Marc J. Goldstein Arbitrator & Mediator NYC
May 27, 2010

Unconscionability of Class Action Waivers: Who Decides?

Recently the US Third Circuit Court of Appeals, sitting en banc on its own motion, held that when a motion to compel arbitration is opposed to the extent that the arbitration clause bars class actions, the District Court must resolve the challenge to the class action prohibition, and not refer that issue to the arbitrator. (Puleo v. Chase Bank USA, 2010 U.S. App. LEXIS 9497 (3d Cir. May 10, 2010)).


The Third Circuit en banc majority opinion starts from the premise that a “question of arbitrability” is presented whenever one party challenges in whole or in part the validity of the arbitration agreement.


I question this broad an approach. Certainly if a party contends that the agreement to arbitrate is a contract of adhesion and should not be enforced, there is a question of arbitrability. If that party’s position is sustained, the dispute is resolved in court.


But how does the principle articulated by the Third Circuit apply when, as in Puleo, the named parties do not contest that their claims must be arbitrated, but insist that those portions of the arbitration clause that prevent them from arbitrating in a representative capacity are unconscionable? Is this a question of “arbitrability” as the courts have defined that phrase? When the consequence of deciding the validity challenge favorably is to enlarge the scope of arbitration, not to remove disputes or parties from arbitration, is that an “arbitrability” decision?


The Third Circuit majority says “yes.” The Court maintains that the issue is one of the alleged partial invalidity of the arbitration agreement. The majority addresses the issue from several directions. First, they point out that the FAA only permits a court to compel arbitration in accordance with the terms of the parties’ agreement. Thus, the Court reasons, if there is a dispute over what those terms are, the Court must resolve it before making its order to compel arbitration. On this view, a challenge to the validity of any portion of the arbitration agreement, when raised in conjunction with a motion to compel, must be regarded as a question of arbitrability for the court to decide (absent a clear and unmistakable agreement of the parties to have the arbitrator decide it).


Thus, the Court holds, the District Court here could not have entered an order to compel arbitration without first resolving Plaintiffs’ unconscionability challenge to the class action waiver.


Next, the Third Circuit expresses the view that deciding whether the arbitration may proceed as a class action “calls into question the very authority of the arbitrator to preside over the dispute, and, by extension, the validity of the Agreement itself.”


This articulation is imprecise. When the Claimant questions not the duty to arbitrate but only the clause’s limitation on arbitrable claims to those claims that are personal to the Claimant, the arbitrator’s “authority to preside” is not at issue. The question is does the arbitrator have authority to preside over dozens or hundreds of consolidated disputes that are substantially identical, and as to which the putative individual claimants have not opted in, nor assigned their claims to the nominal Claimant, nor otherwise indicated a desire to have their rights arbitrally determined.


It is this array of “who” questions — with whom have Defendants agreed to arbitrate in this case, and which Claimants have agreed to arbitrate their claims in this case, that makes the issue of whether the class action waiver is unconscionable a question of arbitrability. Indeed, in the Supreme Court’s recent decision in the Stolt-Nielsen case, the “who are the parties to the agreement” question is identified as the marker that makes the issue of class action arbitration a question of arbitrability on which no deference is due to an arbitrator’s decision.


Four of the ten judges of the Third Circuit, joining in a dissent, held the view that no question of arbitrability was presented, and that the question of whether the class action waiver was unconscionable was suitable for the arbitrator to decide as a question of arbitral procedure. The dissenters’ state that their conception of arbitrability is that of the Supreme Court in Howsam v Dean Witter — i.e. either a dispute over the validity of the arbitration agreement, or a dispute of whether a particular claim or dispute is within the scope of what the parties agreed to arbitrate. The dissenters find that the class action waiver unconscionability issue does not fall into either category.


But the position that this is not a “scope of arbitrable issues” arbitrability question is, in my view, flawed. Whether the parties’ agreement provides for arbitration over the alleged unfair treatment by the bank of a credit card holder other than the named claimant seems to me to be just as much a scope issue as whether the sgreement provides for arbitration of the named claimant’s unfair treatment claim. In my view a matter of procedure is a matter concerning how the arbitrator organizes proceeding leading to the final adjudication of the claimant’s claim. If the arbitrator were permitted to decide whether she may also adjudicate claims belonging to absent claimants for whom the nominal claimant wishes to be a proxy, she would not be deciding only the procedure for getting to a result on the claimant’s claim.


The politically-charged access to justice considerations associated with disputes over class arbitration appear to have been as divisive within the Third Circuit as they were on the Supreme Court in Stolt-Nielsen. Regrettably, these considerations threaten to interfere with precise analysis. Within the framework of federal jurisprudence on the allocation of decisions between courts and arbitrators, the unconscionability issue in Puleo v Chase seems to have been clearly one for the court. Taking that view should not brand its proponents as opponents of arbitral class actions merely because, in this case, the District Court held that the class action waiver was not unconscionable. Indeed a growing body of federal appellate jurisprudence has sustained district court decisions finding such waivers in comsumer contracts to be unconscionable under applicable state law. District courts in the Third Circuit, such as the one in Puleo v Chase, have been inhibited from so ruling by a much-criticized Third Circuit decision in 2007 (Gay v CreditInform, 511 F.3d 369) that suggested in dicta that Pennsylvania unconscionability law as applied to class action waivers is pre-empted by the Federal Arbitration Act. But the Third Circuit in a subsequent case held that New Jersey law as applied to class action waivers is not pre-empted by the FAA (Homa v. American Express, 558 F.3d 225).


Last week the Supreme Court accepted certiorari in a case from the Ninth Circuit, in which the Court affirmed a District Court decision finding an arbitral class action waiver unconscionable under California law. (AT&T Mobility v. Concepcion). The Supreme Court has agreed to consoider whether the FAA pre-empts California law because the unconscionability principles applied are specific to arbitration clauses and not applicable to contracts generally. (Discussion of that issue will be the sunject of a future Commentary).

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