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WBK Industry News - Litigation Developments

Court, Not Arbitrator, Decides Whether Class-Wide Arbitration Is Authorized

In Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., the Supreme Court held that class-wide arbitration cannot be compelled “unless there is a contractual basis for concluding that the party agreed to do so.”  Left unanswered, however, was the question of who should determine whether the contract provides for class arbitration – the court or the arbitrator?  Recently the U.S. Court of Appeals for the Fourth Circuit weighed in on the subject and joined two other circuit courts in concluding that the question is one of arbitrability for the courts.

In Dell Webb Communities, Inc. v. Carlson, the plaintiff homebuyers filed suit in South Carolina state court against their builder and others for alleged construction defects.  Plaintiffs later amended their complaint to add class allegations.  Thereafter, the builder successfully moved to compel arbitration because the sales agreement between the parties provided for arbitration of any claims arising out of or related to the agreement.  The homebuyers then filed a demand for arbitration which sought class certification and class arbitration.  The parties were informed that the arbitrator would decide whether the sales agreement permitted class arbitration. The builder filed a petition in federal court asserting that whether the sales agreement authorized class arbitration was a question of arbitrability for the court, not the arbitrator, and seeking a declaratory judgment that the parties did not agree to class arbitration.  The district court dismissed the petition concluding that the availability of class arbitration under the parties’ agreement was a procedural question for the arbitrator, not the court, to decide.

On appeal, the Fourth Circuit disagreed and vacated the district court’s judgment.  According to the court:  “Advancing the prioritization of party intent in arbitration agreements, the Supreme Court has identified two categories of threshold questions – procedural questions for the arbitrator, and questions of arbitrability for the court.”  Procedural questions are those that arise once the obligation to arbitrate has been established; on the other hand, “[w]hen the answer to a question ‘determines whether the underlying controversy will proceed to arbitration on the merits,’ that question necessarily falls with the ‘narrow circumstances’ of arbitrable issues for the court to decide.”

Recognizing that the Supreme Court has not conclusively decided the issue, the Fourth Circuit nonetheless found guidance in recent opinions, including AT&T v. Concepcion, wherein the Court discussed the substantial complexities of class arbitration in comparison to bilateral arbitration, and the fact that “‘betting the company’ without effective judicial review is a cost of class arbitration that defendants would not lightly accept.”  The Fourth Circuit concluded that the issue presented in Dell Webb was one of arbitrability.  “The evolution of the [Supreme] Court’s cases are but a short step away from the conclusion that whether an arbitration agreement authorizes class arbitration presents a question as to the arbitrator’s inherent power, which requires judicial review.”

The Fourth Circuit’s decision is consistent with rulings by the Third Circuit (Opalinski v. Robert Half Int’l Inc.) and the Sixth Circuit (Reed Elsevier, Inc. ex rel. LexisNexis Div. v. Crockett), both of which have concluded that the question of class arbitrability belongs to the court.

In addition to handling arbitrations on behalf of clients, Weiner Brodsky Kider PC regularly advises home builders and other clients on the drafting of arbitration agreements.