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January 03, 2012

What Role for the Courts in Consolidating Related Arbitrations?

Under US arbitration law the question of whether multiple arbitration claims may proceed on a consolidated (or class) basis may well be a question for determination by the arbitral tribunal in the first instance. A recent decision from the US Seventh Circuit Court of Appeals, refusing to rule on the consolidation issue, and thus leaving that question to the arbitral tribunal, reminds us that the procedural posture in which the question is presented will often determine where the power to decide will reside.

In Blue Cross Blue Shield of Massachusetts, Inc. v. BCS Insurance Co., 2011 WL 6382203 (7th Cir. Dec. 16, 2011),  the appellate court held that it lacked jurisdiction to review a District Court order that had denied what the moving party denominated a “cross-motion to compel de-consolidated arbitration.”  Here, the Blue Cross entities in several states had commenced a consolidated arbitration of their respective claims against their captive reinsurer.  The entities and the reinsurer each appointed an arbitrator. But when the entities moved in federal court under Section 5 of the FAA for the appointment of the presiding arbitrator, the re-insurer made its cross-motion “to compel de-consolidated arbitration.”

When the District Court denied that motion, the reinsurer appealed, under Section 16 of the FAA, which provides for interlocutory appeal of an order denying a motion to compel arbitration. But the Seventh Circuit viewed this approach as an effort to recast, as a question of consent to arbitration, what the Court viewed as simply a procedural issue arising within a pending arbitration, i.e. the issue of whether the arbitral tribunal would hear several claimants’ claims in one proceeding or in several.  It held that the underlying motion was therefore not a motion to compel arbitration within the purview of the FAA, and therefore the District Court’s order denying the motion was not appealable on an interlocutory basis.

As a matter of litigation tactics, the advocate must wonder — as did the Seventh Circuit, it appears — why the reinsurer raised the (de-) consolidation issue only after having appointed an arbitrator, and only after an impasse on selection of the chair impelled the claimants to apply to the District Court. Had the reinsurer instead refused to appoint an arbitrator, the claimants would have had to petition the Court to compel arbitration in view of the reinsurer’s refusal to proceed (FAA Section 4).

And whereas FAA Section 4 only permits the district court to compel arbitration “in the manner provided for in [the] agreement,” it is possible the consolidation issue would have been resolved by the court as a matter of contract interpretation. The claimants’ motion to compel would have specified consolidated arbitration as the only relief sought — as the reinsurer would not have failed or refused to proceed with several unconsolidated cases. But the reinsurer equally could have cross-moved to compel case-by-case arbitration, the claimants having refused to proceed in that fashion. One of the two motions to compel arbitration would have been denied, and appellate review would be possible without awaiting a final award. 

A pragmatic first reaction to the Blue Cross case is that the FAA ought not to be construed to prevent pre-award appellate review of an issue so important as whether a dozen or more similar and substantial claims may proceed on a consolidated basis. But in fact it was the flaw in the reinsurer’s approach — seeking to make a mid-course correction after having participated in the arbitration by making its arbitrator appointment — and not any flaw in the statutory scheme,  that led to the outcome in this case.