USA: Third Circuit Holds Class Arbitrability is for the Courts

In its decision in Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, 809 F. 3d 746 (3d Cir. 2016), the Third Circuit held that general reference to arbitration under AAA rules does not constitute clear and unmistakable evidence that the parties delegated the question of class arbitrability to the arbitrators.

Chesapeake Appalachia, LLC (“Chesapeake”) entered into various oil and gas leases with landowners in several Pennsylvania counties in 2008.  Scout Petroleum, LLC and Scout II, LP (collectively, “Scout”) purchased the rights to several of these leases, and thereafter received royalties from Chesapeake.

The oil and gas leases contained an arbitration provision that stated:

ARBITRATION.  In the event of a disagreement between Lessor and Lessee concerning this Lease, performance thereunder, or damages caused by Lessee’s operations, the resolution of all such disputes shall be determined by arbitration in accordance with the rules of the American Arbitration Association.  All fees and costs associated with the arbitration shall be borne equally by Lessor and Lessee.

On March 17, 2014, Scout filed an arbitration demand against Chesapeake on behalf of itself and similarly situated lessors, claiming insufficient royalties.  In its answering statement filed with the AAA, Chesapeake objected to class arbitration on the grounds that it did not agree to resolve disputes arising out of the leases at issue in class arbitration, nor did it agree to submit the question of class arbitrability to an arbitrator.

Chesapeake also filed a declaratory judgment action in district court in Pennsylvania, seeking a judgment that the district court must decide whether class arbitration is available and that the leases did not permit class arbitration. While Chesapeake’s federal court action was pending, the arbitrators held that the arbitration contract in the case clearly and unmistakably authorized them to make the decision about arbitrability.

Chesapeake thereafter filed motions in the district court to vacate the arbitrators’ decision and stay the arbitration proceeding. The district court entered an order on October 16, 2014, granting Chesapeake’s motion to vacate the arbitrators’ decision, and denying Chesapeake’s motion to stay as moot.

In particular, the district court found the decision of the arbitrators to be contrary to the Third Circuit decision in Opalinski v. Robert Half International Inc., in which the Third Circuit held that that the availability of classwide arbitration is a substantive question of arbitrability, to be decided by a court absent clear agreement otherwise. The arbitrators’ decision was also contrary to that reached by other district courts in cases involving related leases.

Following the district court’s decision, Scout filed a petition for permission to appeal, which was granted by the Third Circuit. The Third Circuit, applying a de novo standard of review, considered that the availability of class arbitration implicates two questions or inquiries: (1) the “who decides” inquiry; and (2) the “clause construction” inquiry.

The Third Circuit explained that analysis for the first question is two-fold. First, the court decides whether the availability of classwide arbitration is a question of arbitrability, and if it is, it is presumed that the issue is for judicial determination unless the parties clearly and unmistakably provide otherwise. If it is not a question of arbitrability, then it is presumptively for the arbitrators to resolve.

In the “clause construction” inquiry, the court or the arbitrator then decides whether the parties’ arbitration agreement permits class arbitration. To do so, the contractual language must be express and unambiguous in delegating the question of arbitrability to the arbitrator. While the Third Circuit acknowledged that Scout’s interpretation of the leases was a reasonable one, it explained that it is not the court’s role to ascertain which interpretation is most reasonable, but to determine whether the Leases “clearly and unmistakably” delegate the specific question of class arbitrability to the arbitrators.

The Third Circuit agreed with the district court that the contract language did not meet this burden. The Third Circuit noted that the Supreme Court’s Stolt-Nielsen S.A. v. AnimalFeeds International Corp. decision did not establish a bright line rule that class arbitration is allowed only under an arbitration agreement that incants “class arbitration.” But the simple reference to the AAA rules did not, alone, constitute a clear and unmistakable delegation of authority to the arbitrators to decide the question of class arbitrability.

The Third Circuit conceded that the majority of circuits who have addressed the issue of the incorporation of the AAA rules have held that they are clear and unmistakable evidence that the parties agreed to arbitrate arbitrability, but considered that such holdings were limited to cases of bilateral arbitration, not class arbitration. The Third Circuit also rejected an argument that consent to arbitrate under AAA rules included the AAA’s Supplementary Rules for Class Arbitrations so as to provide the necessary “clear and unmistakable” delegation of class arbitrability.  The Third Circuit thus upheld the district court’s decisions, including vacating the arbitrators’ decision that class arbitrability was within their purview.

A version of this post originally appeared in the March 2016 edition of Baker & McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.