Reed Smith Client Alert

Authors: Kim M. Watterson

Type: Client Alerts

The United States Court of Appeals for the Sixth Circuit recently held that courts, not arbitrators, decide whether an arbitration agreement permits classwide arbitration, unless the parties clearly and unmistakably agreed otherwise. Reed Elsevier v. Crockett, No. 12-3574, ___ F.3d ___ (6th Cir. Nov. 5, 2013). As the Sixth Circuit noted, the issue of classwide arbitrability can have "momentous consequences" and make the difference between arbitrating "one claim or 1,000 in a single proceeding." And the threshold question—whether arbitrators or courts are presumed to decide classwide arbitrability—is consequential because arbitrators are given wide latitude in their rulings, which are subject only to limited, deferential review under the Federal Arbitration Act, while courts are bound by rules of contract interpretation and their decisions are subject to full appellate review. The United States Supreme Court recently highlighted that it has never decided that threshold question, notwithstanding the apparent belief of many courts and members of the bar that it had been resolved by an earlier Supreme Court case. Reed Elsevier is the first federal appellate court ruling on the question since the Supreme Court signaled that it remained unresolved.

In Reed Elsevier, attorney Craig Crockett alleged that LexisNexis—a division of Reed Elsevier that provides online legal-research services—breached a subscription agreement by charging extra fees without sufficient warning. The subscription agreement contained an arbitration clause, which was silent regarding the availability of classwide arbitration. Because individual bilateral arbitration would be economically unfeasible, Crockett filed his arbitration demand seeking more than $500 million in damages on behalf of two putative classes: law firm subscribers who were charged extra fees, and law firm clients onto whom such fees were passed. In response, LexisNexis sued in federal district court, seeking a declaration that the arbitration clause did not permit classwide arbitration. The district court granted summary judgment for LexisNexis, holding that the arbitration agreement did not permit classwide arbitration, and the Sixth Circuit affirmed.

The Sixth first took up the threshold jurisdictional question, explaining that the Supreme Court recently indicated that it has never decided whether classwide arbitrability is decided by a court or an arbitrator, because it has not decided whether that is a "gateway question" or a "subsidiary question." Gateway questions are so fundamental that it cannot be presumed that parties agreed to arbitrate them; therefore, a court must decide them unless the parties explicitly agree to submit them to arbitration. Gateway questions include questions like "whether the parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy." Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 452 (2003). Subsidiary questions, by contrast, arise out of the underlying dispute itself, which the parties have agreed an arbitrator should decide; therefore, they are presumptively for the arbitrator to decide. Subsidiary questions include procedural questions about "waiver, delay" or "whether a condition precedent to arbitrability has been fulfilled." Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002).

In Bazzle, a plurality of the Supreme Court treated classwide arbitrability as a subsidiary question, presumptively for an arbitrator to decide. Courts and litigants alike read Bazzle as holding that arbitrators must decide the question of classwide arbitrability, absent an express agreement otherwise. But, as the Sixth Circuit noted, the Supreme Court more recently cast that understanding into doubt. In Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., the Court noted that "only the plurality" in Bazzle decided it was a subsidiary question. 559 U.S. 662, 680 (2010). And, last term, in Oxford Health Plans LLC v. Sutter, the Court stated explicitly that it "has not yet decided whether the availability of class arbitration" is a gateway question. 133 S.Ct. 2064, 2068 n.2 (2013). The Supreme Court, however, did not decide the question in that case because it found that the parties had agreed the arbitrator would decide it.

The Sixth Circuit considered these recent developments and held that the question of classwide arbitrability is a gateway question, presumptively for the courts. The court stated that the difference between bilateral and classwide arbitration is "fundamental," noting the Supreme Court statement in Stolt-Nielsen that "it cannot be presumed the parties consented to [classwide arbitration] by simply agreeing to submit their disputes to an arbitrator." It also noted that classwide arbitration could frustrate the parties’ intentions in agreeing to arbitration, as well as raise due process concerns.

Therefore, the Sixth Circuit held that courts must decide the question of classwide arbitrability unless the parties’ agreement clearly and unmistakably authorizes the arbitrator to decide it. It then held that class arbitration could not be ordered in the case before it, because the parties’ arbitration agreement did not expressly provide for it. Finally, the court held the arbitration agreement was not unconscionable, even though the unavailability of classwide arbitration made pursuing claims under the arbitration agreement economically unfeasible, based on the Supreme Court’s recent ruling in American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013).

Given the potential impact of classwide arbitration, the consequences of who decides whether to allow it, and the Supreme Court’s recent decision highlighting the question—and noting that it was an open one—the issue of who decides classwide arbitrability surely will arise in other cases and likely will make its way to the Supreme Court. Parties opposing demands for classwide arbitrations should pay careful attention to the issue of who decides the question and, if they want a court to decide, be sure to present the issue to a court and not to concede that an arbitrator can decide it.

 

Client Alert 2013-297