Law 360

Authors: Kim M. Watterson Richard L. Heppner, Jr.

Type: Articles Published

Law360, New York (December 18, 2013, 8:31 PM ET) -- Whether an arbitration agreement authorizes classwide arbitration can have "momentous consequences" — for instance, making the difference between arbitrating “one claim or 1,000 in a single proceeding.” Reed Elsevier v. Crockett, 734 F.3d 594 (6th Cir. 2013). Equally consequential is who — courts or arbitrators — interprets the parties’ arbitration agreement[1] to determine if it allows classwide arbitration. Arbitrators’ rulings are given great deference under the Federal Arbitration Act ("FAA") and are upheld if they “even arguably” construe the arbitration agreement, while a district court addressing that question must apply established canons of contract construction, and its decision is subject to de novo appellate review.

In Reed Elsevier v. Crockett, 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 that the issue is for the arbitrators — because classwide arbitrability is a fundamental or “gateway” question presumptively for the courts, rather than a procedural or “subsidiary” question presumptively for arbitrators. 

The Sixth Circuit is the first federal appellate court to rule on the issue since the U.S. Supreme Court indicated last term that — despite what some lower courts had concluded — it has never resolved whether classwide arbitrability is a gateway question.[2]  

Origin and Guiding Principles

Ever since a plurality decision of the U.S. Supreme Court said in Green Tree Financial Corporation v. Bazzle that the question of classwide arbitrability was a procedural issue, many courts and practitioners have treated the question as presumptively for arbitrators to decide, making it difficult to obtain judicial consideration of the issue.[3]  

Recently, however, the Supreme Court cast doubt upon that understanding. In Stolt-Nielsen SA v. AnimalFeeds Int’l Corp., the court noted that “only the plurality” in Bazzle treated classwide arbitrability as presumptively for the arbitrators.[4] And last term, in Oxford Health Plans v. Sutter, the court stated explicitly that it “has not yet decided whether the availability of class arbitration” is a gateway question for the courts.[5] Still, the Supreme Court left the question unanswered, because it found that the parties in Oxford had expressly agreed that the arbitrator would decide the classwide arbitrability issue. 

Although the Supreme Court has not ruled on whether classwide arbitrability is a gateway question or a subsidiary question, core principles embodied in its FAA precedents should guide the analysis. First and foremost, questions arising out of arbitration agreements are controlled by the oft-repeated “overarching principle that arbitration is a matter of contract” and the settled rule that arbitration agreements must be rigorously enforced according to their terms.[6] Therefore, if the parties’ agreement establishes that a particular question is for the arbitrators, then the arbitrators decide it. 

For cases when an arbitration agreement is silent on whether a particular question is for the arbitrators, the court has established presumptions regarding arbitrability, depending on the nature of the question. “Gateway” questions — namely, those that are so fundamental that it cannot be presumed that parties agreed to arbitrate — should be decided by a court 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.”[7] 

By contrast, “subsidiary questions” — namely, those that arise out of the underlying dispute itself, which the parties have agreed to submit to arbitration — are presumptively for the arbitrators to decide. Subsidiary questions include procedural questions relating to “waiver, delay” or “whether a condition precedent to arbitrability has been fulfilled.”[8]  

Against this backdrop, the Sixth Circuit considered the question of who decides classwide arbitrability in Reed Elsevier. 

Reed Elsevier v. Crockett 

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 him extra fees without sufficient warning. The subscription agreement contained an arbitration clause that said nothing about classwide arbitration. 

Crockett filed an arbitration demand seeking more than $500 million in damages on behalf of two putative classes: law firm subscribers who were allegedly charged extra fees, and law firm clients onto whom such fees were passed. In response, LexisNexis went to federal district court and sought a declaration that the arbitration clause did not permit classwide arbitration. The district court granted summary judgment for LexisNexis, holding that it could decide the question of classwide arbitrability and that the arbitration agreement did not permit classwide arbitration. The Sixth Circuit affirmed.  

The Sixth Circuit first determined that it was free to address the threshold jurisdictional question in light of the Supreme Court’s recent indication that it has not decided whether classwide arbitrability is a gateway or subsidiary question. In considering who presumptively decides classwide arbitrability, the court grounded its analysis in the established principle that arbitrators “derive their authority to resolve disputes only because the parties have agreed in advance to submit such grievances to arbitration.”[9] Because arbitrations are solely creatures of contract, the threshold question of who decides whether classwide arbitration is permitted must be resolved by looking to the parties’ agreement. If the agreement speaks to the issue, then what it says on the issue controls. But, as the court recognized, if the agreement is silent on “who decides,” then the answer turns on whether classwide arbitrability is a gateway question or a subsidiary question. 

To resolve the jurisdictional question, the Sixth Circuit looked to the Supreme Court’s explication of the characteristics of gateway questions, on the one hand, and subsidiary questions, on the other. Based on that examination, the court held that classwide arbitrability is a gateway question, presumptively for the courts. The court explained, the difference between bilateral and classwide arbitration is too “fundamental” to presume that the parties agreed to have the arbitrators decide whether classwide arbitration was allowed, 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.”[10] 

More specifically, classwide arbitrability is a gateway question because it implicates the parties’ fundamental intentions and expectations — regarding, for example, cost, efficiency and confidentiality — when they agreed to arbitration.[11] 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. 

Having disposed of the fundamental jurisdictional question, the Sixth Circuit went on to address three questions relating to the parties’ arbitration agreement itself. 

First, it looked to see whether the arbitration agreement clearly and unmistakably authorized the arbitrator to decide classwide arbitrability and found that it did not. The court rejected the argument that the agreement’s general provision that an arbitrator should resolve “any controversy … arising out of or in connection with” the subscription agreement authorized the arbitrator to decide classwide arbitrability.[12] Instead, the court found that the agreement was “at best … silent or ambiguous” on the issue, which “is not enough to wrest the decision from the courts.”[13] 

Second, the court turned to the question of whether the agreement authorized classwide arbitration. The court held that it did not because it did not even mention classwide arbitration.[14] The court was unswayed by the arbitration agreement’s reference to the AAA’s commercial rules — which include the AAA’s supplemental rules for class arbitration — because the rules themselves provide that they should not be a factor in deciding whether to allow class arbitration. 

Third, and finally, the court held the arbitration agreement was not unconscionable, even if the unavailability of classwide arbitration made pursuing claims economically unfeasible, based on the Supreme Court’s recent ruling in American Express v. Italian Colors Restaurant, 133 S.Ct. 2304 (holding that the FAA does not permit courts to invalidate a contractual waiver of class arbitration on the ground that individual arbitration is economically unfeasible).[15]  

Future Guidance 

Classwide arbitrability is not a question parties should lightly submit to an arbitrator, considering the high stakes of classwide arbitration and the highly deferential standard of review given to even legally incorrect arbitral decisions. As Oxford Health Plans illustrates, this deference extends not only to the final award, but also to the arbitrators’ decision on class arbitrability.[16] Reed Elsevier and its analysis and application of the Supreme Court’s FAA principles provide guidance for practitioners seeking judicial consideration of the classwide arbitrability question, both in the Sixth Circuit and elsewhere. 

Importantly, Reed Elsevier reinforces the core principle that arbitration is a creature of contract and that arbitrators derive their authority from the parties’ agreement. The jurisdictional holding in Reed Elsevier concerns the default presumption that applies when the parties have not agreed who decides classwide arbitrability. Parties can always agree contractually who decides the question of classwide arbitrability. Until the Supreme Court holds explicitly, as the Sixth Circuit did, that the court must decide when the agreement is silent regarding who decides, parties drafting arbitration agreements should include an explicit provision reserving the classwide arbitrability question for the court. Even though arbitration agreements may explicitly bar classwide arbitration,[17] such provisions are still subject to challenge. It is advisable to establish expressly that such challenges will be left to the court, given the wide latitude and deference enjoyed by arbitrators.

The procedural history of Reed Elsevier also provides practical lessons for practitioners facing arbitration based on an arbitration agreement that is silent regarding who decides classwide arbitrability. Parties must take care not to inadvertently acquiesce to an arbitrator deciding classwide arbitrability by proceeding with the question in arbitration. Even when an arbitration agreement is silent on the issue, parties can be deemed to have agreed to arbitrate the question, if they submit it to the arbitrator.[18]  

In Reed Elsevier, LexisNexis avoided that fate by immediately filing suit in federal district court seeking a declaration that classwide arbitration was not authorized, instead of merely responding in the arbitration itself and then trying to vacate the arbitral decision after it had been made. Practitioners should consider seeking relief directly from a court as soon as they are faced with an issue that they believe is outside the arbitrator’s power to decide. And, if compelled to argue such an issue in an ongoing arbitration, practitioners should establish on the record that they do not believe the agreement gives the arbitrator jurisdiction to decide the question and that they reserve the right to submit the question to the court. 

As the Sixth Circuit noted, although “the Supreme Court’s puzzle of cases on [the] issue [of who decides classwide arbitrability] is not yet complete, the Court has sorted the border pieces and filled in much of the background.”[19] The Supreme Court recently heard argument in BG Group PLC v. Republic of Argentina, No. 12-138, which raises the related question of who decides a condition precedent to an arbitration agreement. Either there or in a subsequent case, the Supreme Court likely will soon fill in more of the puzzle pieces. In the meantime, Reed Elsevier provides a thoughtful prediction of what the final picture will look like, and the Sixth Circuit’s clear analysis of the Supreme Court’s precedents can guide parties seeking to obtain judicial determination of the crucial classwide arbitrability question. 

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Oxford Health Plans LLC v. Sutter, 133 S.Ct. 2064, 2066 (2013).
[2] See id.. at 2068 n.2.
[3] Green Tree Financial Corporation v. Bazzle, 539 U.S. 444, 452 (2003); see Vilches v. Travelers Cos., 413 Fed. Appx. 487, 492 (3d Cir. Feb. 9, 2011) (“[W]e must ... refer the questions of whether class arbitration was agreed upon to the arbitrator.”).
[4] 559 U.S. 662, 680 (2010).
[5] 133 S.Ct. at 2068 n.2.
[6] Am. Exp. Co. v. Italian Colors Rest., 133 S.Ct. 2304, 2309 (2013).
[7] Bazzle, 539 U.S. at 452.
[8] Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002).
[9] 734 F.3d at 597 (quoting AT&T Techs., Inc. v. Commc’n Workers of Am., 475 U.S. 643, 648-49 (1986)).
[10] 734 F.3d at 598 (alteration by Sixth Circuit).
[11] Id.
[12] Id. at 599.
[13] Id.
[14] Id.; see also Stolt-Nielson, 559 U.S. at 684-85 (classwide arbitration will be ordered only where the arbitration agreement expressly authorizes it).
[15] Id. at 600.
[16] 133 S.Ct. at 2066.
[17] See AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011).
[18] See Oxford Health Plans 133 S.Ct. at 2070; S. Commc’ns Servs v. Thomas, 720 F.3d 1352 (11th Cir. 2013) (declining to vacate arbitrator’s decision on classwide arbitrability question, which parties had submitted to arbitration).
[19] 734 F.3d at 598-99.

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