Authored by Tim Watson

On February 9, the Court of Appeals for the Third Circuit, in Vilches et al. v. The Travelers Companies, Inc. weighed in on the question of who decides whether and how arbitration will go forward.  The plaintiffs in the case are former insurance appraisers of The Travelers Companies, Inc., and they brought a combined state law/FLSA class/collective action in New Jersey state court.  Travelers removed the case to federal court and sought to compel the plaintiffs to arbitrate their claims pursuant to the arbitration agreement the plaintiffs signed while employees of Travelers.  The plaintiffs conceded that the arbitration agreement was enforceable but that they did not agree to the class action waiver that Travelers added after they had signed the original arbitration agreement. 

The district court in an oral ruling held that the plaintiffs were required to arbitrate their wage and hour claims and that the class action waiver was enforceable, which meant that each plaintiff would have to arbitrate his or her claims against Travelers separately.  The Third Circuit vacated the district court’s ruling regarding the class action waiver, deciding that its enforceability should be determined by the arbitrator.  The question of arbitrability—whether a dispute is subject to arbitration—is generally regarded as a question for the court to decide.  Yet, the Third Circuit referenced its opinion in Puleo v. Chase Bank USA, N.A., (reviewing United States Supreme Court’s opinion in Howsam v. Dean Witter Reynolds, Inc.), which clarified that “questions of arbitrability [should not be confused] with disputes over arbitration procedure, which do not bear upon the validity of an agreement to arbitrate.”   Thus, the appellate court ruled, the class action waiver was a procedural issue, which did not affect the enforceability of the arbitration agreement, and for that reason should be decided by the arbitrator.

But what if the class action waiver is unconscionable as the plaintiffs argued?  In that case, the court of appeals found, the question is not procedural, but raises a question of arbitrability that can be addressed by the court.  Quoting the Supreme Court again, the Third Circuit wrote, “In stark contrast with the question of arbitration procedure … when a party challenges the validity of an arbitration agreement by contending that one or more of its terms is unconscionable under generally applicable state contract law, a question of arbitrability is presented.”  The court then went on to analyze state unconscionability law and decided that Travelers’ waiver clause was not unconscionable. 

Interestingly, when discussing the question of whether the class action waiver was  unconscionable under state law, the Third Circuit did not mention the possibility that the state law is preempted by federal law—specifically, the Federal Arbitration Act.  The Supreme Court heard oral argument on this specific issue on November 9, 2010 in AT&T Mobility LLC v. Concepcion.

To summarize what the Third Circuit’s decision means:  Questions of arbitrability should be decided by the court.  Questions of arbitration procedure should be decided by the arbitrator.  A class action waiver is procedural (unless someone challenges it as unconscionable), and thus its applicability should be decided by the arbitrator.  Whether a class action waiver is unconscionable, however, is a question of arbitrability that is for the court to decide.  All of this, of course, is not a model of clarity; hopefully, the Supreme Court will straighten it out when it decides AT&T Mobility LLC v. Concepcion.