This article was published in the Appellate, Class Action, Commercial Contracts, Corporate, Employment, and Energy sections of Law360 on October 23, 2014. © Copyright 2014, Portfolio Media, Inc., publisher of Law360. It is republished here with permission. This article was one of Law360’s Top 10 Most Read Expert Analyses for the week of October 19.

Companies and other business entities use arbitration clauses to protect themselves from class action liability. While they often use class action waivers that state the parties agree not to pursue class claims in arbitration, the United States Supreme Court does not require such express waivers. Recent Supreme Court decisions indicate clauses that are “silent” as to class claims also preclude class arbitration. Instead, the default result under these agreements is to bilateral (individual) arbitration, thereby protecting the company from class liability altogether. But when this battle moves out of court, and arbitrators are asked to interpret such “silent” arbitration clauses, they have at times reached the opposite conclusion and permitted class arbitration. Under the Federal Arbitration Act’s restrictive judicial review of arbitration decisions, these decisions are upheld, even if they arguably reach the wrong result under Supreme Court precedent. If a lower court had reached the same result, then the appellate court could review the decision de novo, thereby making it easier for the practitioner to argue the decision is contrary to recent Supreme Court decisions. This difference in judicial review standards in turn makes the answer to “who decides” the class arbitration question extremely important. Indeed, it is a multimillion-dollar question for many companies and other business entities because so many “silent” arbitration clauses still exist today, and arbitrators too often permit class arbitration under these clauses.

On July 30, 2014, the Third Circuit answered the multimillion dollar question. In Opalinski v. Robert Half Inc., 2014 U.S. App. LEXIS 14538 (3d Cir. July 30, 2014), the Third Circuit ruled that, absent a clear agreement otherwise, a court and not an arbitrator must decide if an agreement to arbitrate also authorizes classwide arbitration. Because a court and not an arbitrator will decide the issue, any result that is contrary to the Supreme Court’s directive against class arbitration will be more likely reversible, thereby making class liability in arbitration overall less likely. The Third Circuit is only the second circuit court of appeals to reach this decision, with the Sixth Circuit being the first. In reaching its decision, the Third Circuit bobbed and weaved its way through prior precedent that suggested the opposite conclusion.

Notwithstanding its arguably questionable precedential support, the Third Circuit’s decision is not surprising. It continues arbitration law’s march toward a likely end, by any path for class action liability for companies and other business entities. By taking the decision out of the hands of the arbitrators and putting it into the courts, the Third Circuit has decreased the risk of companies and other business entities being stuck with an arbitrator’s ruling that is contrary to the Supreme Court’s expressed preference that even “silent” arbitration clauses be construed to preclude class arbitrations. This article will explore how the Third Circuit got there, the impact its decision will have going forward, and other lessons learned.

Prior Third Circuit Precedent

Courts act as gatekeepers to arbitration. When the parties disagree on whether a particular dispute is subject to arbitration, courts are asked to decide the threshold question as to whether a particular issue is “arbitrable.” This is antithetical since the point of arbitration is to stay out of court, and so “questions of arbitrability” left for the court to decide are kept limited and narrowly defined. They can include questions such as whether an arbitration clause is binding at all, or whether an admittedly binding clause applies to a particular dispute. By contrast, questions that raise purely “procedural” issues relating to the arbitration — for instance, consolidation of two or more arbitrations, discovery, evidentiary questions, etc. — are usually for the arbitrator to decide.

The issue of whether the court or the arbitrator decides classwide arbitration has been fought out on this borderline between arbitrability and procedure. Prior to Opalinski, one could argue the trend, in the Third Circuit at least, was toward characterizing classwide arbitration as raising a procedural question for the arbitrator and not the court. For instance, in Quilloin v. Tenett HealthSys. Philadelphia Inc., 673 F.3d 221 (3d Cir. 2012), the Third Circuit considered the enforceability of an arbitration clause in a case that had class claims. The clause did not contain an express class action waiver. The court noted that while “[s]ilence regarding class arbitration generally indicates a prohibition against class arbitration,” the question was procedural and therefore left for the arbitrator: “the actual determination as to whether class action is prohibited is a question of interpretation and procedure for the arbitrator.” See id. at 232. It is this statement in Quilloin that the Opalinski court, as explained in more detail below, took dead aim at and rejected.

The Opalinski Decision

In Opalinski, the plaintiffs David Opalinski and James McCabe (collectively “the appellees”) brought a class action alleging Fair Labor Standard Action violations. Defendant Robert Half International Inc. (RHI) moved to compel arbitration of the claims on an individual as opposed to class basis. The arbitration clause did not contain an express class action waiver but was instead silent as to the issue. The district court granted the motion in part, but held the question of classwide arbitration availability was for the arbitrator to decide. After the arbitrator issued a partial award and found the arbitration clause permitted classwide arbitration, RHI moved the district court to vacate, which the district court denied. RHI appealed.

The issue raised on appeal was who should have decided whether the arbitration clause permitted classwide arbitration — the court or the arbitrator. In considering the question, the Third Circuit revisited its recent two-year-old Quilloin opinion. The Third Circuit characterized as mere dicta the Quilloin court’s reference to classwide arbitration availability as a “question of interpretation and procedure.” As the Opalinski court explained, the Quilloin court was not asked to consider who should decide the availability of classwide arbitration because “at the district level the parties in Quilloin had already agreed that the arbitrator should be the one to determine whether the contract provided for class arbitration.” See Opalinski, 2014 U.S. App. LEXIS 14538 at *9. Noticeably, the Quilloin court made no reference to this agreement when concluding classwide arbitration raised a procedural question for an arbitrator. Nevertheless, the Opalinski court used such an agreement to marginalize Quilloin’s pronouncement on the issue.

The Third Circuit also noted the Supreme Court had not yet ruled on the issue — a comment that spoke more to the uncertainty than to the frequency of Supreme Court opinions on the topic. In Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 452-3 (2003), a plurality of the court did state the availability of classwide arbitration was for the arbitrator to decide because “it concerns neither the validity of the arbitration clause nor its applicability to the underlying dispute between the parties ... [, but only] contract interpretation and arbitration procedures.” As the Third Circuit correctly pointed out, however, subsequent Supreme Court decisions “cast doubt” on the Bazzle plurality’s decision. In Stolt-Nielson SA v. Animal Feeds International Corp., 559 U.S. 663, 680 (2010), the court emphasized “only a plurality” in Bazzle reached a conclusion on the issue, which made Bazzle not binding on this point. And, in 2013 in Oxford Health Plans LLC v. Sutter, 133 S.Ct. 2064, 2069 n.2 (2013), the court announced it had “not yet decided whether the availability of class arbitration is a question of arbitrability” for a court to decide.

The Third Circuit then turned to the one decision which had squarely addressed the issue, from the Sixth Circuit. In Reed Elsevier Inc. v. Crockett, 734 F.3d 594, 599 (6th Cir. 2013), the Sixth Circuit held that whether an arbitration agreement permits classwide arbitration is a “gateway matter, which is reserved for judicial determination unless the parties clearly and unmistakably provide otherwise.” In reaching its decision, the Sixth Circuit anticipated the Supreme Court would likely reach the same conclusion: “the Court has given every indication, short of an outright holding, that classwide arbitrability is a gateway question rather than a subsidiary one.” See id. at 598.

In reaching its own conclusion, the Third Circuit broke out its analysis into two questions: (1) did the availability of class arbitration implicate whose claims the arbitrator may resolve? and (2) did the availability of class arbitration implicate the type of controversy submitted to the arbitrator? If the answer to both questions is “yes,” then the availability of classwide arbitration is an issue for the court and not the arbitrator.

For both questions, the Third Circuit answered unequivocally “yes.” First, the court noted that by demanding classwide arbitration, the appellees were asking the arbitrator not only to arbitrate their claims, but the claims of additional individuals not currently parties to the action. This implicated whose claims the arbitrator could resolve, therefore making the issue an “arbitrability” question for the court and not a procedural one for the arbitrator.

Second, the Third Circuit looked to prior Supreme Court precedent to conclude that classwide arbitration implicated the type of controversy as opposed to merely its procedural nature. The Third Circuit explained that since class arbitration resolves not merely a single dispute but instead potentially hundreds or more, the presumption of privacy and confidentiality may be compromised as a result, and the award will bind more than just the parties to the single arbitration agreement. This makes the stakes comparable to class action litigation, even though the scope of judicial review is much more limited. These fundamental differences between class arbitration and bilateral arbitration mean the availability of classwide arbitration raises a substantive gateway dispute that a court and not an arbitrator should decide.

The appellees argued the First, Second and Eleventh Circuits had ruled otherwise. The Third Circuit easily rejected that argument and distinguished each of the cases the appellees cited, noting “none of those Circuits ruled, or even expressed a view, on the issue before us.” See Opalinski, 2014 U.S. App. LEXIS 14538 at *18. The court also ruled that the appellees failed to overcome the “strong presumption” favoring judicial resolution because “[n]othing else in the agreements or record suggests that the parties agreed to submit questions of arbitrability to the arbitrator.” See id. at *20. Accordingly, the Third Circuit reversed the district court, and remanded for the district court to determine whether the appellees’ employment agreements call for classwide arbitration.

Understanding Opalinski’s Impact

Simply put, Opalinski will likely decrease the risk of companies and other business entities having their silent arbitration clauses construed to permit class arbitration. To understand how, it helps to revisit the Supreme Court decisions Stolt-Nielson and Oxford Health.

In Stolt-Nielson, the Supreme Court overturned an arbitration panel’s ruling allowing class arbitration under an arbitration clause that was silent with regard to class arbitration. The Supreme Court held the panel erred because it imposed class arbitration “even though the parties concurred that they had reached ‘no agreement’ on that issue.” Stolt-Nielson, 559 U.S. at 684. The court then went even further. It made clear its view that a silent arbitration clause does not permit class arbitration: “[a]n implicit agreement to authorize class-action arbitration, however, is not a term that the arbitrator may infer solely from the fact of the parties’ agreement to arbitrate.” Id. at 685. In the court’s view, the question is not whether a “silent” arbitration clause implicitly permits class arbitration. Instead, the question is “whether the parties agreed to authorize class arbitration.” Id. at 687 (emphasis in original).

Yet, in Oxford Health, the Supreme Court was bound to affirm an arbitrator’s decision finding class arbitration under a clause that, like the clause in Stolt-Nielson, was silent as to class arbitration. The Oxford Health court distinguished Stolt-Nielson on the basis that the parties in Stolt-Nielson agreed they had “never reached an agreement on class arbitration.” Oxford Health, 133 S. Ct. at 2069. By contrast, there was no such stipulation in Oxford Health. Further, unlike the arbitrators in Stolt-Nielson, the Oxford Health arbitrator construed the language of the arbitration clause to determine the parties’ intent. To overturn the decision, therefore, the court would have to find he misapprehended the parties’ intent. The FAA’s limited judicial review precluded that result: “it permits courts to vacate an arbitral decision only when the arbitrator strayed from his delegated task of interpreting a contract, not when he performed that task poorly.” Id. at 2070. The court concluded “[t]he arbitrator’s construction holds, however good, bad, or ugly.” Id.

Stolt-Nielson and Oxford Health teach two lessons. First lesson — if a court is asked to determine whether a silent arbitration clause permits class arbitration, Stolt-Nielson suggests the answer should be no. Second lesson — but, if an arbitrator is asked first and gets the answer wrong, then Oxford Health directs that same court to uphold the wrong decision. As a result, it becomes extremely important who answers the question of classwide arbitration availability.

Justice Samuel Alito in his Oxford Health concurrence highlighted this point and set the table for the Opalinski decision. He noted that the Oxford Health decision followed directly from the petitioner’s concession allowing the arbitrator to decide whether the contract authorizes class arbitration. Had the court been able to review the decision de novo, Justice Alito, citing Stolt-Nielson, explained “we would have little trouble concluding that [the arbitrator] improperly inferred ‘an implicit agreement to authorize class-action arbitration. ... from the fact the of the parties’ agreement to arbitrate.’” Id. at 2071 (Alito, J., concurring). Given the fundamental differences between class arbitration and bilateral arbitration, if the parties do not agree to let the arbitrator decide the issue, Justice Alito cautioned the lower courts to “pause before concluding that the availability of class arbitration is a question the arbitrator should decide.” Id. at 2072.

The Third Circuit followed Justice Alito’s direction. It paused, and then reached a decision that will ultimately favor more protection from class liability. Absent agreement otherwise, courts in the Third Circuit and not arbitrators will now decide whether a mere agreement to arbitrate permits classwide arbitration. Under Stolt-Nielson, as Justice Alito foreshadows, the answer will likely be no classwide arbitration under these clauses.

Lessons Learned

There are several takeaways from the Opalinski decision:

• Arbitration law on this issue continues to evolve. Notice that as recently as 2012, Third Circuit precedent seemed to suggest the arbitrator and not the court should answer the question. Now, that has changed. Indeed, the Third Circuit’s evolution mirrors the Supreme Court’s. In 2003, a plurality of the Supreme Court squarely decided that the arbitrator should decide the availability of classwide arbitration. In 2013 in Oxford Health, the court states it never has fully addressed the issue.
   
• It is likely that other circuits will follow the lead of the Third and Sixth Circuits. It is hard to argue with the Sixth Circuit’s observation that the Supreme Court has given “every indication” classwide arbitrability is for the court and not the arbitrator to decide. Other circuits will likely reach the same conclusion.
   
• For practitioners representing parties wanting to avoid classwide arbitration, the lesson is obvious: do not agree to let the arbitrator decide the issue. Immediately at the motion to compel stage, request that the court compel bilateral arbitration. If an arbitrator is permitted to rule on the availability of classwide arbitration, then Opalinski will not apply and the practitioner runs the risk of being stuck with the wrong result. While of course not every arbitrator will rule in favor of classwide arbitration and in fact most may not, the risk still exists. The Oxford Health arbitrator, the Opalinski arbitrator, and others have found classwide arbitration under silent arbitration clauses. See, e.g., S. Commc’ns Servs. Inc. v. Thomas, 720 F.3d 1352 (11th Cir. 2013);; Jock v. Sterling Jewelers Inc., 646 F.3d 113 (2d Cir. 2011). Further, not every court agrees that silent arbitration clauses automatically preclude classwide arbitration under Stolt-Nielson. See, e.g., Fantastic Sams Franchise Corp. v. FSRO Ass’n Ltd., 683 F.3d 18 (1st Cir. 2012). But, Justice Alito’s concurrence in Oxford Health suggests strongly that a majority of the Supreme Court justices would overrule any court disagreeing with that proposition. At the appellate level, a party will have a better chance overturning a district court’s ruling permitting classwide arbitration than it would overturning an arbitrator’s ruling reaching the same conclusion.
   
• For companies and other business entities wanting to avoid contract-based class action liability, the best practice remains to have an express class action waiver. But, if an arbitration clause is silent with regard to class arbitration, Opalinski is a potential game-changer. It moves to the courthouse the battle over classwide arbitrability, where the battleground favors protection from class liability.