Ahead of the Class

The Third Circuit began the New Year by ruling that courts, not arbitrators, decide whether an arbitration agreement authorizes class-wide arbitration, even if the agreement invokes American Arbitration Association rules.  Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, — F.3d —, 2016 WL 53860 (3d Cir. Jan. 5, 2016).  Before Chesapeake, federal appellate courts agreed that whether the parties authorized class-wide arbitration is normally a question for district courts, but the Third Circuit became only the second to decide that is true even where the parties adopt AAA rules—some of which delegate to the arbitrator broad power to determine the arbitration’s scope—in their arbitration agreements.  The Sixth Circuit led the way in Reed Elsevier, Inc. v. Crockett, 734 F.3d 594 (6th Cir. 2013), cert. denied, 134 S. Ct. 2291 (2014), and Huffman v. Hilltop Cos., 747 F.3d 391 (6th Cir. 2014), and the Third Circuit followed in Chesapeake.

In First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995), a case not involving class-wide arbitration, the Supreme Court established the general rule that courts—not arbitrators—decide gateway questions of arbitrability such as whether the parties have agreed to arbitrate in the first place or whether their agreement covers a particular controversy, unless there is “clea[r] and unmistakabl[e]” evidence that they delegated those questions to an arbitrator.  Since First Options, two circuits have decided that whether an arbitration agreement permits class-wide arbitration fits into that category of gateway questions of arbitrability that courts must ordinarily decide.  Opalinski v. Robert Half Int’l, Inc., 761 F.3d 326 (3d Cir. 2014), cert. denied, 135 S. Ct. 1530 (2015), and Reed Elsevier.

But does agreeing that a dispute “shall be determined by arbitration in accordance with the Rules of the American Arbitration Association” constitute the clear and unmistakable delegation to the arbitrators needed to enable them to decide if the agreement authorizes class-wide arbitration?  In Chesapeake, Scout Petroleum, which had purchased landowners’ rights to receive royalties under Chesapeake oil and gas leases, thought so and filed an arbitration demand against Chesapeake alleging underpayment on behalf of itself and similarly situated lessors.  The arbitrators, three retired federal judges, agreed and ordered the parties to brief the question of whether the arbitration agreement in the leases authorized class-wide arbitration, so they could decide.  Instead of complying, Chesapeake promptly filed a federal lawsuit seeking a declaration that it had no duty to arbitrate with a class of lessors.  The U.S. District Court for the Middle District of Pennsylvania agreed and entered summary judgment for Chesapeake.  The Third Circuit affirmed.

The Third Circuit took to heart Justice Alito’s warning in his concurrence in Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2071-72 (2013), that “’courts should be wary of concluding that the availability of classwide arbitration is for the arbitrator to decide, as that decision implicates the rights of absent class members without their consent.”  Chesapeake, 2015 WL 53806, at *15 (quoting Opalinski, 761 F.3d at 333).  Moreover, as the Supreme Court noted two years earlier, “the changes brought about by the shift from bilateral arbitration to class-action arbitration are fundamental,” which makes “’arbitration … poorly suited to the higher stakes of class litigation’ and … classwide arbitration ‘is not arbitration as envisioned by the F[ederal] A[rbitration] A[ct].’”  Chesapeake, 2015 WL 53806, at *15 (quoting AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1750, 1751-53 (2011)).

These differences that make class-wide arbitration fundamentally different from bilateral arbitration require more explicit delegation of power to arbitrators to decide whether an arbitration agreement permits class-wide arbitration than to decide other gateway questions of arbitrability.  In other words, not all gateway questions of arbitrability are alike.   AAA Commercial Rule 7 expressly grants arbitrators the power to rule on arbitrability of claims, and six circuits have ruled that invoking the AAA rules constitutes clear and unmistakable evidence that the parties delegated rulings on arbitrability to the arbitrator.  Oracle Am., Inc. v. Myriad Grp. A.G., 724 F.3d 1069, 1074 (9th Cir. 2013); Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 675 (5th Cir. 2012); Fallo v. High-Tech Inst., 559 F.3d 874, 878 (8th Cir. 2009); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1373 (Fed. Cir. 2006); Terminix Int’l Co. v. Palmer Ranch LP, 432 F.3d 1327, 1332 (11th Cir. 2005); Contec Corp. v. Remote Solution Co., 398 F.3d 205, 208 (2d Cir. 2005).  But the Third Circuit had no trouble finding that the clear and unmistakable delegation in Commercial Rule 7 and other AAA rules of most arbitrability questions to the arbitrator does not encompass the question of class-wide arbitration without more specific contractual language.  Chesapeake, 2015 WL 53806, at *15-16.

Arbitration clauses that invoke AAA’s Commercial Arbitration Rules do not have to be rewritten in light of Chesapeake to prevent delegation of the class-wide arbitration question to the arbitrator.  Without more, under Chesapeake and Reed Elsevier, only courts will decide whether the parties agreed to class-wide arbitration.  “The burden of overcoming the presumption is onerous, as it requires express contractual language unambiguously delegating the question of arbitrability to the arbitrator.”  Id. at *6 (quoting Opalinski, 761 F.3d at 335).  But, of course, parties that do not mean to agree to class-wide arbitration should say so explicitly in their arbitration agreements to remove all doubt rather than failing to mention it as in Chesapeake’s leases.  Including an explicit class-action and class-arbitration waiver reduces the likelihood that another party will contend that class-wide arbitration is permitted, and makes it easier for a court to decide the question if raised.