Class Action Arbitration After Dell Webb, 0916 SCBJ, SC Lawyer, September 2016, #24

• Author: Michael S. Cashman and Thomas M. Cull, J.

Class Action Arbitration After Dell Webb

No. Vol. 28 Issue 2 Pg. 24

South Carolina Bar Journal

September, 2016

Michael S. Cashman and Thomas M. Cull, J.

Introduction

Agreeing to arbitrate disputes, in lieu of traditional litigation, is not a new phenomenon. As consumers, we all contractually agree to arbitrate disputes on an almost daily basis. While everyone may not read through the entire contact, mandatory arbitration clauses are frequently included when we sign up for credit cards, buy songs online or purchase a cell phone. Consumer contracts have contained mandatory arbitration clauses for decades. Increasingly, however, courts have confronted a new issue in consumer contracts— class arbitration. While courts have issued various decisions on the issue over the last 15 years, class arbitration has assumed particular importance as of late. The Fourth Circuit’s 2016 decision Dell Webb Communities, Inc. v. Carlson^[1] is the most recent and perhaps the most significant.

In its March 2016 decision, the Fourth Circuit changed course in its approach to class action arbitration, rejected its prior holding in Davis v. ECPI, and declined to follow a 2003 Supreme Court plurality decision in Green Tree Financial Corp. v. Bazzle.^[2] In doing so, the Dell Webb court held that, unless the parties clearly and unmistakably agree otherwise, whether an arbitration agreement provides for class arbitration is a matter for judicial resolution. The decision may come as a surprise to some, particularly corporate counsel, and a welcome change to others, namely consumer advocates. Irrespective of one’s perspective, the issue is significant to all South Carolina practitioners. Although Dell Webb is a federal court decision, the Federal Arbitration Act governs the vast majority of arbitrations, and is therefore significant to both state and federal practitioners of class action litigation.

While the Dell Webb decision represents a course change from prior Fourth Circuit case law, it is consistent with another circuit’s recent treatment of the issue. Earlier this year, the Third Circuit issued a decision in Chesapeake Appalachia, LLC v. Scout Petroleum, LLC,^[3] where it reached the same conclusion as the Dell Webb court and held that the availability of class arbitration is reserved for judicial determination, and not the arbitrator. Chesapeake is currently being appealed to the Supreme Court. That appeal presents the Court with an opportunity to clarify its position on class arbitration and provide a cohesive—perhaps conclusive—decision on the viability of Bazzle. This article will analyze the principles and policies underlying class arbitration, explore Fourth Circuit jurisprudence on the issue and discuss the potential implications for class arbitration in South Carolina.

Arbitration and arbitrability

Under the Federal Arbitration Act (FAA), arbitration agreements that implicate interstate commerce are enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.”^[4] The U.S. Supreme Court has ruled that, because the statute invokes Congress’s Commerce Power as its jurisdictional basis, the FAA applies in state and federal court and preempts conflicting state law.^[5] Thus, unless the parties have contracted to the contrary, the FAA applies in federal or state court to any arbitration agreement regarding a transaction that involves interstate commerce.^[6]

While courts are empowered to settle disputes by both a state and federal constitution and legislation, an arbitrator derives authority only through contract. That is, the arbitrator may only resolve the issues that he is authorized to resolve under the arbitration agreement. Courts retain jurisdiction to decide all other matters. Accordingly, courts have historically divided threshold questions into two categories: questions of arbitrability and procedural issues.

With respect to arbitrability, courts decide whether a party is contractually bound to arbitrate and, if so, whether the arbitration clause’s scope makes the disputed issue arbitrable.^[7] Judicial review is generally limited to three issues: (1) whether the parties agreed to arbitrate their dispute, (2) whether third parties are bound to arbitrate, and (3) whether the arbitration clause applies to a particular dispute between the parties.^[8]

Conversely, procedural questions, which arise after the arbitrator has authority to hear a matter, are within the arbitrator’s providence. These issues only arise once a dispute has become arbitrable.^[9] After all, “arbitrators ‘exist’ as...