Class Arbitration: Who Decides?

• Author: Lathrop, Mitchell L.

OVER the past several years, the U.S. Supreme Court has clarified a myriad of issues surrounding the availability of class arbitration, including most recently with the court's 2018 decision in Epic Systems Corp. v. Lewis providing firm guidance that express provisions precluding class arbitration will be enforced. However, one question remains unanswered by the high court: When an arbitration provision is silent as to class arbitration and a party seeks to include a class in the arbitral proceedings, who decides arbitrability--the court or the arbitrator? Put another way, is the question simply a procedural issue to be decided by the arbitrator, or is it a "gateway" issue which must be decided by the court? The Circuits remain divided on this point, so the question may soon make its way to the Supreme Court for resolution.

1. Arbitration background

   The federal policy in support of arbitration is well established. 1 So too is the rule that courts must "enforce the bargain of the parties to arbitrate." 2 When the Federal Arbitration Act ("FAA") 3 applies, it preempts any contrary state laws. 4

   For there to be an enforceable arbitration provision there must be (1) a writing, 5 and (2) a contractual relationship between the parties. 6 "[A]rbitration is a matter of contract, and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit. ... An order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. Doubts should be resolved in favor of coverage." 7 At the same time, arbitration agreements can be declared unenforceable "upon such grounds as exist at law or in equity for the revocation of any contract." 8 This saving clause permits agreements to arbitrate to be invalidated by "generally applicable contract defenses, such as fraud, duress, or unconscionability," but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. 9 Challenges to the validity of the agreement to arbitrate are to be decided by the court, 10 while challenges to the validity of the contract or instrument containing the arbitration provision is to be decided by the arbitrator.11

2. Epic Systems Corp. v. Lewis

   Despite the myriad rulings of the Supreme Court on arbitration issues, by mid-2018 a significant question remained: can employers require that employees agree to one-on-one arbitrations, or does Section 7 of the National Labor Relations Act12 supersede the Federal Arbitration Act and permit class arbitration? Or, in a broader sense, will provisions in agreements requiring one-on-one arbitrations be enforced? Most recently, in Epic Systems13 the Supreme Court concluded that where there are express provisions that preclude class arbitration, these provisions are enforceable and may be adjudicated by the arbitrator. The long and tortured history of what ultimately spawned the U.S. Supreme Court decision in Epic Systems began some 13 years ago. On September 27, 2005, David Ho, an employee of the accounting firm of Ernst & Young ("E&Y"), filed a purported class action in California state court, asserting claims under the Fair Labor Standards Act ("FLSA") 14 and the California Labor Code ("CLC") alleging that E&Y failed to compensate them for overtime or required breaks. E&Y removed the case to the Northern District of California, and Ho amended his complaint to add three additional plaintiffs, one of whom was Sarah Fernandez. 15 After the district court granted summary judgment against Ho, and two of the additional plaintiffs voluntarily withdrew, only Fernandez remained to represent the putative class. 16 Two additional cases involving putative classes asserting claims under the CLC17 were consolidated with the Ho action, which was renamed Fernandez for class certification purposes.

   Plaintiffs in the three cases sought to represent two classes of current and former E&Y employees: (1) Staff, consisting of first- and second-year employees and (2) Seniors, third- and fourth-year employees, in the auditing and tax groups at E&Y's offices in California. On September 20, 2011, the court in the Northern District of California District denied certification with respect to the auditing employees but granted the motion with respect to the tax employees.

   The denial of certification in Fernandez was based on the fact that Fernandez herself was not an adequate class representative. 18 Following denial of class certification, the Fernandez plaintiffs moved to add Stephen Morris as a new plaintiff. The court denied Morris's attempt to join the suit, finding that plaintiffs had unduly delayed in attempting to add Morris, but pointed out that Morris could file his own suit. Morris brought suit in the Southern District of New York where another suit by E&Y employees was pending. 19 E&Y moved to transfer the cases to the Northern District of California and the court granted the motion. 20

   When the cases arrived in the Northern District of California, E&Y moved to compel arbitration and to dismiss the cases. The court granted the motion, 21 and the plaintiffs appealed. The Ninth Circuit, in a 2-to-1 decision, reversed the district court and held that an employer violates the National Labor Relations Act ("NLRA")22 by requiring employees to sign an arbitration agreement precluding them from bringing a...