Court of Appeals Addresses Class-wide Arbitration Issue

Our loyal readers know that the decision whether a matter gets sent to arbitration, as opposed to being adjudicated through traditional litigation, can have profound impact, including on timing and costs to the litigants. Even more so, when the case is a proposed class action. A few weeks ago, the Third Circuit weighed in on the issue of the availability of class-wide arbitration, holding that it is generally a question for the court, not an arbitrator, to decide.  See Opalinski v. Robert Half Int'l Inc., No. 12-4444 (3d Cir., July 30, 2014). This week, the petition for rehearing was denied by the panel and the en banc court. See Opalinski v. Robert Half Int'l Inc., No. 12-4444 (3d Cir.) (petition for rehearing denied, 8/27/14).

The plaintiffs brought claims under the Fair Labor Standards Act.  The court noted that the issue was whether a district court, rather than an arbitrator, should decide if an agreement to arbitrate disputes
between the parties to that agreement also authorizes class-wide arbitration. Because of the fundamental differences between class-wide and individual arbitration, and the consequences of proceeding with one rather than the other, the court of appeals concluded that the availability of class-wide arbitration is a substantive “question of arbitrability” to be decided by a court, absent clear agreement otherwise. The only other Circuit Court of Appeals to have squarely resolved the “who decides” issue is the Sixth, which has also held that “whether an arbitration agreement permits
class-wide arbitration is a gateway matter” that is presumptively “for judicial determination.” Reed Elsevier, Inc. v. Crockett, 734 F.3d 594, 599 (6th Cir. 2013).

Plaintiffs had signed employment agreements that contained arbitration provisions. They provided that “[a]ny dispute or claim arising out of or relating to Employee’s employment, termination of employment or any provision of this Agreement” shall be submitted to arbitration. Neither agreement mentioned class-wide arbitration.  Defendant moved to compel arbitration of plaintiffs' claims on an individual basis. The District Court granted the motion in part, thus compelling arbitration but holding that the propriety of individual (also known as bilateral) versus class-wide arbitration was for the arbitrator to decide.

The first part of the analysis was whether the availability of class-wide arbitration is a “question of arbitrability.” See Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002).  If yes, it is presumed that the issue is “for judicial determination unless the parties clearly and unmistakably provide otherwise.” Id.  If the availability of class-wide arbitration is not a “question of arbitrability,” it is presumptively for the arbitrator to resolve. See First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944-45 (1994). “Questions of arbitrability” are limited to a narrow range of gateway issues. They may include, for example, whether the parties are bound by a given arbitration clause or whether an arbitration clause in a concededly binding contract applies to a particular type of controversy. On the other hand, questions that the parties would likely expect the arbitrator to decide are not “questions of arbitrability.”  The Third Circuit has explained that questions of arbitrability generally fall into two categories – (1) when the parties dispute whether they have a valid arbitration agreement at all (whose claims the arbitrator may adjudicate); and (2) when the parties are in dispute as to whether a concededly binding arbitration clause applies to a certain type of
controversy (what types of controversies the arbitrator may decide). Puleo v. Chase Bank USA, N.A., 605 F.3d 172, 178 (3d Cir. 2010).

By seeking class-wide arbitration, plaintiffs contended that their arbitration agreements empower the arbitrator to resolve not only their personal claims but the claims of additional individuals not currently parties to this action. The determination whether defendant must include absent individuals in its arbitrations with named plaintiffs affects whose claims may be arbitrated and is thus a question of arbitrability to be decided by the court. Second, while plaintiffs argued that, because class actions in the context of traditional litigation are a procedural construct, the availability of class-wide arbitration is also a procedural question, the Supreme Court, in Stolt-Nielsen, SA v. Animal Feeds Int'l Corp., had expressly disclaimed class-wide arbitration as simply procedural. 559 U.S. at 687 (the differences between class and individual arbitration cannot be characterized as a question of “merely what ‘procedural mode’ [i]s available to present [a party’s] claims”). The Court stated that class action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.

Moreover, it is presumed that courts must decide questions of arbitrability unless the parties clearly and unmistakably provide otherwise, said the court. The burden of overcoming the presumption is onerous, as it requires express contractual language unambiguously delegating the question of arbitrability to the arbitrator. Here, the plaintiffs' employment agreements provided for arbitration of any dispute or claim arising out of or relating to their employment but are silent as to the availability of class-wide arbitration or whether the question should be submitted to the arbitrator. Nothing else in the agreements or record suggests that the parties agreed to submit questions of arbitrability to the arbitrator.

This case was remanded for the District Court to determine whether appellees’ employment agreements call for class-wide arbitration.

 

 

Court of Appeals Compels Arbitration, Not Class Litigation

The role of alternative dispute resolution mechanisms in alleged consumer product defect cases continues to be a hotly disputed issue.  Plaintiff lawyers prefer the class action device, with its ability to pressure blackmail settlements, while product makers continue to require in product literature that consumers go the quicker and cheaper route of ADR.

The Third Circuit held last week that a putative class of computer customers should arbitrate, not litigate, their product defect claims against Dell Inc., even though the arbitration forum originally named in the computer purchase "terms and conditions" was no longer available. See Raheel Ahmad Khan, et al. v. Dell Inc., No.10-3655 (3d Cir.).

This appeal involved a matter of first impression for this court– whether Section 5 of the Federal Arbitration Act (FAA) required the appointment of a substitute arbitrator when the arbitrator designated by the parties was unavailable.  The district court denied Dell's Motion to Compel Arbitration, based on the belief that the arbitration provision was rendered unenforceable because it provided for the parties to arbitrate exclusively before a forum that was unavailable when plaintiff commenced suit. The district court also refused to appoint a substitute arbitrator, finding that it could not compel the parties to submit to an arbitral forum to which they had not agreed.

Khan purchased a Dell computer through Dell's website; he alleged that his unit suffered from design defects, causing his computer to overheat and thereby destroy the computer's motherboard. Khan allegedly replaced the motherboard multiple times. Eventually, the  warranty expired. In 2009, Khan filed a putative consumer class action on behalf of himself and other similarly situated purchasers and lessees of the allegedly defectively designed computers.

But to complete the purchase, plaintiff had been required to click a box stating “I AGREE to Dell's Terms and Conditions of Sale.” Just beneath was a box requiring "BINDING ARBITRATION ADMINISTERED BY THE NATIONAL ARBITRATION FORUM (NAF)."  However, at the time the lawsuit was filed, the NAF had gotten out of the business of conducting consumer arbitrations pursuant to a Consent Judgment, which resolved litigation brought by the Attorney General of Minnesota.  Although Khan suggested that Dell must have chosen the NAF based on its alleged corporate-friendly disposition, the record did not show that Dell was aware of the practices challenged by the state AG at the time that it selected the NAF as the arbitral forum governing Khan's purchase, or that Dell selected the NAF for any improper reason.

The arbitration provision did not designate a replacement forum in the event that NAF was unavailable for any reason. But, the product Terms and Conditions did incorporate the Federal Arbitration Act.  The court of appeals noted that, because this was a question of arbitrability, it was governed by the FAA. Congress passed the FAA in response to widespread judicial hostility to arbitration agreements. The FAA reflects a liberal federal policy favoring arbitration. The federal courts have regularly noted that questions of arbitrability must be addressed with a healthy regard for this federal policy favoring arbitration.

The particular problem presented in this case – the unavailability of the NAF – was addressed in section 5 of the FAA, which provides a mechanism for substituting an arbitrator when the designated arbitrator is unavailable. In determining the applicability of Section 5 of the FAA when an arbitrator is unavailable, courts have focused on whether the designation of the arbitrator was “integral” to the arbitration provision or was merely an ancillary consideration. Only if the choice of forum is an integral part of the agreement to arbitrate, rather than an ancillary logistical concern, will the failure of the chosen forum preclude arbitration. In other words, a court will decline to appoint a substitute arbitrator, as provided in the FAA, only if the parties' choice of forum is so central to the arbitration agreement that the unavailability of that arbitrator brings the agreement essentially to an end. In this light, said the court, the parties must unambiguously express their intent not to arbitrate their disputes in the event that the designated forum became unavailable.

Plaintiff stressed that the NAF's rules were incorporated into the contract, and that these rules provide that all arbitrations must be conducted by the NAF or an entity having an agreement with it.  The court found this requirement ambiguous as to what should happen in the event that the NAF was unavailable. The NAF's rules provided that they shall be interpreted in a manner consistent with the FAA and that, if any portion of the NAF rules were found to be unenforceable, that portion shall be severed and the remainder of the rules shall continue to apply.  This suggested the possibility of substitutions.

The dissent argued that it was important why the NAF was not available to arbitrate. But, the terms and conditions clearly contained an agreement to resolve disputes through arbitration, rather than through litigation. And the reason the forum was not available was not dispositive.