Arbitrator Erred in Forcing Parties into Class Arbitration Absent Contractual or Legal Basis: Fifth Circuit

Practical Law Legal Update 6-519-4759 (Approx. 4 pages)

Arbitrator Erred in Forcing Parties into Class Arbitration Absent Contractual or Legal Basis: Fifth Circuit

by PLC Labor & Employment

Key Litigated Issues

On May 18, 2012, the US Court of Appeals for the Fifth Circuit issued an opinion in Reed v. Florida Metropolitan University, Inc. The key litigated issues in this appeal were whether:

The district court properly allowed the arbitrator to decide whether the parties agreed to class arbitration.
The parties to an arbitration agreement that was silent about class arbitration could be found to have implicitly consented to class arbitration.

Background

Plaintiff-Appellee Jeffrey Reed obtained a bachelor's degree in paralegal studies from Everest University Online's distance learning program. Before he enrolled, Everest officials had assured Reed that the degree would be accepted by educational institutions and employers. However, Reed later learned that law schools and employers would not recognize his degree.

Reed filed a putative class action in Texas state court alleging that Defendants-Appellants Corinthian Colleges and Florida Metropolitan University (School) violated the Texas Education Code by soliciting students in Texas without the appropriate certifications. The School removed the action to federal court and then moved to compel individual arbitration pursuant to the arbitration provision of Reed's enrollment agreement, which did not explicitly address class arbitration.

The district court, among other things, granted the School's motion to compel arbitration and concluded that whether the agreement provided for class arbitration was an issue "more appropriately decided by the arbitrator."

The case then proceeded before the American Arbitration Association, where Reed sought class arbitration. Although the arbitration agreement did not explicitly address class arbitration, the arbitrator determined that the parties implicitly agreed to class arbitration and entered an award to that effect. Reed sought to confirm the arbitration award in district court. The School moved to vacate the award, arguing that:

The arbitrator exceeded his powers by ordering the parties into class arbitration without sufficient contractual basis.
The award conflicted with the recent Supreme Court decisions in:
- Stolt-Nielsen S.A. v. AnimalFeeds International Corp.; and
- AT&T Mobility LLC v. Concepcion.

The district court confirmed the award, and the School appealed to the Fifth Circuit.

Outcome

The Fifth Circuit reversed the district court, holding that the district court:

Properly allowed the arbitrator to determine whether the parties' arbitration agreement allowed for class arbitration, instead of deciding the issue itself.
Erred in failing to vacate the arbitration award under the Federal Arbitration Act (FAA).

In reviewing the arbitration award under the FAA, the Fifth Circuit discussed in detail the US Supreme Court decisions in Stolt-Nielsen S.A. and AT&T Mobility LLC. Based on these decisions, the Fifth Circuit concluded:

Arbitrators should not conclude that the parties consented to class arbitration without a contractual basis for that conclusion.
An agreement to arbitrate on a class basis may be implicit, but "should not be lightly inferred."

The court then held that the arbitrator lacked a contractual basis for concluding that the parties agreed to class arbitration because:

The arbitration agreement at issue did not explicitly address class arbitration.
The arbitrator improperly relied on the "any dispute" and "any remedy" clauses in the arbitration agreement to find that the agreement authorized class arbitration.

Noting that the US Court of Appeals for the Second Circuit reached a different conclusion in Jock v. Sterling Jewelers Inc., the Fifth Circuit held that the arbitrator exceeded his powers and that the arbitration had to proceed bilaterally and not on a class basis.

Practical Implications

Based on this decision, employers in the Fifth Circuit can argue that arbitrations should not be permitted to proceed on a class basis if the arbitration agreement is silent on class arbitrations.

However, because there is now a split between the Second and Fifth Circuits, employers that wish to minimize the risk of a class arbitration should:

Understand jurisdiction-specific factors based on the circuit they are located in.
Ensure employees sign class arbitration waivers.

Arbitrator Erred in Forcing Parties into Class Arbitration Absent Contractual or Legal Basis: Fifth Circuit | Practical Law