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April 09, 2019 Top Story

Contract Trumps Presumption That Court Decides Arbitrability

Supreme Court expected to clarify arbitrability questions in class actions

By Peter J. Murphy

In JPay, Inc. v. Kobel, the U.S. Court of Appeals for the Eleventh Circuit joined several other circuits in holding that the availability of class action arbitration is a “question of arbitrability” that is decided by a court, not an arbitrator.

JPay is a company that allows friends and family of prison inmates around the country to purchase various goods and services on inmates’ behalves

JPay is a company that allows friends and family of prison inmates around the country to purchase various goods and services on inmates’ behalves

iStockphoto by Getty Images

The parties’ contract did not specifically mention class arbitration. Nevertheless, the court concluded that the contract’s general terms clearly and unambiguously required that the question be decided by an arbitrator instead of the court. ABA Section of Litigation leaders note that the U.S. Supreme Court is expected to provide further guidance on the availability of class arbitration this term.

Eleventh Circuit Adopts Prevailing View on Arbitrability

The defendants filed individual demands for arbitration with the American Arbitration Association (AAA) against JPay, a company that allows friends and family of prison inmates around the country to purchase various goods and services on inmates’ behalves. The defendants claimed that the company charged “exorbitant transfer fees” for money transfers and used these fees to fund kickbacks to corrections departments. The defendants also sought to represent a class of all individuals who paid such fees.

In response, the company filed a lawsuit seeking to stay class arbitration and compel bilateral arbitration. The defendants filed a motion to compel arbitration on the question of whether class arbitration was available. The U.S. District Court for the Southern District of Florida found that it had the authority to decide arbitrability and further found that the parties’ agreement did not allow class arbitration.

On the initial issue, the Eleventh Circuit stated that courts should presume that merits-related disputes are subject to arbitration unless excluded. This “presumption is reversed” on the question of who should decide arbitrability, however, and courts “should not assume that the parties agreed to arbitrate arbitrability.” Instead, when faced with silence or ambiguity on the question of who should decide arbitrability, courts “should presume that the question remains with the court” unless parties “clearly and unmistakably provide otherwise.”

The Eleventh Circuit noted that taking that approach on this important issue was consistent with Supreme Court opinions from 2010 and 2013, which emphasized that class-based proceedings bring “fundamental changes” to the arbitration process. The Eleventh Circuit further noted that its conclusion is consistent with four circuits that considered the question anew since 2013. Although the U.S. Court of Appeals for the Fifth Circuit concluded differently, the Eleventh Circuit noted that the Fifth Circuit’s holding was based on an earlier, pre-2013 circuit precedent.

Parties’ Contract Provisions Were Key

Upon review of the contract at issue, the court found several factors demonstrated a “clear and unmistakable intent to delegate questions of arbitrability to the arbitrator.” For example, the contract expressed an agreement “to arbitrate any and all such disputes, claims and controversies.” The contract also repeatedly referenced AAA’s rules, which provide that “[t]he 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 the arbitration agreement.” One judge dissented, stating that “a general delegation to arbitrate issues of arbitrability is not enough and that without a specific reference to class arbitration the court should presume that the parties did not intend to delegate to an arbitrator an issue of such great consequence.”

Court’s Decision Receives Conflicting Reviews

“The court reached the correct decision on arbitrability, as arbitrators have an inherent conflict of interest in determining the question of arbitrability,” notes Louis F. Burke, New York, NY, cochair of the Section of Litigation’s Class Actions & Derivative Suits Committee. “Although both the Federal Arbitration Act and AAA give arbitrators the ability to decide arbitrability, it is better practice for a court to decide,” adds Burke.

Section leaders have conflicting views, however, on the court’s decision to send the question back to the arbitrator based on the language in the parties’ contract. “References to AAA’s rules and the wording of the contract, including the use of the term ‘all disputes,’ were enough to meet the standard” for allowing an arbitrator to decide the issue of class arbitrability, says Betsy A. Hellman, New York, NY, cochair of the Section’s Alternative Dispute Resolution Committee. The dissenting judge in the case disagreed, noting that he would require a specific reference to class arbitration in order for a court to find that parties intended to delegate such an important issue to an arbitrator. Burke agrees with the dissent, which “provided a more persuasive view on the interpretation of the parties’ contract.”

Court’s Decision May Have Limited Impact

This dispute on arbitrability may be a “tempest in a teapot,” says Hellman, because moving forward, parties can include language that specifically precludes class arbitrations in their arbitration agreements. The dispute on arbitrability may also be limited by class action cases on the Supreme Court’s 2018–2019 docket, including the Lamps Plus v. Varela case argued in November, says Burke. Like in JPay, the parties’ contract in Lamps Plus was silent on the availability of class action arbitration, and just like in JPay, the U.S. Court of Appeals for the Ninth Circuit inferred mutual assent to class arbitration from general language in the contract. The Supreme Court therefore will decide whether “the FAA forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements.” A ruling in Lamps Plus is expected before June 2019.


Peter J. Murphy is a contributing editor for Litigation News.

Hashtags: #lampsplus, #scotus, #arbitration

Related Resources

  • Manjit S. Gill, “Who Decides Whether an Arbitration Agreement Is Unconscionable?,” ADR Comm. Vol. 14, No. 2 (Winter 2010).
  • American Arbitration Association, Consumer Arbitration Rules (September 2014).

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