September 21, 2018 / 10:14 PM / 2 months ago

New 11th Circuit ruling on classwide arbitration is reminder: Draft carefully, companies

(Reuters) - If you’re a company counting on your mandatory arbitration contract with employees or customers to save you from a classwide proceeding, you’d save yourself a lot of trouble if you included language to that effect in the arbitration agreement.

A ruling this week from the 11th U.S. Circuit Court of Appeals in JPay v. Kobel (2018 WL 4472207) is a wake-up call about the consequences for companies that haven’t specifically addressed classwide arbitration in their contracts.

In a matter of first impression for the 11th Circuit, the appeals court joined the 3rd, 4th, 6th and 8th Circuits to hold that courts, and not arbitrators, have the presumptive authority to decide whether individuals bound by an ambiguous arbitration contract have a right to band together to bring their claims. But the appeals court also said that companies lose the presumption that courts have authority to decide the gateway arbitrability issue when they delegate disputes to arbitration forums that give that power to arbitrators.

It’s easier to understand the court’s decision when I explain the specific facts. JPay is a company that, among other things, facilitates money transfers to prison inmates from their friends and relatives. In 2015, two JPay customers filed for arbitration, alleging the company overcharged for money transfers and engaged in other troubling conduct. The two customers said they intended to arbitrate on behalf of all JPay users who paid a fee for money transfers.

The company, represented by Boies Schiller Flexner, did not want the group arbitration to move forward. Nor did it want an American Arbitration Association arbitrator to decide whether the case could proceed on a classwide basis. Jpay sued its customers in federal district court in Miami to obtain a ruling that the arbitration agreement does not allow classwide proceedings. The JPay customers contended that it’s up to the arbitrator, not a federal district judge, to decide that gateway issue, but the trial court sided with Jpay.

Not the 11th Circuit. As the appeals court explained, there’s no definitive guidance on the question of who has the authority to decide the threshold question of classwide arbitrability when a contract is ambiguous. The U.S. Supreme Court has noted the controversy but the justices haven’t resolved it. A plurality of four justices held in 2003’s Green Tree Financial Corp v. Bazzle (539 U.S. 444) that it’s up to arbitrators, the 11th Circuit noted, but the Supreme Court subsequently said in 2010’s Stolt-Nielsen v. AnimalFeeds International (559 U.S. 662) and Oxford Health Plans v. Sutter (569 U.S. 564) that the issue remains open.

For the 11th Circuit panel in the JPay case, Judges Stanley Marcus and Charles Wilson and U.S. District Judge James Graham of Columbus, sitting by designation, the deciding factor was that parties can’t be bound to arbitration unless it’s clear they’ve agreed to arbitrate. So unless an arbitration agreement clearly delegates to an arbitrator the question of a classwide proceeding, the appeals court said, the issue belongs in court. “Because we will not compel anyone to arbitrate if we aren’t confident they have agreed to do so, we presume that parties would have expected a court to answer questions of arbitrability,” Judge Marcus wrote for the panel.

So far, so good for companies that haven’t specifically forbidden classwide proceedings in their arbitration agreements. But there’s a huge catch in the second part of the panel’s decision that effectively erases any benefit for companies from the court’s holding on the threshold question. The 11th Circuit said courts’ presumptive authority to determine whether customers can arbitrate as a group evaporates when the arbitration agreement delegates authority over arbitrability to an arbitrator.

JPay ceded the right to go to court for a determination on classwide arbitrability, the 11th Circuit held, when it mandated that customers use the American Arbitration Association to resolve disputes. AAA rules, the appeals court said, delegate questions of arbitrability to the arbitrator. Under its own agreement, the court said, JPay was bound to let an arbitrator decide whether the classwide proceeding is okay.

In other words, according to the 11th Circuit, companies that direct customers or employees to specific arbitration forums like AAA or JAMS, whose rules say arbitrators can decide the scope of proceedings, can’t go to court to limit the cases.

For the two JPay customers who brought the classwide arbitration, the ruling means their case will go forward as a class proceeding at AAA, said their counsel, Karla Gilbride of Public Justice. Gilbride said her clients would rather have brought a class action in court, but were stuck with the arbitration clause. The key, she said, is that companies like JPay are similarly bound by the agreements they foisted on their customers. The big arbitration forums like AAA and JAMS, she said, have the infrastructure in place to oversee group proceedings.

This week’s JPay ruling is the second big 11th Circuit pronouncement in the last few weeks on classwide arbitration. I’ve previously told you about the appellate court’s decision in Spirit Airlines v. Maizes, which involved yet another corporation running to federal court when customers demanded classwide arbitration. In that case, the 11th Circuit held AAA rules, by themselves, are not definitive evidence that an arbitrator must decide if an arbitration contract permits a classwide proceeding.

It certainly seems like corporate lawyers ought to be running to clients with the Spirit Airlines and JPay rulings in hand, exhorting general counsel to amend arbitration agreements specifically to bar classwide arbitration. Otherwise, as those rulings suggest, they’re primed for expensive litigation just to figure out who gets to decide whether their agreements allow group proceedings.

Of course, as I’ve also been telling you, fending off a bunch of individual arbitration claims isn’t necessarily a great alternative. But that’s another story.

The views expressed in this article are not those of Reuters News.

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