Arbitration: Third Circuit, En Banc, Backs a Class Waiver, and Compels an Individual Credit Card Action (Web)

The Third U.S. Circuit Court of Appeals affirmed a federal district court ruling that the enforceability of a class action waiver in an arbitration agreement, challenged by the plaintiffs-appellants as unconscionable, is a gateway question of arbitrability for the court, not the arbitrator, to decide.  Puleo v. Chase Bank USA, N.A, No. 08-3837 (3rd Cir. May 10, 2010) (available here).

The circuit court remanded the case for individual, not class, arbitration.

The Puleos brought a class action suit against Chase Bank challenging a retroactive credit card interest rate increase.  They claimed that the arbitration agreement’s class action waiver was unconscionable.  When Chase moved to compel, the Puleos asked the Court to send the case to arbitration for a tribunal determination on a class action arbitration, even though the agreement expressly waived class actions.

The U.S. District Court rejected their arguments.  It concluded that the Puleos’ challenge to the enforceability of the class action waiver was a question of arbitrability for the court.  It also held that “the entirety of the Arbitration Agreement was enforceable,” according to the en banc Third Circuit opinion, which was written by Circuit Judge Julio M. Fuentes.

The district court granted Chase's motion to compel arbitration, but not as a class, holding that the validity of the class action waiver is a “question of arbitrability” for the court to decide as a gateway matter, and that the waiver was not unconscionable.

The Puleos appealed only on the question of who should determine the enforceability of the waiver.

The majority opinion, in which Fuentes was joined by five other circuit judges, explains that the U.S. Supreme Court and Congress generally favor arbitration as a way to lighten judicial case loads and promote efficiency.   But, the Fuentes opinion notes, the nation’s top Court recognizes that arbitrability questions--whether there is a valid arbitration agreement at all, or whether the arbitration agreement applies to the particular dispute--is a matter for judges to decide, unless the parties expressly stipulate otherwise.  (Citing Howsam v. Dean Witter Reynolds Inc., 537 U.S. 79, 84 (2002).)

The majority notes that federal circuit courts agree that the unconscionability of an arbitration clause, as opposed to the unconscionability of the contract itself, is an arbitrability question for the courts. Yet apart from this initial “gateway” inquiry, all other matters, such as procedures or contract interpretation, are determined by the arbitrator.

There also is a four-judge dissent, written by Circuit Judge Marjorie O. Rendell, emphasizing the parties’ contract terms, and suggesting that the majority intrudes on their agreement to have all issues arbitrated–even where there is an express class waiver.

The Puleos first argued that the case does not present an arbitrability question, but rather an arbitration procedure question, because while they are challenging a specific term of the arbitration clause, they are not challenging the general agreement to arbitrate.

The Third Circuit disagreed, reasoning that the Federal Arbitration Act requires courts to uphold arbitration agreements “according to their terms,” not in the abstract. Thus, the District Court cannot compel a class arbitration against the agreement’s express terms without first addressing the validity of the class action waiver.

The opinion notes that the class action waiver implicates the arbitrator’s authority, not just procedure, because the parties agreed that the arbitrator will have “no authority to proceed” on a class claim. An arbitrator cannot determine his or her own jurisdiction, the court says, because the decision implicates whether the parties agreed to arbitrate, which is part of the initial judicial inquiry.

Second, the Puleos relied on Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003), to argue that the existence of a class action waiver is a procedural question for the arbitrator.  Bazzle held that the arbitrator should decide the procedural question of class arbitration when the arbitration clause is silent.

But the Puleo majority opinion notes that Bazzle involved an issue about which the agreement was silent, not one  that was unambiguously expressed.  Contract interpretation was required to decide arbitration procedures, which is the arbitrator’s task.  Here, the validity of an express term is at issue, not the existence of an implied term.

Third, the Puleos argued that the severability clause required the district court only to decide whether the arbitration agreement as a whole would be invalidated if the waiver was found unconscionable by the arbitrator, and the district court should not have decided whether the waiver itself was unconscionable.  

The Third Circuit rejected this argument, explaining that many circuit cases support the claim that where a term of the arbitration clause is challenged for unconscionability, a court must first determine if the clause is unconscionable, and if so, whether it is severable.

Finally, the Puleos maintained that even if this is a question of arbitrability, the parties agreed that the arbitrability questions would be decided by the arbitrator. But the Court claimed that contracts must “clearly and unmistakably” stipulate such an agreement, and that the contract here does not meet this standard. Puleo at 28.

Circuit Judge Rendell in a dissent wrote that while the validity of an arbitration agreement generally is a question for the court, this case does not raise an arbitrability question, because the Puleos agreed to arbitrate. Usually, a plaintiff will assert that a class action waiver is unconscionable in order to invalidate the arbitration agreement as a whole, but this is not the case here, the dissent notes.

Furthermore, since the contract stipulates that all claims, broadly construed, are to be arbitrated, Rendell concludes that the parties agreed that a challenge to the validity of the waiver would be arbitrated.

The dissent notes that the majority’s focus on the arbitrator’s jurisdiction is misguided:  

Since it is clear that the parties agree that the case will go to arbitration–whether as a class action or as plaintiffs’ individual suit–there is no issue of “arbitrability,” and there is no issue as to the arbitrator’s jurisdiction. No one–neither the court nor the arbitrator–needs to decide the “jurisdiction” of the arbitrator. The arbitrator has jurisdiction over the case; the case will be arbitrated–no ifs, ands, or buts.

Rendell notes that Puleo needs to be decided under the parties’ terms to be consistent with the recent Supreme Court decision in Stolt-Nielsen SA v. AnimalFeeds, No. 08-1198  (April 27, 2010), which held that arbitrators cannot choose class arbitration when an agreement is silent. “[I]t is not for us to decide what should and should not be arbitrated,” the dissent notes.  “Here, the parties agreed that ‘all Claims’ should be submitted to arbitration. The dispute over whether the class action waiver should be enforced is a claim that the parties agreed to arbitrate.”

The majority also uses Stolt-Nielsen for support.  Like the dissent, the majority cites the case for the proposition that “the central or primary purpose of the FAA is to ensure that private agreements to arbitrate are enforced according to their terms.”  Puleo at 17 n.5 (citing Stolt-Nielsen).

Yet while the majority contends that the parties agreed that they would not arbitrate class actions at all—a question of arbitrability-- the dissent emphasized the agreement’s requirement to submit all claims to arbitration, including the waiver’s viability.

Rather than disagreeing with the dissent on which agreed-upon term should be enforced, the majority had a stronger argument in Associate Justice Samuel A. Alito Jr.'s Stolt-Nielsen opinion about the fundamental differences between class and bilateral arbitration.  Alito wrote that the benefits of bilateral arbitration--lower costs and greater efficiency--are not necessarily present in class arbitration.  The heightened stakes requires the same expenditures of resources and time as class litigation, but without the procedural formality or the same opportunity for appellate review. Stolt-Nielsen at 21.

Because of such “crucial differences,” class arbitration cannot be understood in the same way as other procedural questions, according to the Alito opinion. The Puleo majority’s claim that the class action waiver challenge raises a question of arbitrability seems to follow Stolt-Nielsen, because allowing a class arbitration is more than a basic procedural question, which implicates the scope of the arbitrator’s authority.

Furthermore, the Puleo result--compelling individual arbitration--also is consistent with Stolt-Nielsen, because actually proceeding with a class arbitration under these facts would be prohibited under the recent Supreme court opinion, no matter who decides the question. 

In Puleo, either the waiver is valid, prohibiting class arbitration, or the waiver is invalid, in which case Chase Bank still never actually agreed to a class arbitration—invoking the Stolt-Nielsen rule that class arbitrations cannot be imposed unless the parties consent.

But if the waiver was found invalid, the Puleos could perhaps then try to bring a class action in court, arguing that the binding arbitration agreement is only applicable to individual claims.

--David Perechocky, CPR Intern