Who Determines if Class Arbitration is Available? Why it Matters and Will the Supreme Court Decide

SONY DSCIn the wake of several favorable U.S. Supreme Court decisions, companies increasingly are using arbitration agreements to control their exposure to class action liability.  Although recent cases have reinforced the power of arbitration agreements, companies must tread carefully when crafting their arbitration contracts and related class waivers.  In conjunction with giving force to arbitration agreements, the Federal Arbitration Act (“FAA”) limits the federal courts’ ability to review and reverse arbitrator decisions construing those agreements.  The Supreme Court’s Oxford Health decision warned that if companies grant an arbitrator the power to decide whether class arbitration is available, the “arbitrator’s construction holds, however good, bad, or ugly.”  In that case, the defendant company was stuck facing class arbitration based on the arbitrator’s interpretation of the agreement.  The Supreme Court recently was asked to answer the next burning question in the quest to delineate class arbitration jurisprudence:  if the arbitration agreement is silent with respect to the availability of class arbitration, who has the authority to decide if it is available when the parties have not clearly delegated the responsibility to the arbitrator?

The Supreme Court seemingly invited this question in Oxford Health, noting that it had not yet determined whether the availability of class arbitration is a “gateway” question of substantive arbitrability that must be decided by the courts or whether it is the type of procedural question that should rest in the hands of arbitrators.  Earlier this year, however, the High Court denied a request to review the Sixth Circuit’s Reed Elsevier decision, which held that the authority to decide the availability of class arbitration rests with the courts.  At the end of November, the Supreme Court was presented with another opportunity to provide the clarity that lower courts and parties seek.  Plaintiffs filed a petition seeking review of the Third Circuit’s Opalinski decision, which similarly held that courts have the authority to decide the availability of class arbitration. The petitioners argued that stripping arbitrators of the power to decide the availability of class arbitration contradicts the Third Circuit’s own precedent, as well as decisions of the First, Second, Seventh and Eleventh Circuits.  The petitioners did indicate that the other Circuit Court decisions they cite either implicitly held the question is to be decided by arbitrators or they were decided in contexts other than (but similar to) class arbitration.  The Third and Sixth Circuit decisions were based, in part, on the Supreme Court’s recent discussions regarding the fundamental differences between individual and class arbitration.

Whether the High Court passes on the opportunity to clarify this issue again remains to be seen, but the answer is not inconsequential – if the decision is made by an arbitrator, Oxford Health makes clear that there will be little to no room for a court to reverse it if the arbitrator gets it wrong.  Even if the authority ultimately rests with the courts, it is critically important that arbitration agreements use precise language.  Silence on the issue is not a guarantee that class procedures will be prohibited, no matter who makes the decision.  If a company wishes to avoid class actions and class arbitrations, its arbitration clauses should contain class waivers and explicitly preclude class arbitration.  Given the limited opportunity for review of an arbitrator’s decision, companies that already are in the throes of arbitration with an agreement that is silent on the class issue should take caution in deciding whether to agree to allow the arbitrator to decide if class arbitration is permissible.

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