Who Decides if your Arbitration Agreement Allows Class Arbitration?
At least within the Third Circuit, in order for arbitrators, not a court, to decide whether disputes are subject to class arbitration, an arbitration agreement must “clearly and unmistakably” delegate such power to arbitrators. It is not enough for the arbitration agreement to incorporate by reference American Arbitration Association (“AAA”) rules, even though those rules themselves authorize arbitrators to decide whether class arbitration is available. That is the key takeaway from the Third Circuit’s recent decision in Chesapeake Appalachia LLC v. Scout Petroleum, et al., No. 15-1275.
Chesapeake involved oil and gas leases with mandatory arbitration provisions requiring that any disputes be arbitrated “in accordance with the rules of the AAA,” which included the AAA’s Commercial Arbitration Rules and Supplementary Rules. Commercial Arbitration Rule 7 states that an arbitrator has the power to rule on his or her own jurisdiction. Supplementary Rules 3 and 4 authorize an arbitrator to determine whether an arbitration clause permits arbitration to proceed on a class basis.
After a royalty dispute broke out, lessor Scout Petroleum filed an arbitration demand on behalf of itself and similarly situated lessors against lessee Chesapeake. Chesapeake quickly filed an action in federal court seeking a declaratory judgment that the court, not the arbitrators, should decide whether class arbitration was available. The arbitrators subsequently issued a decision saying they were authorized to determine whether class arbitration was available. But the district court vacated that decision, finding that it, not the arbitrators, should decide the threshold question of whether class arbitration was available. The case eventually made its way to the Third Circuit.
The Third Circuit affirmed the district court’s ruling. It explained that the “availability of classwide arbitration constitutes a question of arbitrability because it ‘implicates whose claims the arbitrator may adjudicate.’” And courts, not arbitrators, decide questions of arbitrability unless the parties’ arbitration agreement “clearly and unmistakably” provides otherwise. The Third Circuit concluded that merely incorporating the AAA’s rules by reference does not “clearly and unmistakably” delegate the question of class arbitrability to arbitrators. Specifically, the court explained, “it is not enough to establish that the AAA rules provide for arbitrators to decide . . . the question of class arbitrability, and that in turn, these rules are incorporated by reference pursuant to state law.” Rather, although an arbitration agreement need not include any special incantation, it must contain some “express contractual language unambiguously delegating” the question of class arbitrability to arbitrators, “not mere silence or ambiguous contractual language.” The court reached this decision notwithstanding its recognition that Chesapeake could have, and should have, drafted a clearer arbitration agreement.
The bottom line is that if, for some reason, you want arbitrators to decide whether classwide arbitration is available, you need to expressly say so in your arbitration agreement. If you want a court to decide whether classwide arbitration is available, you don’t need to expressly say so (at least in the Third Circuit), although doing so can’t hurt and is advisable.