agreement permits class-wide arbitration is a gateway matter, which is reserved for judicial determination unless the parties clearly and unmistakably provide otherwise.

Next, the court turned its attention to the provisions in the arbitration agreement itself. Although the AAA's Commercial Rules were referenced, the parties' agreement provided that "issues of arbitrability be determined in accordance and solely with the federal substantive and procedural laws relating to arbitration." The court concluded that this language did not clearly and unmistakably assign to an arbitrator the question of whether the agreement permits class-wide arbitration. Replying on the Supreme Court's admonition in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662 (2010),that an implicit agreement to authorize class action arbitration should not be inferred solely from the fact of the parties' agreement to arbitrate, the court determined that the parties had not agreed to class-wide arbitration.

In Opalinski v. Robert Half International, Inc., 761 F.3d 326 (2014), cert. denied, 135 S. Ct. 1530 (2015), the Third Circuit agreed with the Sixth Circuit's reasoning in Reed Elsevier that subsequent Supreme Court decisions cast doubt on the plurality decision in Green Tree Financial Corp. v. Bazzle, 539. U.S. 444 (2003), that the availability of class-wide arbitration was not a question of arbitrability. The Supreme Court's post-Bazzle opinions indicate that because of the fundamental differences between class-wide and bilateral arbitration and the consequences of proceeding with one rather than the other, the availability of class-wide arbitration is a substantive gateway question rather than a procedural one. Thus, the Third Circuit joined the Sixth Circuit in concluding that the availability of class arbitration is a question of arbitrability for a court to decide unless the parties unmistakably provide otherwise.

In Chesapeake Appalachia, LLC v. Scout Petroleum LLC, 2016 WL 53860 (Jan. 5, 2016), the Third Circuit began its analysis by noting the court's opinion in Opalinski did not address whether an arbitration agreement referring to the AAA rules clearly and unmistakably delegated the question of class arbitrability to an arbitrator. Noting that while it has split the district courts, only two circuit courts have addressed the impact of the AAA's delegation rule on the question of who decides. Relying in part on the analysis conducted by the Sixth Circuit in Reed Elsevier, the Third Circuit concluded that the language in the parties' agreement could just as easily be read to speak only to issues related to bilateral arbitration. Expanding the scope of analysis to include the nature and contents of the various AAA rules, the court could see no reason to reach a different conclusion—and create a circuit split. While not expressing any opinion as to whether or not the leases at issue permitted class arbitration, the court held that the arbitration provision in the leases did not satisfy the onerous burden of overcoming the presumption in favor of judicial resolution of the question of class arbitrability.

Conclusion
The answer to the question of who decides whether class-wide arbitration is available now depends on the federal circuit providing a response. Adding to the uncertainty, three federal circuits have yet to rule on this issue—the First, the Fourth, and the Seventh. At some point, the Supreme Court will need to determine whether—as observed by the Third Circuit in Chesapeake—the "bilateral arbitration dispute case law" is or is not entitled to relatively little weight in the class arbitrability context.

Keywords: litigation, ADR, arbitrability, clear and unmistakable, class arbitration


Copyright © 2018, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).