Court Not Arbitrator Decides If Class Arbitration Is Allowed: Fourth Circuit | Practical Law

Court Not Arbitrator Decides If Class Arbitration Is Allowed: Fourth Circuit | Practical Law

In Dell Webb Communities, Inc. v. Carlson, the US Court of Appeals for the Fourth Circuit held that whether an agreement allows for class arbitration is an issue for the court, and not the arbitrator, to decide.

Court Not Arbitrator Decides If Class Arbitration Is Allowed: Fourth Circuit

Practical Law Legal Update w-001-8246 (Approx. 3 pages)

Court Not Arbitrator Decides If Class Arbitration Is Allowed: Fourth Circuit

by Practical Law Litigation
Published on 29 Mar 2016 • USA (National/Federal)
In Dell Webb Communities, Inc. v. Carlson, the US Court of Appeals for the Fourth Circuit held that whether an agreement allows for class arbitration is an issue for the court, and not the arbitrator, to decide.
On March 28, 2016, in Dell Webb Communities, Inc. v. Carlson, the US Court of Appeals for the Fourth Circuit held that the district court, not the arbitrator, must decide whether the case could proceed on a class basis ( (4th Cir. Mar. 28, 2016)).
The plaintiffs signed a sales agreement with the defendants, PulteGroup, Inc. and its subsidiary Del Webb Communities, Inc., for the purchase of land and the construction of a home. The agreement contained an arbitration clause. In 2008, the plaintiffs filed suit in South Carolina state court against the defendants and two other parties alleging construction defects. The state court later granted the plaintiffs' motion to amend their complaint to add class action allegations. On appeal, the South Carolina Court of Appeals found that the plaintiffs' claims were subject to arbitration under the sales agreement. Subsequently, the plaintiffs filed a demand for arbitration with the American Arbitration Association (AAA), seeking class arbitration and class certification. During a call with the AAA manager, the parties were notified that the arbitrator would decide whether the sales agreement permitted class arbitration.
The defendants filed a petition under § 4 of the Federal Arbitration Act (FAA) in federal court, arguing that whether the sales agreement authorizes class arbitration is a question of arbitrability for the court to determine. The defendants sought a declaratory judgment that the parties did not agree to class arbitration. The district court, among other things, denied the petition, holding that class arbitration is an issue of contract interpretation for the arbitrator.
On appeal, the Fourth Circuit reversed. The court noted the distinction between procedural questions for the arbitrator (questions that arise once the obligation to arbitrate is established) and "gateway" questions of arbitrability for the court (whether the case will proceed to arbitration). The Fourth Circuit held that whether an arbitration clause permits class arbitration is a question of arbitrability for the court because:
  • The parties did not unmistakably provide that the arbitrator would decide whether the agreement authorizes class arbitration.
  • There are fundamental differences between bilateral and class arbitration that would change the nature of arbitration, including:
    • class arbitration would bring higher risks for defendants;
    • class arbitration is slower and more expensive than bilateral arbitration; and
    • the FAA provides limited grounds for vacating an arbitration award, so the absence of multilayered review in arbitration makes it more likely that errors will go uncorrected.
Notably, there is a circuit split on the issue of whether class arbitration is an issue for the court or arbitrator to decide. The Fourth Circuit joins the US Courts of Appeals for the Third and Sixth Circuits in holding that, unless the agreement clearly states otherwise, class arbitration is for the court to determine (see Opalinski v. Robert Half Int'l Inc., 761 F.3d 326, 331-34, 335-36 (3d Cir. 2014) and Reed Elsevier, Inc. ex. rel. LexisNexis Div. v. Crockett, 734 F.3d 594, 597-99 (6th Cir. 2013)). The US Court of Appeals for the Fifth Circuit, however, recently held that the class arbitration issue is instead for the arbitrator to decide (Robinson v. J & K Admin. Mgmt. Servs., Inc., (5th Cir. Mar. 17, 2016)).