Member Article

On May 18, 2012, the United States Court of Appeals for the Fifth Circuit held in Reed v. Florida Metropolitan University, Inc. that class actions are available in arbitration proceedings only if there is a contractual basis for finding that the parties agreed to class arbitration. Applying recent Supreme Court precedents, the court found that an arbitrator exceeded his authority by ruling that the parties had consented to class arbitration despite the absence of any direct reference to class proceedings in the arbitration agreement. Reed demonstrates that the Fifth Circuit is unlikely to be receptive to class arbitrations, and will not go out of its way to distinguish Supreme Court cases that have restricted the availability of class arbitrations.

Background

In 2008, Jeffrey Reed enrolled as a student in Everest University Online, an affiliate of Florida Metropolitan University. Reed earned a bachelor’s degree in paralegal studies with the goal of attending law school after graduation. Everest allegedly assured him prior to his enrollment that law schools and employers would recognize his degree. Reed then incurred approximately $51,000 in student loan debt before graduating. After obtaining his degree, Reed allegedly found that neither law schools nor a local police department would recognize his degree from Everest.

Reed alleged that Florida Metropolitan University violated the Texas Education Code by recruiting students without required certifications. He brought a putative class action in Texas state court, seeking $51,000 in damages. The school removed the case to federal court and sought to compel bilateral arbitration under an arbitration provision in the school’s enrollment agreement. The arbitration provision provided that (1) “any dispute” arising from Reed’s enrollment must be submitted to binding arbitration conducted under the rules of the American Arbitration Association, and (2) “any remedy” available from a court would also be available in the arbitration.

The district court granted the school’s motion and referred the case to arbitration, but left it for the arbitrator to decide whether class proceedings were available. The arbitrator decided that the parties had implicitly agreed to class arbitration and entered an award. The district court confirmed the arbitrator’s award, and the school appealed to the Fifth Circuit.

The Fifth Circuit’s Opinion

First, the Fifth Circuit held that the district court appropriately allowed the arbitrator to determine whether class arbitration proceedings were permissible under the parties’ arbitration agreement. The school had argued that the district judge should have resolved the issue. After finding that there was no controlling Supreme Court precedent, the court looked to the American Arbitration Association’s rules to resolve the issue. The parties had consented to the American Arbitration Association’s Commercial Rules, and the Fifth Circuit held that such consent implicitly encompassed the Supplementary Rules for Class Arbitration as well. The Supplementary Rules provide that arbitrators are empowered to determine whether arbitration agreements authorize class proceedings.

Second, and more importantly, the Fifth Circuit reversed the district court’s refusal to vacate the arbitrator’s award and held that the arbitrator “exceeded his powers” and “forced the parties into class arbitration without a contractual basis for doing so.” The court began by emphasizing that an arbitrator’s decision permitting class arbitration could be overturned only if the decision could not fairly be deemed to be derived from the terms of the arbitration agreement. Even under this highly deferential standard of review, the court found the arbitrator’s decision permitting class arbitration deficient.

The Supreme Court’s recent decisions in Stolt-Nielsen S.A. v. AnimalFeeds International Corp. (2010) and AT&T Mobility v. Concepcion (2011) figure prominently in the Fifth Circuit’s analysis. In Stolt-Nielsen, the Court held that an arbitration agreement that was silent on the issue of class proceedings could not be construed as permitting class arbitration. Both the Stolt-Nielsen and Concepcion Courts emphasized that a fundamental tenet of arbitration is the consent of the parties, and significant differences between bilateral and class arbitration caution against finding that parties consented to class arbitration in the absence of a contractual basis for doing so.

Applying Stolt-Nielsen, the Fifth Circuit rejected each of the arbitrator’s three grounds for ruling that the arbitration agreement contained a contractual basis for inferring that the parties consented to class arbitration:

• The Fifth Circuit rejected the arbitrator’s reliance on the “any dispute” clause of the arbitration agreement as violative of Stolt-Nielsen. This clause merely indicates that the parties agreed to arbitrate their disputes and says nothing about whether they agreed to class proceedings.
• The Fifth Circuit also rejected the arbitrator’s reliance on the “any remedy” clause. The court stressed that remedies include damages, injunctions, restitution, and other similar forms of relief, while a class action is instead a “procedural device.” Because a class action does not qualify as a remedy, the “any remedy” clause provided no support for inferring that the parties consented to class arbitration.
• Finally, the Fifth Circuit rejected the arbitrator’s reliance on the fact that the arbitration agreement was silent regarding class arbitration. The arbitrator had concluded that as the drafter of the agreement, the school was responsible for including a provision that prohibited class arbitration if it wanted to avoid class proceedings. The court held that this ground directly contravened Stolt-Nielsen’s ruling that arbitrators should not presume that silence constitutes consent to class arbitration.

Implications of the Decision

The court’s decision shows that the Fifth Circuit will not lightly permit class arbitration proceedings in the absence of an explicit contractual agreement. While the defendant ultimately obtained a favorable ruling that precluded class arbitration proceedings, the ruling came after considerable time and expense. Companies should consider including explicit class action waiver clauses in their standard arbitration agreements to increase the likelihood of avoiding the kind of litigation at issue in this case. Such waiver provisions will almost always be found enforceable under Concepcion, unless they contain other terms that foreclose individual adjudication.

Including a class action waiver clause in an arbitration agreement is particularly important for companies operating outside of the Fifth Circuit. While the Fifth Circuit applied Stolt-Nielsen andConcepcion in finding that the parties had not consented to class arbitration, the court noted that it disagreed with other circuits that have reached a different conclusion in factually similar cases.

If you would like more information on the Reed decision or on the firm’s Class Action and Appellate practices, please contact one of the attorneys below.