February 10, 2016 Practice Points

Third Circuit Vacates Arbitrators' Decision on Availability of Class Arbitration

The parties’ dispute arose after Scout Petroleum purchased Chesapeake Appalachia’s rights under several oil and gas leases in Pennsylvania.

By Matthew Mall

On January 5, 2016, a panel for the United States Court of Appeals for the Third Circuit reaffirmed a recent Third Circuit decision holding that the availability of class arbitration is presumed to be a question for the courts, unless the parties’ arbitration agreement “clearly and unmistakably” provides otherwise. Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, et al., No. 15-1275 (3d Cir. Jan. 5, 2016). The parties’ incorporation of the rules of the American Arbitration Association into their arbitration agreement did not overcome that presumption, notwithstanding that some of those rules delegate class arbitrability questions to the arbitrator.

The parties’ dispute arose after Scout Petroleum purchased Chesapeake Appalachia’s rights under several oil and gas leases in Pennsylvania. The leases contained an arbitration provision, which provided that arbitration would be resolved “in accordance with the rules of the American Arbitration Association.” Scout filed a demand for arbitration with the AAA on behalf of itself and similarly situated lessors, alleging that Chesapeake paid insufficient royalties.

Chesapeake objected to class arbitration and filed a declaratory judgment action in federal court, seeking a declaration that the court—not the arbitrators—must decide the question of class arbitrability. After the arbitration panel ruled that they had the authority to decide class arbitrability, Chesapeake moved in the district court to vacate the panel’s order. The district court vacated the order, holding that the availability of class arbitration was an issue for the court.

On appeal, the Third Circuit panel applied its decision in Opalinski v. Robert Half International, Inc., 761 F.3d 326 (3d Cir. 2014), cert. denied, 135 S. Ct. 1530 (2015), which held that the availability of class arbitration is a “question of arbitrability” to be decided by the courts, unless the parties’ arbitration agreement “clearly and unmistakably” provides otherwise. The panel held that this standard poses an “onerous burden,” which the language of the parties’ agreement and incorporation of the AAA rules failed to satisfy.

The parties’ arbitration agreement did not expressly mention class arbitration or who should decide questions of arbitrability. Although no particular language or “incantation” is necessary to rebut the presumption in favor of judicial resolution, the panel held that total silence on the issue “makes it more difficult to meet such burdens.” Further, the panel found it significant that the parties’ agreement contemplated arbitration of disagreements between the “Lessor” and “Lessee” with respect to “this Lease,” language that indicates that the parties intended bilateral arbitration, not class arbitration. Thus the agreement did not “clearly and unmistakably” delegate class arbitrability to the arbitrators.

The panel next addressed the incorporation of the AAA arbitration rules. Scout emphasized the AAA’s supplemental rules governing class arbitration, which specifically authorize the arbitrator to decide class arbitrability. As the panel noted, however, the parties’ agreement did not refer specifically to the supplemental rules governing class arbitration, but simply to the “rules of the American Arbitration Association.” This was critical to the panel because the AAA website lists more than 50 sets of active rules, and the standard commercial arbitration rules contemplate only bilateral arbitration and do not cross-reference the supplemental rules. Even reaching the supplemental rules, the panel reasoned, required a “daisy-chain” of incorporation that rendered the agreement ambiguous: without express language regarding class arbitrability or referencing the AAA’s supplemental rules, the agreement could reasonably be interpreted any number of ways. This ambiguity could not overcome the presumption for judicial resolution of arbitrability.

Finally, the panel gave “little weight” to the substantial circuit level authority holding that, in bilateral arbitrations, incorporation of the AAA arbitration rules delegates arbitrability to the arbitrators. Relying on Supreme Court rulings highlighting the “fundamental differences” between bilateral and class arbitration, the panel reasoned that the concerns unique to class arbitration rendered the authority in the bilateral context inapplicable.

The panel’s conclusion was driven largely by the Third Circuit’s earlier holding in Opalinski that the availability of class arbitration is a “question of arbitrability,” an issue that is unsettled under recent Supreme Court jurisprudence. Compare Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003) (plurality concluding that class arbitrability is not a question of arbitrability); with Stolt–Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662, 680 (2010) (noting that because “only the plurality” in Bazzle decided that an arbitrator should determine class arbitration, Bazzle is not binding on the point); Oxford Health Plans LLC v. Sutter, ––– U.S. ––––, 133 S. Ct. 2064, 2069 n.2 (2013) (the Court “has not yet decided whether the availability of class arbitration” is for a court or for an arbitrator to resolve). Practitioners should keep an eye out for a definitive resolution of this issue by the Supreme Court, which would significantly how various arbitration agreement provisions, including those incorporating the rules of an arbitral provider, affect who decides class arbitrability questions.

Matthew Mall is a partner with Parker Poe Adams & Bernstein in Raleigh, North Carolina.


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