Following on the heels of Puleo v. Chase Bank, USA, N.A., 605 F.3d 172 (3d Cir. 2010), a Third Circuit panel, in a non-precedential opinion, has confirmed that a court, not an arbitrator, should decide an unconscionability challenge to an arbitration agreement. (Click here to read our legal alert on Puleo.)

In Vilches v. The Travelers Companies, Inc., No. 10-2888 (3d Cir. Feb. 9, 2010), the Court upheld the validity of an express class action waiver in the plaintiff’s employment agreement with Travelers. Applying New Jersey law, the Court held that the party asserting unconscionability must establish both procedural and substantive unconscionability. Finding that the facts presented established neither in this employment case, the Court distinguished prior New Jersey decisions that had invalidated class action waivers in consumer adhesion contracts involving small amounts of damages.

However, the specific circumstances underlying the plaintiff’s agreement to arbitrate prompted the Court to further hold that it was for the arbitrator to determine whether the class action waiver had become part of the plaintiff’s arbitration provision in the first instance. That is because the plaintiff’s initial employment contract contained an arbitration provision that did not contain a class action waiver; Travelers subsequently revised the arbitration provision to add a class action waiver.

The Court relied upon both Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010), and Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003), in concluding that an arbitrator, not a court, must determine whether an arbitration provision that does not mention class proceedings was intended to permit class arbitration. However, the Third Circuit did not address the U.S. Supreme Court’s pronouncement in Stolt-Nielsen that Bazzle is not precedential because it did not garner a majority opinion. Moreover, in Stolt-Nielsen, the U.S. Supreme Court strongly suggested that because Bazzle is not precedential, the question of whether a court or an arbitrator should decide whether parties to an arbitration provision that does not refer to class procedures intended to allow class arbitration has not been definitively decided.

Vilches is the ninth decision in which the Third Circuit has upheld the validity of a class action waiver in an arbitration agreement. Ballard Spahr attorneys were involved in five of those cases. Vilches illustrates, however, that all of the ramifications of Stolt-Nielsen have yet to be fully realized. Moreover, the U.S. Supreme Court will soon issue its decision in AT&T Mobility v. Concepcion, which will decide whether the Federal Arbitration Act preempts state unconscionability laws, so readers should stay tuned. (Click here to read an earlier legal alert on AT&T Mobility v. Concepcion.)