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Third Circuit: Courts (Not Arbitrators) Must Decide Whether Claims Should Be Arbitrated on Individual or Class Basis

Wednesday, May 19, 2010

The en banc Third Circuit ruled last week in Puleo v. Chase Bank, USA, N.A., No, 08-3837 (May 10, 2010), that judges – not arbitrators – have the authority to determine the enforceability of class action waiver provisions in arbitration agreements. This means that judges will decide not only whether the parties must go to arbitration but also whether that arbitration will proceed on an individual or class basis. The decision is perceived as a victory by companies that use arbitration clauses to control litigation costs.

In Puleo, two Chase Bank credit card holders brought a putative class action challenging Chase Bank’s retroactive interest rate increases on credit card balances. Chase Bank moved to compel arbitration under the arbitration provision in its Cardmember Agreement. The provision expressly barred class actions in litigation or arbitration. In a strange twist, the plaintiffs agreed that the matter should go to arbitration (even though they maintained that the class action waiver was unconscionable). The plaintiffs argued that because they were wiling to arbitrate, there was no “arbitrability” issue and, therefore, the judge should not decide the validity of the class action waiver. Rather, the plaintiffs argued that their challenge to the class action waiver provision was a “procedural question” for the arbitrator to decide.

In Puleo, the Third Circuit in a 6-4 split decision affirmed the district court’s holding that the enforceability of a class action waiver provision is a question of “arbitrability” for a court to decide. The Third Circuit noted that “[t]he question whether the parties have submitted a particular dispute to arbitration, i.e., the question of arbitrability, is an issue for judicial determination unless the parties clearly and unmistakably provide otherwise.” Following this logic, courts of appeals are unanimous in concluding that a challenge to an arbitration provision as unconscionable raises a question of arbitrability for a court to decide. In contrast, “[a]n attack on the validity as a whole of a contract, as opposed to the arbitration clause in particular, does not present a question of arbitrability.” Likewise, “disputes over arbitration procedure, which do not bear upon the validity of an agreement to arbitrate,” are presumptively left for an arbitrator and not a court to decide.

The plaintiffs in Puleo tried to do an end run around these principles by arguing that because they were willing to proceed to arbitration there was no question of arbitrability to be decided by a court. The Third Circuit disagreed, based on the language in the contract at issue that the arbitrator “has no authority to proceed” over a class arbitration. The court noted that the Federal Arbitration Act (FAA) empowers courts to enforce arbitration provisions “in accordance with their terms,” a point emphasized by the Supreme Court in its recent decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., No. 08-1198. In rejecting the plaintiffs’ argument, the Third Circuit expressed agreement with the holding of the Second Circuit in In re Am. Express Merchs.’ Litig., 554 F.3d 300 (2d Cir. 2009), “that a challenge to the enforceability of an explicit class action waiver within an arbitration agreement is a challenge to the validity of the parties’ agreement to arbitrate, and thus a question for the court to decide.”

Judge Marjorie O. Rendell, in dissent, agreed with the plaintiffs that because they were willing to arbitrate the dispute there was no issue of arbitrability for a court to decide, and that the only issue was “whether the case will proceed as a class action,” which she would have held to be a procedural matter to be decided by the arbitrator.

Puleo is another strong precedent for the enforceability of arbitration clauses as written. And yet arbitration advocates should be careful about becoming too optimistic, because it appears that Congress is about to create a new consumer financial protection regulatory agency that will have the power to “prohibit or impose conditions or limitations on the use of” arbitration agreements in the financial services industry. In other words, just as the courts are beginning to unravel some of the uncertainty about the enforceability of class waiver provisions in arbitration contracts, Congress is preparing to authorize the new agency to abrogate the FAA for arbitration contracts entered into by financial services companies. If it does so, that may be the death knell for arbitration clauses in all types of consumer contracts.

Stephen G. Harvey and Eric J. Goldberg

Written by

Stephen G. Harvey
Eric J. Goldberg
Stephen G. Harvey
Eric J. Goldberg

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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