More Class: Fifth Circuit Sends Arbitrability to the Court, Not the Tribunal

By Hew Zhan Tze

The Fifth U.S. Circuit Court of Appeals recently held that class arbitrability is to be determined by the Court instead of the arbitrators in a class arbitration case.  20/20 Comms. Inc. v. Lennox Crawford, No. 18-10260 (5th Cir. July 22, 2019). The case appears to add a level of inquiry in the subject matter that may run counter to a U.S. Supreme Case earlier this year.

Several employees of 20/20 Communications, a marketing firm based in Fort Worth, Texas, filed individual arbitration claims against the employer. The arbitrator commenced a class arbitration despite an arbitration agreement contract clause prohibiting the consolidation of individual claims, “on the theory that the parties’ class arbitration bar is prohibited by federal law.”

Following the views of the Fourth, Sixth, Seventh, Eighth, Ninth and Eleventh Circuits, the Fifth Circuit held that where class arbitration is an issue, a legal presumption arises that the Court will determine the availability of class arbitration unless the arbitration agreement contained clear and unmistakable language to the contrary.

The Fifth Circuit, in a unanimous opinion written by Circuit Judge James C. Ho, reversed the decisions of two district courts. In one case, the district court held that the arbitration agreement authorized the arbitrator to determine class arbitrability instead of the court. See 20/20 Comms. Inc. v. Randall Blevins, No. 4:16-cv-00810-Y (N.D. Tex.) (Means, J.). In the other case, the district court held that the class arbitration bar was unenforceable under the National Labor Relations Act. See 20/20 Comms. Inc. v. Lennox Crawford, No. 4:17-cv-929-A (N.D. Tex.) (McBryde, J.).

The Fifth Circuit determined that class arbitrability is a gateway issue for the court. It rejected the employee’s arguments that the delegation provisions in the arbitration agreement clearly and unmistakably delegated the determination of class arbitrability to the arbitrator.

The circuit court said class arbitrability falls under the category of a gateway issue which would presumptively be determined by the courts because (i) the increased size and complexity of the dispute, (ii) the due process concerns that are raised and (iii) the privacy and confidentiality of the parties may be compromised.

While these factors point toward class arbitrability being a gateway issue, the appeals court stops short of elaborating on why arbitrators are not well-equipped to handle these concerns. An arbitrator could undertake these considerations and determine not to consolidate the individual claims.

Regardless, it means that the court could be involved despite the parties’ attempt to resolve the dispute via arbitration. Additionally, to the extent the employee can bargain, the individual may not reach an agreement with the employer to use the “clear and unmistakable” language sought by the courts to override the legal presumption that the court is to decide class arbitrability.

Having raised the legal presumption that class arbitrability is to be determined by the court, not the arbitrator, the court’s next task, according to the Fifth Circuit, would be to assess whether the arbitration agreement contained delegation provisions in clear and unmistakable language that would override the legal presumption. The circuits courts are currently split on whether traditional delegation provisions are sufficient to override this legal presumption.

The Arbitration Nation blog points out that in the Second, Tenth and Eleventh Circuits, traditional delegation provisions which submits any dispute to the arbitrator were held to be sufficient to overcome the presumption, citing Wells Fargo Advisors LLC v. Sappington, 884 F. 3d 392 (2nd Cir. 2018) and Spirit Airlines, Inc. v. Maizes, 899 F. 3d 1230 (11th Cir. 2018). See Henry Allen Blair, “The Fifth Circuit Weighs in About Who Decides Class Arbitrability,” Arbitration Nation (July 28) (available at http://bit.ly/2KqcIFu). It is noted that the Tenth Circuit held similarly in Dish Network L.L.C. v. Matthew Ray, 900 F.3d 1240 (10th Cir. 2018).

On the other hand, Blair’s Arbitration Nation post notes that the Third, Fourth, Sixth and Eighth Circuits concluded that notwithstanding traditional delegation provisions or provisions incorporating institutional rules which delegates the decision of class arbitrability to the arbitrator, the decision of class arbitrability still lies with the Court. See Opalinski v. Robert Half Intern Inc., 761 F. 3d 326 (3rd Cir. 2014); Dell Web Communities Inc. v. Carlson, 817 F.3d 867 (4th Cir. 2016); Reed Elsevier Inc. v. Crockett, 734 F. 3d 594 (6th Cir. 2013), and Catamaran Corp. v. Towncrest Pharmacy, 864 F. 3d 966 (8th Cir. 2017), among others.

In the Fifth Circuit Crawford opinion, typical delegation provisions were included in the arbitration provision. Interestingly, after a brief discussion of the delegation provisions at issue, the court stated that it ultimately need not make a conclusion on “[w]hether these provisions, standing alone, clearly and unmistakably empower the arbitrator to decide questions of class arbitrability.” Instead, the Court considered it sufficient to compare the class arbitration bar at issue with the delegation provisions to reach the conclusion that none of the provisions “state with the requisite clear and unmistakable language that arbitrators, rather than courts, shall decide questions of class arbitrability.”

The Fifth Circuit’s conclusion raises an important question: What language used in the arbitration agreement would be clear and unmistakable enough to overcome the legal presumption that it is the courts that will decide class arbitrability instead of the arbitrators when there is a contractual clause barring class arbitration?

“[T]here is tension in this decision,” notes Philip J. Loree Jr., of New York’s Loree & Loree, who closely watches class arbitration cases, “and I think the culprit is the Court’s ruling that the clarity of the class arbitration waiver should be considered as evidence that the parties did not clearly and unmistakably  intend arbitrators to decide arbitrability.”

Loree notes in an email, “Whether or not the class arbitration waiver is clear and unmistakable says nothing about who is supposed to interpret and apply the waiver. This, he notes, gives the impression that the Fifth Circuit is —perhaps unintentionally— making an end around this year’s U.S. Supreme Court rejection of the “wholly groundless” exception to the clear and unmistakable rule set out in Henry Schein, Inc. v. Archer And White Sales, Inc., 139 S.Ct. 524 (2019) (available at http://bit.ly/2YLDkWQ) (see Mark Kantor, “Implications of Henry Schein and New Prime US Supreme Court Decisions,” CPR Speaks (Jan. 22) (available at http://bit.ly/33d5nSo).

Loree notes that where an arbitrator ignores the parties’ clear and unmistakable class arbitration waiver, the award would presumably be vacated under Federal Arbitration Act Section 10(a)(4), following the Supreme Court’s decisions in Stolt-Nielsen S.A v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758 (2010) and Oxford Health Plans LLC v. John Ivan Sutter, 133 S.Ct. 2064 (2013).

“But rather than allow that scenario to play itself out,” he continues, “the Fifth Circuit has effectively conflated the clarity of the contract on the merits issue (class arbitration consent) with the clarity of the contract on the issue of who gets to decide class arbitration consent.”

This, according to Loree, runs counter to the Supreme Court’s Schein decision.

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The author is a CPR Institute summer intern.

 

Faulty Procedure? Fifth Circuit Vacates an Arbitration Order for Unconscionability Inquiry

By Savannah Billingham-Hemminger

The Fifth U.S. Circuit Court of Appeals has reversed, vacated and remanded an order to compel arbitration in an age discrimination case so that the federal district court can re-examine the merits of a procedural unconscionability claim.

The circuit judges in Bowles v. OneMain Fin. Grp. LLC, No. 18-60749, 2019 U.S. App. LEXIS 18414 (June 19) (available at http://bit.ly/2KBXcJf) found that the district court had erroneously referred a procedural unconscionability challenge to an arbitrator after determining that such a claim was about the enforceability of the arbitration agreement.

Senior Circuit Judge E. Grady Jolly, writing for a unanimous three-judge panel, determined that procedural unconscionability instead goes toward contract formation, not contract enforcement, under Mississippi law. Contract formation issues are to be decided by the court, while contract enforcement is to be decided by the arbitrator.

According to the case, plaintiff Cathy Bowles worked for lender OneMain Financial Group for nearly 20 years when she was terminated for “allegedly inappropriate interactions with employees under her supervision.” During her time there, she was required to “review and acknowledge” the Employee Dispute Resolution Program/Agreement on multiple occasions.

After her termination, she filed a complaint with the U.S. Equal Employment Opportunity Commission, which was unsuccessful, and then filed a federal court suit under the Age Discrimination in Employment Act and Title VII of the Civil Rights Act of 1964. OneMain responded with a motion to compel arbitration under the Federal Arbitration Act and pursuant to a 2016 Arbitration Agreement that Bowles had acknowledged electronically.

Bowles objected to arbitration on two grounds: that there was no “meeting of the minds” resulting in mutual assent for contract formation, and that OneMain obtained consent through misrepresentation, which was procedurally unconscionable.

The district court granted the motion to compel, finding that the necessary meeting of the minds for contract formation was met under Mississippi law. Whether Bowles did or did not understand was irrelevant because lack of diligence before her acknowledgment does not impede formation of the contract.

On the second ground, the district court ruled against her as well. “The district court found that Bowles’s procedural unconscionability challenge went to the enforceability rather than the formation of the Arbitration Agreement and therefore referred it to the arbitrator for decision, in accordance with the Arbitration Agreement’s delegation clause.”

But the federal appellate court disagreed with the trial court on the second point.  It reviewed OneMain’s motion to compel arbitration de novo. The opinion noted that in determining the validity of an arbitration agreement, state-law principles should ordinarily apply to the formation of contracts, citing First Options of Chicago Inc. v. Kaplan, 514 U.S. 938, 944 (1995).

The panel opinion found that the district court correctly concluded that mutual assent existed because on multiple occasions the Arbitration Agreement was communicated clearly to Bowles, and she acknowledged receipt.

But citing West v. West, 891 So. 2d 203 (Miss. 2013), the panel opinion said that in Mississippi, procedural unconscionability is a claim on the formation of the contract—”it is pellucid that ‘[p]rocedural unconscionability goes to the formation of the contract.’” In such a case, the court has a duty to resolve the challenge.

The opinion examines unconscionability factors using another Fifth Circuit case, Begole v. N. Miss. Med. Ctr., 761 Fed. Appx. 248 (2019). In a footnote, the court explained that general allegations of unconscionability going to the formation of the entire contract is an issue for the arbitrator. But in challenging the specific decision to agree to arbitrate as unconscionable, the district court must weigh in.

The opinion repeats Begole’s specific distinctions “between procedural and substantive unconscionability under Mississippi law:

Under substantive unconscionability, we look within the four corners of an agreement in order to discover any abuses relating to the specific terms which violate the expectations of, or cause gross disparity between, the contracting parties. Procedural unconscionability may be proved by showing a lack of knowledge, lack of voluntariness, inconspicuous print, the use of complex legalistic language, disparity in sophistication or bargaining power of the parties and/or a lack of opportunity to study the contract and inquire about the contract terms.”

Because the trial court needs to determine the procedural unconscionability claim on the merits, the Fifth Circuit panel reversed and remanded.

The author, a Summer 2019 CPR Intern, is a law student at Pepperdine University School of Law in Malibu, Calif.