As this blog has previously discussed, the availability of class arbitration has been significantly restricted after a series of U.S. Supreme Court decisions. However, we have also noted that express preclusion of class arbitration remains advisable for companies because they eliminate the ability of state courts and arbitrators to read permission for class arbitration into an arbitration clause that was never intended to allow class arbitration.
A recent decision in the Supreme Court of Alabama highlights the continuing wisdom of including a class waiver even following the U.S. Supreme Court’s rulings. In Alabama Psychiatric Services, P.C. v. Lazenby, et al., several laid-off employees filed a class action complaint against their employer, APS. APS successfully moved for a circuit court order that compelled arbitration under the employment agreements.
The arbitration clauses in the employment agreements were silent on the topic of whether class arbitration was available. At the same time that the parties argued the motion to compel arbitration, APS asked the circuit court to decide whether class arbitration was available. The circuit court concluded that that question was itself reserved for the arbitrator.
Arbitration began. Early on, the arbitrator issued a “clause-construction award”—which is allowed under the rules of the American Arbitration Association—ruling that class arbitration was available under the parties’ agreements. APS appealed this clause-construction award to the circuit court, which denied the appeal. The appeal then went to the Supreme Court of Alabama.
APS sought to challenge the circuit court’s earlier decision to send the question of class arbitrability to the arbitrator, arguing that the circuit court should have decided that question itself. The Alabama Supreme Court disagreed, noting that this decision was a part of the order compelling arbitration, and APS failed to appeal that order within the 42-day deadline to appeal under Ala. R. App. P. 4(d).
As an aside, this is a reminder for arbitration defendants that in a state court, the state’s rules of civil procedure govern when and how an order compelling arbitration must be appealed. In Alabama, such an order is immediately appealable, and so APS had to appeal within 42 days; the deadline was not tolled by the arbitration.
At this point, APS’s chances of success became very low. Having blown its deadline to appeal the circuit court’s order, APS now had to overturn the arbitrator’s clause-construction award under the very limited standards of review in the Federal Arbitration Act (FAA). Winning an appeal on one of these grounds is notoriously difficult. As you might have guessed by now, APS was unable to persuade the court that any available ground to have the award overturned under the FAA had been satisfied. The Alabama Supreme Court found the parties’ agreement distinguishable from those in recent U.S. Supreme Court cases that had restricted the availability of class arbitration. APS was therefore required to proceed with a class arbitration.
Class arbitration raises the specter of a “heads you win, tails I lose” situation for companies. A class arbitration victory for plaintiffs will be extremely difficult for the company to challenge in court, as it will rarely present grounds for overturning an arbitration award. Meanwhile, a victory for the company can more easily be set aside if class members who were not participants in the arbitration raise a due process challenge to the decision.
This decision should serve as a reminder to companies to review their arbitration agreements and ensure that class arbitration is expressly disallowed. Best practice is likely to specify that, while all claims of the contracting parties’ must be submitted to binding arbitration, the arbitrator “shall not have jurisdiction to determine any claims on a class, collective, or representative basis or to join the claims of more than one claimant for adjudication in a single arbitration proceeding,” or words to that effect. Why? Because one of the very few grounds for vacating an arbitration award under the FAA is that the arbitrator exceeded his or her jurisdiction under the written arbitration agreement (9. U.S.C. § 10(a)(4)).
The bottom line: Despite the U.S. Supreme Court cases minimizing the possibility of unintended agreement to class arbitration, your own failure to expressly preclude class arbitration can still cause your next arbitrable dispute to take a detour down the dangerous road of class arbitration.