Usually the plaintiffs in a class action want to stay out of arbitration, but in the recent case of JPAY v. Kobel, 2018 WL 4472207 (11th Cir. Sept. 19, 2018), it was the class representatives who were fighting for arbitration.  In particular, they wanted the arbitrator to decide whether they could have a class action.  And they won.

In a case that reads as if it is charting significant new ground, even though the court reached almost the same conclusion just a few weeks ago, the Eleventh Circuit clarified a few holdings.  First, the availability of class arbitration is a “gateway issue” that is presumptively for courts to decide.  [To be fair, in the earlier decision, it had assumed that result without actually reaching that holding.]  Second, the availability of class arbitration can be delegated to arbitrators just as easily as other gateway questions.  In other words, the 11th Circuit reaffirmed its opposition to the rule adopted by three other circuits: that the question of class arbitrability takes special delegation language, and incorporating JAMS or AAA rules is not enough.

In this case, the court found that the parties had delegated the question of whether the action could proceed on a class basis in arbitration in two independent ways.  First, they had agreed to arbitrate under AAA rules (the agreement mentions both consumer and commercial rules).  Because the AAA rules authorize arbitrators to determine their own jurisdiction, the 11th Circuit found this was sufficient to authorize the arbitrator to decide whether a class action was available under the language of the parties’ arbitration agreement.  It disagreed that the parties needed to have adopted or referenced the AAA Supplementary Rules for Class Arbitrations.

Second, the parties had included this language in the arbitration clause: “the ability to arbitrate the dispute, claim or controversy shall likewise be determined in the arbitration.”  The court found that was sufficient, even without the incorporation of AAA rules, to take the class arbitrability decision out of the court’s ambit.

The court also took on some of the public policy arguments made in favor of keeping class arbitrability in the courts.  It said “[t]he arbitrator’s decision whether a class is available will be more efficient and more confidential than a court’s would be.  The determination of class availability has the same stakes and involves the same parties whether it is decided in a court or in arbitration.”  And while the arbitrator’s decision is “somewhat less reviewable than a court’s,….it will be no less reviewable than any other decision made in arbitration, and the law generally favors arbitration of many high-stakes questions.”  This is one of the most respectful, positive statements I have seen about arbitration in a court decision in a long time.  Curious though that the court did not address the frequent rebuttal to these arguments: that there could be financial incentive for an arbitrator or administrator to find a class can proceed.

The decision was not unanimous.  The lone dissenter from the panel wrote 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.”

I am taking bets on how quickly SCOTUS grants cert to decide this circuit split.

Today’s post concerns a perennially hot topic: class actions.  In particular, do courts decide whether an arbitration agreement allows for class actions?  Or do arbitrators?  (Because, it turns out, there are actually some corporations who have not inserted class action waivers in their consumer contracts.)  To date, four circuit courts have held that class arbitrability is an issue that is presumably for courts (not arbitrators) to decide, even if the parties incorporate rules that generally delegate issues of arbitrability to an arbitrator (3rd, 4th, 6th, 8th).  In recent weeks, the Tenth Circuit and Eleventh Circuit disagreed.  Because the Second Circuit had also previously disagreed, there is now a 4-3 split among the circuits over whether the incorporation of AAA (or similar) rules is sufficient to authorize an arbitrator to decide whether arbitration can proceed on a class-wide basis.

In Spirit Airlines v. Maizes, 2018 WL 3866335 (11th Cir. Aug. 15, 2018), members of Spirit Airlines’ “$9 Fare Club” started a class arbitration with the AAA.  Spirit then brought an action to federal court, seeking a declaration that the arbitration clause did not authorize class arbitration.  (You may recall that the outcome of the Stolt-Nielsen and Sutter cases is that there can be no class arbitration unless the parties agreed to that process in their arbitration clause, but the language does not have to be explicit.)  The district court found that the arbitrator should determine the issue of whether a class action could proceed in arbitration.

On appeal, the Eleventh Circuit found that no special rules apply to class arbitration.  It assumed that class arbitration is a gateway issue of arbitrability, such that the court has presumptive authority to decide it.  Here, the Spirit agreement called for the AAA rules, which the court found included the Supplementary Rules for Class Arbitration, and those supplementary rules empower an arbitrator to decide whether claimants may proceed as a class action.  The court found that incorporation of AAA rules was clear and unmistakable evidence that the parties intended the arbitrator to decide the availability of a class action in arbitration.  It relied on earlier precedent finding that AAA rules are sufficient to delegate jurisdictional issues to arbitrators, and disagreed that SCOTUS rulings provide for any different outcome in the case of class arbitration.

In Dish Network v. Ray, 2018 WL 3978537 (10th Cir. Aug. 21, 2018), a former employee of Dish Network started a class and collective arbitration with the AAA.  The appointed arbitrator issued a Clause Construction Award, finding that he had authority to decide the issue and that the arbitration agreement permitted a collective action.  The arbitrator’s award included ten pages of analysis interpreting the text of the arbitration agreement to shed light on whether they agreed to allow class/collective actions in arbitration.  The district court denied Dish’s motion to vacate the Clause Construction Award, and the Tenth Circuit affirmed that decision.

On appeal, the court assumed without deciding that the availability of class arbitration is a gateway dispute for court to decide.  Even so, it found that the parties’ selection of AAA rules to govern the arbitration was sufficient to clearly and unmistakably delegate the issue of class arbitration to the arbitrator.  It acknowledged that four circuits had “require[d] more specific language delegating the question of class wide arbitrability,” but noted that the Second Circuit had disagreed with that holding earlier this year.  Following the lead of the Second Circuit, the court relied on precedent from Colorado and the Tenth Circuit finding that incorporation of AAA rules is sufficient to delegate arbitrability to the arbitrator.  Having concluded that the arbitrator had authority to determine whether the parties’ arbitration agreement allowed for class/collective actions, the court had little trouble finding that the arbitrator’s Clause Construction Award could not be vacated.  The court found that the arbitrator “interpreted the parties’ contract, which is all we are allowed to consider” and did not manifestly disregard the law.

The fact that this circuit split is heating up is interesting in light of one of the arbitration cases that SCOTUS will hear on October 29.  That case, Lamps Plus, presents the question of how specific the language of an arbitration agreement must be in order to authorize class arbitration.

_______________________________

A class action postscript.

A putative class of plaintiffs sued Bluestem Brands in federal court in Minnesota for claims related to its credit programs.  In response to a motion to compel arbitration, the district court compelled arbitration of some claims, but denied others, finding they fell outside the scope of the credit agreement’s arbitration clause.  On appeal, the Eighth Circuit found all claims fell within the arbitration clause.  Parm v. Bluestem Brands, 2018 WL 3733424 (8th Cir. Aug. 7, 2018).  After finding the arbitration clause was “broad” (because it used the magic phrase “arise out of”), it found the factual allegations for all claims “touch[ed] matters covered by the arbitration agreement,” because all allegations related to the financing agreements.

And, in further fallout from Epic Systems, roughly 1600 employees of Kelly Services alleged violations of the Fair Labor Standards Act in federal court.  Gaffers v. Kelly Services, 2018 WL 3863422 (6th Cir. Aug. 15, 2018).  Kelly Services compelled individual arbitration with the employees who had arbitration agreements (about half).  As those employees’ only defense was that the Federal Arbitration Act should take a backseat to the FLSA or NLRA, the employees lost on appeal and will have to arbitrate.

Class action arbitration continues to be a hot topic among the federal appellate courts this summer.

The 8th Circuit followed the lead of other circuit courts, finding that courts, not arbitrators, presumptively decide whether the parties’ arbitration agreement allows for class arbitration. Catamaran Corporation v. Towncrest Pharmacy, 2017 WL 3197622 (July 28, 2017).   In support of its decision, the court raised concerns about class arbitration, including loss of confidentiality, due process concerns for absent parties, and a concern about the lack of appellate review.  [Interesting that it didn’t cite any of CFPB’s report on this, but just cited other case law… ] Therefore, unless the parties have “clearly and unmistakably delegated” the class arbitration issue to the arbitrator, a court will decide the issue.  Furthermore, the court said that incorporating the AAA rules is not a clear and unmistakable delegation of the class arbitration decision, even though citing the AAA rules is sufficiently clear in analogous issues in regular “bilateral arbitration.”  The court remanded to the district court to determine whether there was a contractual basis for class arbitration.

Halfway across the country, the 9th Circuit held that employees could bring their claims related to a data breach as a class action in arbitration.  Varela v. Lamps Plus, Inc., 2017 WL 3309944 (Aug. 3, 2017).  The employees had first brought their class claims to federal court, and the employer moved to compel individual arbitration.  The district court found the arbitration agreement was valid, but ambiguous about whether class actions were waived.  Construing that ambiguity against the employer who drafted the agreement, the district court ordered class arbitration.  On appeal, the 9th Circuit affirmed the finding of ambiguity, sending the class to arbitration as a group.  One judge issued a two sentence dissent, noting “we should not allow Varela to enlist us in this palpable evasion of Stolt-Nielsen

The Alabama Supreme Court has followed the Eighth Circuit’s lead, concluding that when the parties agree to arbitrate pursuant to the AAA Rules, they have clearly and unmistakably authorized the arbitrator to determine who is bound by that arbitration agreement.  Federal Ins. Co. v. Reedstrom, __ So. 3d __, 2015 WL 9264282 (Ala. Dec. 18, 2015).

The dispute in Reedstrom centered on whether an executive liability insurance policy covered a judgment against a former executive for misconduct.  The executive sued the insurance company for breach of contract, and the company moved to compel arbitration.  The trial court denied the motion without any rationale.

The Alabama Supreme Court reversed.  On appeal, two key issues were analyzed: whether the insurance company could compel arbitration with the executive, even though he did not sign the insurance policy (his former employer did); and whether the insurance company had waived its right to arbitrate.  The court noted that the default rule is that courts generally decide both those issues, unless the arbitration provision “clearly and unmistakably” delegates them to the arbitrator.  And in this case, the majority found the arbitration provision did exactly that by agreeing to arbitrate pursuant to the current AAA commercial rules, which allow the arbitrator to rule on his or her own jurisdiction.

Three justices dissented from the opinion, generally concluding that incorporating the AAA rules is not enough, by itself, to constitute clear and unmistakable evidence that parties intend to submit arbitrability to an arbitrator.