In a unanimous opinion, the US Court of Appeals for the Eighth Circuit joined the majority of appellate courts (including the Third, Fourth, and Sixth Circuits) in holding that the question of whether an arbitration agreement authorizes class arbitration is for a court, not an arbitrator, to decide, unless the agreement expressly delegates that issue to the arbitrator.
As we have discussed in a prior Legal Update, the US Supreme Court has held that a party cannot be forced to arbitrate on a class-wide basis absent “a contractual basis for concluding that the party agreed to do so.” Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 684 (2010). Parties frequently dispute, however, the threshold question of who decides—a court or an arbitrator—whether an agreement authorizes class arbitration when there is no express language addressing the issue. Catamaran Corp. v. Towncrest Pharmacy, No. 16-3275 (8th Cir. July 28, 2017), is one such case.
In Catamaran, four pharmacies commenced a putative class arbitration against Catamaran, a health benefits manager. The parties’ arbitration agreements required that disputes be resolved under the rules of the American Arbitration Association (“AAA”). Catamaran filed a lawsuit in federal court seeking a declaratory judgment that the arbitration agreements barred class arbitration. But the district court ruled in favor of the pharmacies, holding that the arbitration agreements clearly and unmistakably committed the question of whether class arbitration is permissible to an arbitrator by broadly incorporating any AAA rules. Slip op. at 3-4. According to the district court, various AAA rules, namely the AAA Supplementary Rules for Class Arbitrations (“AAA Supplementary Rules”)—which state that “the arbitrator shall determine as a threshold matter . . . whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class,” Suppl. Rule 3—give arbitrators the power to decide whether an arbitration agreement contemplates class arbitration.
In an opinion by Chief Judge Shepherd, the Eighth Circuit reversed. The court first considered if the class-arbitration question is (i) a substantive question of arbitrability akin to whether the parties have agreed to arbitrate or whether the agreement covers a particular claim, which are questions that are presumptively for a court to decide, or (ii) a procedural question of arbitrability (such as whether an arbitration demand is time-barred) that is for an arbitrator to decide. The Eighth Circuit adopted the majority view, holding that the question at hand is a substantive question of arbitrability for judicial determination. The court stated that, although the Supreme Court has not offered a definitive answer to this question, its recent opinions “strongly hinted at [its] ultimate conclusion: the question of class arbitration is substantive in nature and requires judicial determination.” Id. at 6 (discussing Stolt-Nielsen, 559 U.S. at 680; Oxford Health Plans, LLC v. Sutter, 133 S. Ct. 2064, 2068 n.2 (2013)).
To that end, the Catamaran court cited four fundamental differences between bilateral and class arbitration—based primarily on the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion—to demonstrate that the question at hand is substantive: (1) the benefits of arbitration are lessened in a class arbitration proceeding as it is slower, more costly, and more likely to generate “procedural morass”; (2) confidentiality is lost or becomes more difficult in class arbitration; (3) class arbitration brings the bet-the-company stakes of class-action litigation into arbitration without the safety net of multi-layered judicial review; and (4) class arbitration raises important due process concerns as it purports to bind absent class members. Accordingly, the court concluded that the “question of class arbitration belongs with the courts as a substantive question of arbitrability.” Catamaran, Slip op. at 8.
Catamaran is significant for its rejection of the plaintiffs’ argument that, even if the availability of class proceedings is presumptively a question for the court, the parties had delegated the issue to the arbitrator by incorporating the AAA rules. It is well established that parties may supplant the presumption that courts decide substantive questions of arbitrability by “clearly and unmistakably” agreeing to delegate these issues to an arbitrator. Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002). The Eighth Circuit noted the plaintiffs’ argument that it had held in three previous decisions that parties’ incorporation by reference of the AAA rules constitutes clear and unmistakable evidence they intended to delegate “substantive questions of arbitrability” to an arbitrator. However, the Catamaran court distinguished those cases, stating that each “dealt with bilateral arbitration agreements” and “never grappled with the fundamental changes in the underlying controversy that arise when dealing with class arbitration.” Slip op. at 9. The court held that “the risks incurred by defendants in class arbitration . . . demand a more particular delegation of the issue than we may otherwise deem sufficient in bilateral disputes.” Id. The court concluded that the arbitration agreements before it failed to delegate the issue of class arbitration with the necessary specificity.
In the end, the Eighth Circuit remanded the case to the district court instructing it to determine whether the arbitration agreements at issue permit class arbitration.
A number of businesses are still operating under contracts containing arbitration agreements that do not contain language expressly waiving class arbitration. The holding in Catamaran, like those from the Third, Fourth, and Sixth Circuits, that a court ordinarily must decide whether an arbitration agreement authorizes class arbitration protects these businesses’ ability to seek meaningful judicial review of an adverse ruling on this critical issue. By contrast, a minority of appellate courts, including the Fifth Circuit and California Supreme Court, have arguably taken a different view.
Finally, while the Catamaran court did not mention it, 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. Specifically, although Supplementary Rule 3 authorizes arbitrators to decide “as a threshold matter” whether a particular arbitration agreement permits class arbitration (subject to immediate review by any “court of competent jurisdiction”), Supplementary Rule 1(c) makes clear that arbitrators do not have sole right to decide this issue. Instead, Rule 1(c) mandates that arbitrators “follow the order of the court” whenever “a court has, by order, addressed and resolved any matter that would otherwise be decided by an arbitrator under these Supplementary Rules,” such as whether an agreement permits class arbitration. In addition, Supplementary Rule 3 states that “in construing the applicable arbitration clause,” the “existence of these Supplementary Rules, or any other AAA rules” should not “be a factor either in favor of or against permitting the arbitration to proceed on a class basis.” Businesses faced with the issue presented in Catamaran should consider pointing to these AAA rules as further confirmation that the parties did not intend the availability of class arbitration to be an issue for the arbitrator to decide.