Despite the numerous Supreme Court decisions limiting class arbitrations, one central issue remains undecided: who decides whether an arbitration agreement permits class arbitration, the courts or the arbitrators? Entities that want to avoid class arbitration want the question to be decided by the courts, where the appeal process ensures at least one level of review. Leaving the issue in the hands of an arbitrator only opens up the possibility, however remote, that the arbitrator will construe an agreement to permit class arbitration and that the decision may not be effectively reviewable.
The courts that that have addressed the issue are split as to whether it’s a “gateway” question of “arbitrability” for the courts to decide under Howsam (S.Ct. 2002) or a question of interpretation or procedure for arbitrators to decide. The Sixth, Third, and, just this month, Fourth Circuits each have held that whether an arbitration agreement permits class arbitration is a question of “arbitrability” for the courts to decide unless the parties have “clearly and unmistakably” made the issue one for the arbitrators. Other circuits, including the Second and Ninth, have not yet weighed in.
At least one trial level decision in the Second Circuit, In re A2P SMS Antitrust Litig., (S.D.N.Y. 2014) squarely holds that the availability of class arbitration is a “procedural” issue that, under Howsam, is presumptively within the power of arbitrators to decide. In late March, a second district court adopted a magistrate’s decision to the same effect in Rossi (E.D.N.Y. 2016). The defendants in that action have asked the Second Circuit to grant immediate, interlocutory review on the issue, including how it can be consistent with the decision Am. Express Merchants’ Antitrust Litig. (2d Cir. 2009) holding that the enforceability of a class action waiver is a “gateway” question for the courts.
Importantly, even after the Supreme Court’s Stolt-Nielsen (S.Ct. 2010) decision requiring an agreement to permit class arbitration, caselaw also highlights the potential trap of agreements that incorporate AAA, JAMS, or other similar organizational rules. Those rules may be construed to permit class processes and as an agreement to make the interpretation and application of the rules – or of “arbitrability” issues generally – an issue for the arbitrators to decide.
For example, in Flynn, a federal court in Hawaii held that, even if the availability of class arbitration is a question of “arbitrability” under Howsam, the parties had agreed to submit the issue to the arbitrators by incorporating the AAA’s Commercial Arbitration rules, which, in turn, automatically invoke the AAA’s Supplementary Rules for Class Arbitrations whenever a class demand is filed. The district court was unmoved by the defendant’s argument that the form agreement at issue was drafted before the AAA promulgated its Supplementary Rules – underscoring another danger of incorporating by reference rules that may easily change over time and without notice.
All of the above counsels strongly in favor of including express statements that not only disclaim and waive the availability of class arbitration, but make the construction, application, and enforcement of the disclaimers and waivers a question to be resolved solely by the courts, notwithstanding any arbitral rules otherwise incorporated by reference.