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The Mischief That Arbitrators May Do: Clause Construction Award Enables Class Arbitration

If we needed a reminder of why the “delegation” question – i.e., whether parties have agreed that gateway arbitrability issues should be adjudicated in the first instance by an arbitrator rather than by a court – is important, a recent decision by the Fifth Circuit Court of Appeals should do the trick.  In Sun Coast Resources, Inc. v. Conrad, 2020 U.S. App. LEXIS 12149 (5th Cir. April 16, 2020), an arbitrator had issued a “clause construction award” to the effect that an arbitration agreement that did not mention class or collective arbitration nonetheless permitted it, and the Court held that there was no turning that train around.

Fundamentally, if the question of class arbitrability is delegated to an arbitrator for determination in the first instance, (i) the arbitrator is not, strictly speaking, bound to apply the law as a court might, and (ii) overturning the arbitrator’s order or award in that regard is rather difficult.  Typically, where the Federal Arbitration Act (“FAA”) applies, the principal basis for seeking to vacate such an award is under FAA §10(a)(4) – “where the arbitrators exceeded their powers . . ,” 9 U.S.C. §10(a)(4) – which is difficult enough.  In addition, the courts typically must afford considerable deference to such an order or award (although there is some controversy regarding whether that doctrine should apply with respect to judicial review of gateway arbitrability issues).

It is thus difficult indeed to overturn an arbitrator’s decision that the controlling arbitration agreement permits class arbitration.  Therefore, getting the threshold delegation question resolved correctly, preferably on the basis of a thoughtfully drafted arbitration agreement, is critical.

In Sun Coast, an hourly worker brought a Fair Labor Standards Act overtime claim in arbitration, purportedly on behalf of a class of similarly aggrieved employees.  Notably, neither party reportedly raised the delegation issue during the arbitration; hence, the arbitrator addressed the class arbitrability question in the first instance.  He issued a clause construction award based upon his determination that “the agreement … clearly provides for collective actions.”  See id. at *1-*2.  Sun Coast moved to vacate the award, invoking FAA §10(a)(4); the District Court denied that motion; and the Fifth Circuit Court of Appeals affirmed. 

The Court of Appeals reviewed the District Court’s order confirming the arbitration award de novo “using the same standards employed by the district court.”  Id. at *2.

Delegation

The appellate court first opined that the delegation issue was not a basis for vacatur of the clause construction award under FAA §10(a)(4) because the arbitrator had interpreted the terms of the arbitration clause in question (an interpretation with which the court seemed to agree), and that was all that the arbitrator was required to do.  See id. at *4-*5.  The pertinent arbitration agreement incorporated (1) rules of the American Arbitration Association (“AAA”), which by default included the AAA’s Supplementary Rules for Class Arbitrations, and (2) provided for arbitration of “any controversy or claim arising out of or relating to [the] employment relationship with Sun Coast,” including “any dispute concerning the arbitrability of any such controversy or claim.”  Id. at *5. 

However, first, the incorporation by reference of AAA rules is not uniformly viewed as a “clear and unmistakable” manifestation of an agreement to delegate the class arbitrability issue (or any other such gateway issue).  Indeed, that question is currently making its way to the U.S. Supreme Court.  But the Fifth Circuit relied on its own precedent to the effect that “consenting to the AAA Supplementary Rules ‘constitutes a clear agreement to allow the arbitrator to decide whether the party’s [sic] agreement provides for class arbitration’.”  Id. at *5, citing, e.g., Reed v. Florida Metropolitan University, Inc., 681 F.3d 630, 635-36 (5th Cir. 2012).

Furthermore, the express delegation language in the arbitration clause could have been interpreted to concern only subject matter arbitrability rather than party arbitrability – that is, which actionable grievances are arbitrable between the parties to the operative agreement, not which additional persons, if any, may become parties in the arbitral proceeding.  However, there was no indication that such an argument was ever raised in the arbitration or in the District Court, and the Fifth Circuit did not consider that.

And, in any case, the review by the Court of Appeals regarding whether there was evidence of an agreement to delegate was admittedly dictum because the Fifth Circuit found that Sun Coast had waived the delegation issue as a defense by its conduct in the arbitration and before the District Court.  That is, Sun Coast had not presented the issue to the arbitrator at all and had not presented it to the District Court in a timely manner.  See id. at *5-*10.

Class Arbitrability

As for the arbitrator’s award regarding the class arbitrability issue itself, both the District Court and the Court of Appeals applied a deferential standard of review in connection with Sun Coast’s vacatur application.  Id. at *4-*5.  Thus it was sufficient if the clause construction award evidenced any interpretation of the arbitration agreement in question, even if that interpretation were regarded as poor by a court.  See id. at *2.

“So whatever the merits of the arbitrator’s analysis here, it is enough that he ‘focused on the arbitration clause’s text, analyzing (whether correctly or not makes no difference) the scope of both what it barred from court and what it sent to arbitration.’” 

Id. at *4, citing Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 570 (2013).

The Court indicated that the arbitrator’s analysis of the arbitration agreement in this case had relied upon (1) the breadth of the claims that were subject to arbitration; (2) the availability of “all remedies which might be available in court;” (3) the contra proferentem doctrine (in that Sun Coast, as draftsman, had not expressly excluded class arbitration); and (4) the incorporation by reference of the AAA arbitration rules, which “permit” class proceedings, see AAA Supplementary Rules for Class Arbitration. 

Would a court have found that clear or unmistakable?  For example, “class arbitration” is arguably neither a claim nor a remedy.  The contra proferentem doctrine has already been found by SCOTUS to be insufficient if not irrelevant to the analysis.  And the AAA Supplementary Rules expressly state that “the arbitrator shall not consider the existence of these Supplementary Rules, or any other AAA rules, to be a factor . . . in favor of . . . permitting the arbitration to proceed on a class basis.”  AAA SR.3.

If the class arbitrability question had been presented to a court in the first instance, it would first have evaluated whether the arbitrating parties had “clearly and unmistakably” manifested an agreement to delegate that gateway issue to an arbitrator.  If not, then the court would have adjudicated the class arbitrability question, presumably in accordance with the developing law in that regard.  For example, in a recent decision reviewing a class arbitrability determination by a District Court, see Catamaran Corp. v. Towncrest Pharm., 2020 U.S. App. LEXIS 753 (8th Cir. Jan. 10, 2020), the Eighth Circuit sharpened the pre-existing formulation by SCOTUS in Stolt-Neilsen v. AnimalFeeds Int’l Corp., 559 U.S. 662, 684 (2010) (“[a] party may not be compelled … to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so”) by requiring “an affirmative contractual basis” to conclude that the parties had agreed to permit class arbitration.  That does not appear to be the criterion that the arbitrator used in this case.

(The United States Supreme Court will eventually elucidate the correct analysis in that regard, including whether an express statement permitting class arbitration is required at a minimum.  Reading SCOTUS tea leaves, we note that it has indicated more than once recently that it considers class arbitration to be very different from conventional bilateral arbitration.  Therefore, such a requirement would not be surprising.)

In sum, contracting parties beware.  An arbitration clause in a commercial agreement of any kind deserves attention by someone familiar with the current law regarding its interpretation, especially as it may concern “class arbitration”.

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Author

Gilbert A. Samberg is a Mintz litigator with extensive experience in complex international and domestic commercial disputes. He focuses on international litigation arbitration and other cross-border alternative dispute resolution proceedings, and is a regular commentator on current topics in those areas. He often draws on his science background to assist companies with disputes concerning technical matters.