Class Arbitration: Who Decides, The Arbitrator or the Court?

New York Law Journal 

The preemptive effect of valid arbitration agreements to preclude lawsuits in court, even class actions via arbitration clause class action waivers, has been reinforced by the U.S. Supreme Court time and again in recent years. My column “Arbitration Clause Class Waivers Upheld Again” (N.Y.L.J., Feb. 17, 2016) discussed salient case law. For a more copious legal study, see M. Hoenig and L. Brown, “Arbitration and Class Action Waivers Under Concepcion: Reason and Reasonableness Deflect Strident Attacks,” 68 Ark. L. Rev. 669 (December 2015). Indeed, just on May 15, The Supreme Court issued its decision in Kindred Nursing Centers L.P. v. Clark, 2017 U.S. LEXIS 2948, ruling that a nursing home’s arbitration agreement had to be enforced as preempting tort claims for injuries filed in Kentucky courts.

The spearhead high court decision holding that valid arbitration clauses preemptively trump lawsuits—even class actions where the arbitration clause contains a class action waiver—is AT&T Mobility v. Concepcion, 563 U.S. 333 (2011). In December 2015, the court’s decision in DIRECTV v. Imburgia, 136 S. Ct. 463, again upheld a class arbitration waiver clause in a consumer service agreement. The court observed that, while lower court judges can note their disagreement with Concepcion, “[n]o one denies that lower courts must follow” Concepcion. The Federal Arbitration Act “is a law of the United States and Concepcion is an authoritative interpretation of that Act. Consequently, the judges of every State must follow it.” DIRECTV, 2015 U.S. LEXIS 7999, at *9—*10.

But, what if there is an arbitration clause in the contract and the provision is silent about class arbitration? In other words, there is no class arbitration waiver provision, but there is an agreement to arbitrate disputes. And, let’s say that the arbitrator selected favors expanding the proceeding into a class arbitration. Does silence about class arbitration in the arbitration provision make it an issue the arbitrator can decide or is viability of class arbitration, rather, an issue for a court to decide? That question was decided by the Eighth Circuit on July 28 as an issue of first impression in that circuit.

Arbitration Provisions

The case is called Catamaran v. Towncrest Pharmacy, 2017 U.S. App. LEXIS 13689 (8th Cir. July 28, 2017). Catamaran was a pharmacy benefit manager and, among other things, reimbursed pharmacies who furnished prescription drugs to individuals covered by drug benefit plans. The defendants were four pharmacies who had agreements with Catamaran for reimbursements. The agreements were brokered by a pharmacy services organization comprised of some 85 independent pharmacies. The agreements contained similar arbitration provisions.

The salient language was as follows: If “any disputes arising during the term of this Agreement” cannot be resolved informally, then “either party may submit the dispute to binding arbitration in accordance with the Rues for the Conduct of Arbitration of the American Arbitration Association (AAA) … in effect at the date of commencement of such arbitration.” The agreements did not use the word “class” or refer to “class arbitration.” The AAA Supplementary Rules for Class Arbitration permit class arbitration and seemingly give arbitrators the power to decide whether an agreement contemplates class arbitration.

A dispute arose thereafter between Catamaran and the four pharmacies. The latter filed a demand for class arbitration with the AAA, asserting claims on their behalf and the similarly situated independent pharmacies—a class of over 85 pharmacies. Catamaran responded by filing a declaratory judgment action under the Federal Arbitration Act in federal district court and, as well, sought to enjoin the pharmacies from proceeding with class arbitration. It also moved for summary judgment arguing that the agreements do not permit the pharmacies to proceed to arbitration as a class. Catamaran contended that each pharmacy must proceed in bilateral arbitration proceedings.

The district court denied the motion for summary judgment. It viewed the issue as twofold: (1) Was availability of class arbitration a “substantive” or a “procedural” question; and (2) Did the agreements “clearly and unmistakably commit the class arbitration issue to an arbitrator”? The district court did not answer the first since the Eighth Circuit had not yet answered that question. Instead, the court answered “yes” to the second question because its analysis of “bilateral arbitration” case law indicated that the agreements’ reference to the AAA rules was a clear commitment for an arbitrator to decide whether class arbitration was contemplated.

Court Issue

The Eighth Circuit reversed the denial of summary judgment, holding that “a court must decide the question because of the fundamental differences between bilateral and class arbitration.” Since arbitration is “a process of consent and not coercion” and a party “cannot be required to submit to arbitration any dispute which he has not agreed so to submit,” then courts must play a threshold role to determine whether the parties have submitted a particular dispute to arbitration. These “threshold” or “gateway” issues are called “substantive questions of arbitrability.” Courts presume that substantive questions are for judicial determination unless the parties clearly and unmistakably provide otherwise. Interpreting silence or ambiguity in an agreement are “important questions” for the court rather than the arbitrator. Catamaran, LEXIS at *5-*6.

The question of class arbitration was deemed “substantive” because recent cases “have strongly hinted at the Supreme Court’s ultimate conclusion.” The court has given “every indication, short of an outright holding, that class wide arbitrability is a gateway question rather than a subsidiary one.” Indeed, there are fundamental differences between bilateral and class arbitration. For example the benefits of arbitration are substantially lessened in a class arbitration proceeding. Benefits such as private dispute resolution, lower costs, greater efficiency and speed, and informality are compromised by class arbitration, which requires the kind of procedural formality seen in class action litigation. Also, confidentiality is lost or becomes more difficult. Class arbitration brings the “bet-the-company-stakes” of class action litigation without the “safety net of multi-layered judicial review.” Thus, arbitration is “poorly suited” to the higher stakes of class litigation. Catamaran, LEXIS at *8-*10.

The agreements here did not mention class arbitration. “There is complete silence. And silence is insufficient grounds for delegating the issues to an arbitrator.” Case precedents relying on acceptance of AAA rules as implying an agreement that threshold issues are for the arbitrator, dealt with bilateral arbitrations. They are inapposite when it comes to the question of class arbitration. Since the latter issue is for the courts to decide, the matter was remanded to the district court to determine whether a “contractual basis” for class arbitration exists in the agreements.

The Eighth Circuit has joined the majority of appellate courts (including the Third, Fourth and Sixth Circuits) in holding that the question of class arbitration “is for a court, not an arbitrator to decide, unless the agreement expressly delegates that issue to the arbitrator.” C.E. Harris, II, K.S. Ranlett & A.A. Parasharami [of Mayer Brown], “Eighth Circuit: Courts, Not Arbitrators, Decide If Arbitration Agreement Permits Class Arbitration,” Lexology, Aug. 1, 2017. The latter authors astutely observe that the AAA Supplementary Rules “in fact, expressly disclaim any intent to give arbitrators sole jurisdiction to decide whether a particular arbitration agreement permits class arbitration.” And, while Supplementary Rule 3 authorizes arbitrators to decide “as a threshold matter” whether an agreement permits class arbitration, it is subject to immediate review by any “court of competent jurisdiction.” Supplementary Rule 1(c) “makes clear that arbitrators do not have the sole right to decide this issue.” Instead, Rule 1(c) “mandates that arbitrators follow the order of the court when a court addresses the issue.”

Practical Lessons

Here, briefly, are some practical lessons gleaned from the slew of case decisions wrestling with class action waivers and class arbitrability.

• Since many arbitration clauses do not mention class proceedings at all, it is important for companies and businesses to review their arbitration agreements and revise them, if necessary, to incorporate explicitly the unavailability of class arbitration and to include “class action waiver” provisions which the Supreme Court upheld in Concepcion in 2011 and thereafter.
• Reviewing and revising agreements to make explicit that class arbitration is foreclosed and not intended, and including class action waivers are good practices for future controversies. This course should be considered for contracts that renew year to year. But what about “silent” arbitration clauses already out there? Well, do not agree or stipulate that the question of class arbitration is left for the arbitrator to decide. Once a dispute arises a key step would be to challenge the authority of the arbitrator to decide the class arbitration question at the outset. Pose the issue as one of “arbitrability,” one of those “gateway” issues which are, presumptively, for courts to decide. Objections to class arbitration—indeed, asking a court not to send that question to an arbitrator—should be raised very early on, certainly well before an arbitrator gets to decide the issue.
• Arbitration clauses containing class action waivers should be somewhat “consumer-friendly” so that charges of “unconscionability” of such provisions, now frequently asserted, can be defended. Concepcion involved a “consumer-friendly” arbitration/class waiver agreement. A demonstrably “generous” provision would support clear language requiring individual arbitration only and leaving interpretation and enforcement of a class action waiver to the court.
• There is some difficulty in appealing the arbitrator’s decision even if he was wrong and even if the court disagrees with him. Thus, a decision to arbitrate must be made wisely, balancing utility and risks. Choosing arbitrators or arbitral panels or organizations known for fairness and adherence to established law is also necessary. For all its advantages, and there are many, sometimes, arbitration may be an inferior choice or a poor fit for a particular type of dispute, especially if appellate proceedings are foreseeable in order to clarify, change or distinguish existing law.