Last week, the United States Court of Appeals for the Fourth Circuit, which hears federal appeals in South Carolina, North Carolina, Virginia, West Virginia, and Maryland, ruled that courts, not arbitrators, must decide whether an arbitration agreement permits class arbitration.  This is a substantial victory for companies trying to avoid class arbitration because it ensures that the permissibility of class arbitration will be decided by a court and will be subject to appellate review.  The Court's opinion in Del Webb v. Carlson is available here.  McNair attorneys Vic Rawl, Jr.Robert Widener, and Hal Frampton were counsel for Del Webb, the prevailing party in the appeal. 

For decades, companies have used arbitration as a means to streamline the process and reduce the expense of resolving disputes with other companies and with consumers.  It was originally assumed that arbitration was, by necessity, a bilateral proceeding between the claimant and respondent.  Some years ago, however, beginning in California, consumers' attorneys attempted to bring "class arbitrations" on behalf of classes of allegedly aggrieved consumers.  Class arbitration came to national prominence in 2003 when the Supreme Court of the United States first addressed the issue in Green Tree Financial Corp. v. Bazzle, a case that also arose out of South Carolina.

Class arbitration is deeply troubling to most companies because it turns the cost/benefit analysis of arbitration on its head.  In bilateral disputes, arbitration is often preferred because of its speed, efficiency, lack of procedural formality, confidentiality, and finality.  These benefits are generally regarded as sufficient to outweigh the lack of meaningful appellate review.  In class disputes, however, procedural formality is required to protect the due process rights of absent class members, and class arbitration is generally just as slow and expensive as traditional litigation.  In addition, confidentiality is impossible given the requirement of notice to the putative class members.  Coupled with the lack of meaningful appellate review, it is difficult to imagine any company voluntarily agreeing to class arbitration.

While arbitration agreements today often contain clauses expressly disallowing class arbitration, arbitration agreements drafted in the early to mid-2000s generally did not.  In cases involving agreements that do not address class arbitration, a threshold question is whether the agreement does or does not permit class arbitration. 

Companies generally want this threshold question to be answered by the court, and not by the arbitrator, for many reasons.  For one, it has been argued that arbitrators have a personal financial incentive to allow class arbitration.  For another, courts are held to a stricter standard in applying the law, and their decisions are subject to full appellate review. 

In Del Webb v. Carlson, the Fourth Circuit joined the Third and Sixth Circuits in holding that the threshold question of whether an arbitration agreement permits class arbitration must be decided by a court and not an arbitrator.  In so ruling, the Court recognized the fundamental differences between bilateral and class arbitration, and concluded that, without clear and unmistakable language to the contrary, the parties would not have committed such a momentous decision to the arbitrator.  While the Court did not expressly address the ultimate question of whether the arbitration agreement at issue permitted class arbitration, the language of the opinion suggests that the Court will be skeptical of any ruling that class arbitration is permitted, unless there is a solid contractual basis for that conclusion.

Going forward, companies should ensure that their arbitration agreements include express class action waivers.  However, if forced to litigate agreements that lack such language, companies should be certain to argue that the threshold question of whether the agreement permits class arbitration goes to the court, and not to the arbitrator.