Silence Is Not Always Golden: Who Decides Between Individual and Class Arbitration?

After the landmark decision in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), businesses with arbitration clauses in their consumer and employment agreements breathed a sigh of relief. There was finally some protection against the legalized extortion racket that we know as class actions. But Concepcion involved an arbitration clause that expressly precluded the arbitrator from hearing class claims. Where an arbitration clause is silent on the class issue and the arbitrator is deemed to be able to hear class claims, a business may face the worst of both worlds—exposure to potentially net-worth killing class claims and virtually no right to appeal from an adverse ruling by the arbitrator. In the face of a silent arbitration clause, the first question becomes: Who is charged with deciding whether class claims are arbitrable—the court or the arbitrator?

Two recent California Court of Appeal decisions have determined that the issue of arbitrability of class claims is normally for the trial court to decide and not the arbitrator, unless the arbitration clause expressly states to the contrary. Garden Fresh Restaurant Corp. v. Super. Ct., 231 Cal. App. 4th 678, 687 (2014) (“‘classwide arbitrability is a gateway question rather than a subsidiary one’”) (quoting Reed Elsevier, Inc. v. Crockett, 734 F.3d 594, 598 (6th Cir. 2013)); Network Capital Funding Corp. v. Papke, 178 Cal. Rptr. 3d 658, 669 (2014) (“Allowing an arbitrator to decide this issue threatens the consensual nature of arbitration”), rev. granted 2015 WL 177333 (Cal. Jan. 14, 2015). Both decisions emphasize that an agreement to the contrary must be clear and unmistakable, a difficult standard for any plaintiff to overcome. And, more important, that proof must likewise be submitted to the trial court, not the arbitrator. These decisions prevent an arbitrator from bootstrapping his or her power to entertain class claims.

Unfortunately, not all courts have come to the same conclusion. The confusion emanates from a pre-Concepcion plurality opinion by the U.S. Supreme Court that attempted to address the antecedent question of whether the issue of whether an arbitrator could hear class claims was one of arbitrability or procedure. The four-justice plurality ruled it was a procedural issue for the arbitrator. Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 452-53 (2003). Two subsequent Supreme Court decisions noted that because Bazzle was a plurality opinion, the issue remains unresolved. Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2068 n.2 (2013); Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662, 683 (2010). This has left the door open for lower courts to decide whether to follow the Bazzle plurality or not. The result has been a split at both the federal and state levels, although the weight of authority—including Garden Fresh Restaurant and Network Capital Funding—disagrees with Bazzle.

The two federal circuits that confronted the issue have both rejected the Bazzle reasoning and held that the arbitrability of class claims is for the courts to decide. Opalinski v. Robert Half Intern., Inc., 761 F.3d 326 (3rd Cir. 2014); Huffman v. Hilltop Companies, LLC, 747 F.3d 391 (6th Cir. 2014); Crocket, 734 F.3d at 598-99. On the other hand, several district courts in other circuits have followed the Bazzle formulation, some without analysis and others citing subsequently overruled authority from the Third Circuit. See, e.g., Lee v. JPMorgan Chase & Co., 982 F. Supp. 2d 1109, 1113-14 (C.D. Cal. 2013) (relying on the unpublished decision in Vilches v. The Travelers Companies, Inc., 413 Fed. Appx. 487 (3rd Cir. 2011), which was effectively overruled by the published decision in Opalinski).

There is also a split in authority in California. Prior to Garden Fresh Restaurant and Network Capital Funding, another panel of the California Court of Appeal decided Sandquist v. Lebo Automotive, Inc., 228 Cal. App. 4th 65 (2014), rev. granted 180 Cal. Rptr. 3d 1 (2014), holding that in the face of a silent arbitration agreement, whether to entertain a class arbitration was a procedural issue for the arbitrator. Sandquist noted the split in the various lower level federal courts and chose to follow the Bazzle plurality as persuasive, although not binding authority. By contrast, Network Capital Funding found Bazzle unpersuasive, in light of the U.S. Supreme Court’s subsequent decisions in Concepcion and Stolt-Nielsen which described the drastic differences between individual and class arbitrations, and accordingly declined to follow Sandquist. Garden Fresh did not discuss Sandquist because the California Supreme Court had previously granted review, as it now has in Network Capital Funding pending the decision in Sandquist, resulting in the depublication of the intermediate appellate court’s opinions.

The primary flaw with the Bazzle plurality is that it treats the issue of whether an arbitrator can hear a class claim as purely a “procedural” matter. Network Capital Funding, 178 Cal. Rptr. 3d at 665-66. As Network Capital Funding points out: “Whether the parties’ arbitration agreement authorizes class arbitration does not pose a procedural question … because it does not grow out of the parties’ underlying dispute and does not bear on the final disposition of their claims. Here, the Class Arbitration Question arises out of an ambiguity in the Arbitration Agreement … [Plaintiff] is entitled to continue pursuing those claims regardless of how the Class Arbitration Question is resolved.” Id. at 666. Examples of procedural issues that arise out of a given claim include whether conditions to the arbitration agreement established by the parties have been met, whether one of the defendants has waived the right to enforce the arbitration agreement by pursuing a court action and whether a statute of limitation bars the plaintiff’s claim. By contrast, whether an arbitrator can hear a class claim goes to the heart of the arbitration agreement itself and is an issue that the court must resolve, absent a contrary direction from the parties.

This view is reinforced by the U.S. Supreme Court’s subsequent Stolt-Nielsen and Concepcion decisions. “In Stolt-Nielsen, the Supreme Court explained the shift from individual to class arbitration is not simply a matter of ‘what “procedural mode” [i]s available to present [a party’s] claims’ because that shift fundamentally changes the nature of the arbitration and significantly expands its scope.” Network Capital Funding, 178 Cal. Rptr. 3d at 666. Similarly, in Concepcion, “the Court concluded the shift from individual to class arbitration so fundamentally changes the nature and scope of arbitration that any state law or policy requiring class arbitration without an explicit agreement is inconsistent with the consensual nature of arbitration, and therefore the FAA preempts the state law or policy.” Id. The differences between individual and class arbitration include the joinder of potentially hundreds or thousands of claimants before one arbitrator, the introduction into the arbitration of formal procedures governing class certification, the creation of vast exposure for the defendant with virtually no appellate review, and loss of privacy/confidentiality contained in many arbitration agreements.

Network Capital Funding expressly, and we believe correctly, rejected the reasoning of the Bazzle plurality. “We are not persuaded by this rationale because the Class Arbitration Question determines whose claims the parties agreed to arbitrate and thereby fundamentally affects the scope of the parties’ arbitration.” 178 Cal. Rptr. 3d at 667. This approach is also consistent with the normal expectations of the parties to an arbitration agreement. “[C]ontracting parties would likely and reasonably expect a court to decide the question . . . Allowing an arbitrator to decide this issue threatens the consensual nature of arbitration and the rule that parties may be compelled to arbitrate only those issues they agreed to arbitrate.” Id. at 669. Put another way, an arbitrator should be able to decide the antecedent question of whether the arbitration should proceed on a class basis only if the arbitration agreement expressly empowers the arbitrator to make that critical preliminary decision. In the absence of such an express delegation, the class arbitration question should be for the court, with appropriate review available either by appeal or writ. This holding is in sync with the Third and Sixth Circuit opinions on which Network Capital Funding heavily relies.

All eyes will be on the California Supreme Court in the Sandquist case. Depending on whether the Court takes a different path than the Third and Sixth Circuits, Sandquist could also provide a vehicle for the U.S. Supreme Court to finally put the matter to rest. Without a circuit split or a divergence of an important state supreme court, the U.S. Supreme Court may not feel any pressure to resolve the question of who decides whether a class claim is arbitrable in the face of a silent arbitration clause. Of course, the best way for a business to avoid the continuing uncertainty is to be sure that its arbitration agreements contain an unequivocal waiver of the right to pursue a class claim in arbitration.

For more information about recent developments in arbitration law in California, contact Donald J. Querio at djq@severson.com.