Be Careful What You Ask For: Eleventh Circuit Holds That Arbitrator – Not Court – Decides Whether Arbitration Agreement Designating AAA Rules Allows for Class ArbitrationThe Eleventh Circuit has held that, absent express language to the contrary in the arbitration agreement itself, whether class arbitration is permitted under an arbitration agreement selecting American Arbitration Association (AAA) rules is an issue for the arbitrator to decide (Spirit Airlines, Inc. v. Maizes, No. 17-14415 (11th Cir. Aug. 15, 2018)). This decision highlights yet another class action-related circuit split calling for Supreme Court resolution, and also illustrates a potential pitfall in drafting effective arbitration agreements.

Case Background and Ruling

The case arose out of Spirit Airlines’ “$9 Fare Club,” a program offering cheaper fares and bag fees to members. Steven Maizes and three other individuals filed a claim in arbitration against Spirit claiming that the company violated the Fare Club agreement and asserting those claims on behalf of a putative class. The airline responded with a declaratory judgment action against the class representatives in federal court, seeking a declaration that the agreement’s arbitration clause did not authorize class claims. Spirit also sought to enjoin prosecution of the class claims in arbitration. Following a hearing, the district court denied Spirit’s request for an injunction, and dismissed the case. The court reasoned that the arbitration agreement, which required arbitration “in accordance with the rules of the American Arbitration Association then in effect,” of necessity incorporated Rule 3 of the AAA’s Supplementary Rules for Class Actions. Because the AAA rules require the arbitrator to determine whether the arbitration agreement permits class arbitration, the trial court dismissed Spirit’s case for lack of jurisdiction. The court also declined to allow Spirit’s vice president to testify that the company never had any intent to arbitrate more than one dispute at a time, as there was no ambiguity in the agreement requiring parol evidence to clarify.

On appeal, the Eleventh Circuit affirmed. The court first cited the Supreme Court’s decision in First Options of Chicago, Inc. v. Kaplan for the proposition that lower courts should not presume that parties to an arbitration agreement have agreed to have an arbitrator decide questions of arbitrability “unless there is clear and unmistakable evidence that they did so.” The court went on to hold that the parties’ selection of AAA rules in their agreement amounted to such clear and unmistakable evidence. In so doing, the court relied on its 2005 decision in Terminix Int’l Co. v. Palmer Ranch Ltd. Partnership, which involved individual rather than class arbitration. In Terminix, the court held that the parties’ adoption in their agreement of the AAA Commercial Arbitration Rules (including Rule 8(a), which grants the arbitrator the authority to determine the existence, scope or validity of the arbitration agreement) was clear and unmistakable evidence that the parties intended for the arbitrator to decide the agreement’s enforceability. The Eleventh Circuit in Spirit Airlines took the Terminix reasoning and holding as outcome-determinative, holding that invocation of the AAA rules put the arbitrability of class claims squarely in the hands of the arbitrator.

The court acknowledged that appellate decisions from the Third, Fourth, Sixth and Eighth Circuits have, by contrast, held that adoption of the AAA rules is not clear and unmistakable evidence of the parties’ intent to allow the arbitrator to decide the class arbitrability question. Nevertheless, the Eleventh Circuit read those decisions as requiring a higher showing for class arbitrability than for other issues of arbitrability, for which it could find “no basis” in Supreme Court precedent.

Takeaways

  • While the Eleventh Circuit may have felt its hands were tied by the decision in Terminix (which “weigh[ed] heavily” in the court’s consideration), its conclusion that there is no basis in the Supreme Court’s cases for requiring a higher burden in the class arbitrability context can fairly be questioned. In both its Concepcion and Stolt-Nielsen decisions, the Supreme Court described the dramatic differences between two-party and class arbitration, including vastly higher monetary stakes, due process concerns implicated by class proceedings, and stark disparities in speed, efficiency, formality and cost.
  • Layered onto these differences is the reality that appellate review is practically nonexistent in arbitration (including on questions of class arbitrability, if such are left to the arbitrator). If an arbitrator errs in the resolution of a class case (for example, in deciding certification, in approving or rejecting a class settlement, in failing to require adequate representation or class notice, or in dealing with class member opt-out rights), such an error is almost certain to go uncorrected. That may well mean that while the defendant is stuck with the arbitrator’s decision, the class may not be bound by it as a matter of due process, and therefore may be free to relitigate a result they don’t like, either individually or as a class. Given those risks, it is fair to require an express delegation to the arbitrator of the class arbitrability question, rather than simply relying on an inference based on the rules the parties selected.
  • Spirit Airlines creates a circuit split, one that the Supreme Court – given its recent interest in the interplay of class proceedings and the Federal Arbitration Act – seems likely to address sooner rather than later. (The split was deepened the following week, when the Tenth Circuit held that the parties’ adoption of AAA rules constituted clear and unambiguous intent to defer the question of collective action arbitrability to the arbitrator.)
  • Whether or not the Supreme Court takes up the issue, companies would do well to review their arbitration agreements. Many companies prudently craft their arbitration agreements to contain a class action waiver that is not severable and that expressly reserves the issue of class arbitrability to the courts. Jurisdiction to decide the issue should be expressly withheld from the arbitrator. (An award exceeding the arbitrator’s jurisdiction is one of the very few permissible grounds of appeal from an arbitrator’s decision as specified in the Federal Arbitration Act, 9 U.S.C. §16). Expressly disallowing use of the AAA Supplementary Rules for Class Actions might be another prudent drafting measure, as would adopting arbitration rules only to the extent that they do not conflict with the express terms of the arbitration agreement. Whatever the benefits of bilateral arbitration in any given circumstance, facing a class action before an arbitrator — with no necessary application of the rules of civil procedure or evidence, and no possibility of appellate review – is a place few defendants would want to be.
  • No matter what aspect of arbitration is at issue, relying on third-party arbitration rules without specifying rules in effect as of a certain date is risky because those rules are subject to change without notice. Companies should be explicit in stating the critical parts of their arbitration agreements and should not count on arbitration rules to supply them.

We continue to watch arbitration carefully. While arbitration has been a very successful tool in helping companies manage litigation risk, it is not a silver bullet. Companies need to be mindful of what questions are best decided by arbitrators, and what questions belong in court.