The United States Court of Appeals for the Third Circuit, in a precedential opinion, recently held that courts, not arbitrators, must decide whether a class action dispute should be governed by arbitration unless the arbitration clause “clearly and unmistakably” delegates the decision to the arbitrator. The Third Circuit rejected the argument that the incorporation of American Arbitration Association (“AAA”) rules into an arbitration provision required that an arbitrator determine the question of arbitrability.

In 2008, Chesapeake Appalachia, L.L.C. (“Chesapeake”) entered into oil and gas leases (the “Leases”) with defendant Scout Petroleum L.L.C.’s (“Scout”) predecessor. The Leases included the following arbitration provision:

ARBITRATION. In the event of a disagreement between Lessor and Lessee concerning this Lease, performance thereunder, or damages caused by Lessee’s operations, the resolution of all such disputes shall be determined by arbitration in accordance with the rules of the American Arbitration Association. All fees and costs associated with the arbitration shall be borne equally by Lessor and Lessee.

In 2014, Scout filed an arbitration demand against Chesapeake on behalf of itself and similarly situated lessors, alleging that Chesapeake paid insufficient royalties. Chesapeake objected to class arbitration, and filed an action in federal court seeking a declaratory judgment that (1) the District Court—and not the arbitrators—must decide whether class arbitration is available, and (2) the Leases do not permit class arbitration.

The District Court entered an order granting summary judgment to Chesapeake, finding that “[t]he contract here is silent or ambiguous as to class arbitration, far from the ‘clear and unmistakable’ allowance needed for an arbitrator, and not a court, to turn to the clause construction question.” Chesapeake Appalachia, L.L.C. v. Scout Petroleum, L.L.C., 73 F. Supp. 3d 488, 501 (M.D. Pa. 2014). In support of its decision, the district court relied on a recent decision issued by the Third Circuit, Opalinski v. Robert Half International Inc., 761 F.3d 326 (3d Cir. 2014), which held that the availability of class arbitration constitutes a “question of arbitrability” to be decided by the courts unless the parties’ arbitration agreement “clearly and unmistakably” provides otherwise.

In this case, the Third Circuit first noted that the availability of class arbitration implicates two inquiries: “(1) the ‘who decides’ inquiry; and (2) the ‘clause construction’ inquiry.” In the first inquiry, the court must determine whether the availability of class arbitration is a “question of arbitrability.” If it is, then the issue is presumed to be for judicial determination unless the parties clearly and unmistakably provide otherwise. If not, then the availability of class arbitration is presumptively a question for the arbitrator to decide. In the second inquiry, the court or arbitrator will decide whether the arbitration agreement at issue permits class arbitration. In Opalinski, the court held that “[t]he burden of overcoming the presumption [of judicial resolution] is onerous, as it requires express contractual language unambiguously delegating the question of arbitrability to the arbitrator.” 761 F.3d at 329.

Scout argued that the Leases clearly provide that arbitration will be conducted in accordance with the AAA rules, that Pennsylvania law provides that the arbitration clause incorporates all of the AAA rules into the Leases, and that the AAA rules “clearly and unmistakably” vest the arbitrators with the jurisdiction to decide the question of class arbitrability. Specifically, Scout pointed to AAA Supplementary Rules 3 and 4, which provide that an arbitrator must determine whether the arbitration agreement permits class arbitration.

The court first looked to the plain language of the Leases, and noted that the Leases are silent as to the availability of class arbitration, and silent as to whether the question should be submitted to an arbitrator. The court found it significant that the Leases used singular terms to describe the parties to any arbitration and the dispute to be arbitrated, which indicated that bilateral arbitration was contemplated.

In addressing Scout’s incorporation argument, the court examined the various AAA rules and concluded that the Leases fail to satisfy the “onerous burden of undoing the presumption in favor of judicial resolution of the question of class arbitrability.” The court held that the incorporation of the AAA rules was a “daisy chain” that required the court to jump from the Leases, to the AAA rules, to the Commercial Rules – which deal with basic procedural issues arising out of bilateral arbitration proceeding – and finally to the Supplementary Rules, which are not even referred to in the Commercial Rules. Based on this reasoning, the court concluded that the Leases do not include the required “express contractual language unambiguously delegating the question of [class] arbitrability to the arbitrator[s].”

The court acknowledged that virtually every Circuit Court to consider the issue has determined that incorporation of AAA rules constitutes clear and unmistakable evidence that the parties agreed to arbitrate arbitrability. However, the court also noted that each of those cases dealt with bilateral arbitration, thus the cases were entitled to relatively little weight in the class arbitrability context. The Third Circuit affirmed the District Court’s order granting Chesapeake’s motion for summary judgment, but declined to express an opinion on Chesapeake’s second issue on appeal regarding the “clause construction” inquiry.

The case is Chesapeake Appalachia, L.L.C. v. Scout Petroleum, L.L.C., -- F.3d --, 2016 WL 53806 (3d Cir. Jan. 5, 2016). justo.

Client Alert 2016-009