Courts, Not Arbitrators, Decide Gateway Issue of Class Proceedings

Employment Law
 

Who should decide the gateway issue of whether an arbitration agreement permits class proceedings? Courts, not arbitrators, the U.S. Court of Appeals for the Fifth Circuit has concluded, joining the Fourth, Sixth, Seventh, Eighth, Ninth and Eleventh Circuits.

Employees at 20/20 Communications, a national direct sales and marketing company, were required as a condition of employment to sign the company’s Mutual Arbitration Agreement. Among other provisions, the agreement contained a class arbitration bar under which employees agreed to bring only individual actions, and not class or collective actions, to arbitration.

Several field sales managers filed separate individual arbitration claims, later amending them to assert identical class claims. In response, 20/20 sought a declaration in federal court that the issue of class arbitrability is a gateway issue for the court—rather than the arbitrator—to decide, and that the class arbitration bar found in the agreements did in fact foreclose class arbitration.

After consolidating the action with a separate 20/20 appeal of an arbitrator’s decision that the class arbitration ban was unenforceable, the Fifth Circuit ruled in favor of the employer.

Ordinarily, courts must refrain from interfering with arbitration proceedings, the federal appellate panel wrote. However, certain threshold questions—such as if the parties dispute whether they in fact agreed to arbitrate at all—are considered “gateway” issues that presumptively must be decided by courts, not arbitrators.

While the U.S. Supreme Court has yet to weigh in on whether class arbitrability is such a gateway issue, every other federal circuit to consider the issue has answered in the affirmative, the Fifth Circuit said.

“We agree with our sister circuits and hold today that class arbitrability is a gateway issue for courts, not arbitrators, to decide, absent clear and unmistakable language to the contrary,” the panel wrote. “Like our sister circuits, we regard the decision to arbitrate a dispute as a class, rather than on an individual basis, as a threshold question of arbitrability, because class arbitrations differ from individual arbitrations in fundamental ways.”

A class action no longer purports to bind just the named parties, but adjudicates the rights of absent parties as well, the court explained; class actions also “dramatically increase not only the size but also the complexity of the dispute,” with implications for due process and the privacy and confidentiality of the parties involved.

Having determined that class arbitration is a gateway issue that must be presumptively decided by courts, not arbitrators, the Fifth Circuit then examined the arbitration agreement at issue to decide whether the parties clearly and unmistakably agreed to allow the arbitrator to determine that issue.

The agreement provided: “[T]he parties agree that this Agreement prohibits the arbitrator from consolidating the claims of others into one proceeding, to the maximum extent permitted by law. This means that an arbitrator will hear only individual claims and does not have the authority to fashion a proceeding as a class or collective action or to award relief to a group of employees in one proceeding, to the maximum extent permitted by law.”

This language not only operated to bar class arbitration to the maximum extent permitted by law, “but also to foreclose any suggestion that the parties meant to disrupt the presumption that questions of class arbitration are decided by courts rather than arbitrators,” the panel said. “After all, it is difficult for us to imagine why parties would categorically prohibit class arbitrations to the maximum extent permitted by law, only to then take the time and effort to vest the arbitrator with the authority to decide whether class arbitrations shall be available.”

Although the employees pointed to three different provisions in the agreement that they argued vested the arbitrator with various general powers, the court rejected each as lacking “the requisite clear and unmistakable language that arbitrators, rather than courts, shall decide questions of class arbitrability.”

“That language is, at best, in substantial tension with—and in any event, not clear and unmistakable support for—the notion that the parties authorized the arbitrator to decide the gateway issue of class arbitration,” the panel said, reversing and remanding the case.

To read the opinion in 20/20 Communications, Inc. v. Crawford, click here

Why it matters: The Fifth Circuit joined every other circuit to consider the issue and held that class arbitration is a gateway issue that must be decided by courts and not arbitrators, absent clear and unmistakable language in the arbitration agreement to the contrary. As the panel was unable to find such clear and unmistakable intent in the agreement at issue, it remanded the case for the district court to answer the question of whether the employees can proceed as a class.