Originally published by Beth Graham.
On Friday, the Supreme Court of Texas overruled its 2004 decision in In re Wood on the issue of arbitrability. In Robinson v. Home Owners Management Enterprises, Inc., No. 18-0504 (Tex. 2019), a couple, the Robinsons, purchased a new home that included a warranty which was administered by Home Owners Management Enterprises, Inc. (“HOME”). The home-warranty and its addendum included a mandatory binding arbitration provision. This provision was silent regarding whether the courts or an arbitrator must decide issues related to arbitrability and whether class arbitration was permitted.
Later, the couple filed a breach of warranty claim against HOME and other defendants. HOME filed a motion to compel the dispute to arbitration based on the terms of the home-warranty. The trial court granted HOME’s motion and ordered the case to arbitration. Prior to arbitration, however, the Robinsons sought to amend their case to include unrelated class-action claims. HOME objected to the amendment and asked the arbitrator to strike the collective action claims. Instead, the arbitrator bifurcated the proceedings.
Following arbitration but before the arbitrator issued a final decision, HOME filed a motion to clarify the scope of the issues that were referred to arbitration. While the trial court was considering HOME’s motion, the arbitrator issued a damages award in favor of the Robinsons. He also awarded HOME the costs associated with the couple’s attempts to avoid arbitration.
Next, the Robinsons filed a “Statement of Claims, Individually and as the Representatives of All Persons Similarly Situated” with the trial court based on the unrelated claims the couple previously filed with the arbitrator. In addition, the couple asserted that HOME was required to participate in class arbitration based on the terms of the home-warranty. HOME responded by filing a motion to dismiss the class-action claims and disputed that class arbitration was permitted under the terms of the arbitration provision. According to HOME, the question of class arbitration was for the courts and not the arbitrator to decide.
The trial court agreed with HOME and stated:
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The question of whether the parties agreed to class arbitration is a question of arbitrability for [the court].
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The Parties did not “clearly and unmistakably” provide that the arbitrator is to decide issues of arbitrability; thus, [the court] shall determine the issue of class arbitrability.
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The Court determines and finds that the Warranty Agreement between the Parties does not permit class arbitration.
On appeal, the Second District of Texas affirmed the lower court’s holding that the question of arbitrabilty was a gateway issue for the courts to decide. The Robinsons then filed a petition for review with the Supreme Court of Texas. According to the Texas high court:
The Robinsons’ petition for review presents three issues: (1) who decides whether parties have agreed to class arbitration; (2) whether the Robinsons and HOME agreed to class arbitration; and (3) whether HOME otherwise consented or acquiesced to arbitration of the class claims. Though an order denying an arbitration demand is reviewed for abuse of discretion, the issues on appeal present only questions of law, which are subject to de novo review.
In its opinion, the Texas Supreme Court explained:
Gateway arbitrability issues are distinct from procedural or subsidiary questions that grow out of an arbitrable dispute and are presumptively for an arbitrator to decide. Examples include fulfillment of prerequisites to arbitration; limitations, notice, laches, estoppel, and the like; and waiver of limitations periods, claims, or defenses. Subsidiary issues present “questions for the arbitrator not only because the ‘parties would likely expect that an arbitrator would decide [them],’ but also because the questions do not present any legal challenge to the arbitrator’s underlying power.”
Whether an arbitrator or the court has the primary authority to determine a disputed issue is consequential, not only from a contractual-expectations standpoint, but also because appellate review of an arbitrator’s decisions is significantly more deferential than review of a court’s decisions. If the parties have agreed to submit an issue to an arbitrator, a court can set aside the arbitrator’s decision only in finite circumstances. But if the parties have not agreed to submit a particular dispute to arbitration, the court must decide the answer independently. And unlike arbitral awards, reviewing courts afford no deference to the trial court’s legal determinations and must only defer to factual determinations that are supported by competent evidence.
The court then stated two inquiries are necessary to determine who decides issues of arbitrability:
(1) whether the availability of class arbitration is a question of arbitrability presumptively for the court or a question to be arbitrated and, thus, presumptively for the arbitrator; and
(2) whether the arbitration agreement clearly and unmistakably evinces a contrary intent.
Next, the highest court in Texas said:
We answered the “who decides” question fifteen years ago in In re Wood, applying Supreme Court authority as settled law. In Wood, we found the Supreme Court’s opinion in Green Tree Financial Co. v. Bazzle to be “directly on point” and relied exclusively on that case as authority for the proposition that the arbitrator has the power to rule on class certification issues when the contract commits all disputes arising out of the agreement to the arbitrator. We cited Bazzle as holding that whether a contract “‘forbids the use of class arbitration procedures[] is a dispute ‘relating to’” the parties’ contract and that “as a question of contract interpretation, the issue of class arbitrability had [therefore] been committed to the arbitrator.”
Despite this, the Supreme Court of Texas added, “this is one of those rare circumstances requiring us to reconsider our prior decision.” The court then expressly overruled its own decision in Wood.
Since Wood issued in 2004, the jurisprudential landscape has evolved to provide a clearer, and distinctly different, perspective. In the last decade, the Supreme Court has issued two opinions emphasizing that whether class arbitration is a gateway or subsidiary question remains an open question that was not answered by Bazzle.
The Texas Supreme Court then discussed the United States Supreme Court’s decisions in Stolt-Nielsen S.A. v. AnimalFeeds International Corp. and Oxford Health Plans LLC v. Sutter before stating:
Following the Supreme Court’s rather pointed clarification, several federal circuit courts have addressed the open question unburdened by any misconception about Bazzle’s authoritative force. To date, every one of those courts—the Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, and Eleventh Circuits—has concluded that class arbitrability is for the courts to determine as a gateway matter absent clear and unmistakable language delegating arbitrability matters to the arbitrator. Two supporting rationales have been advanced: (1) the availability of class arbitration invokes contract-formation issues because it implicates whether a presently binding and enforceable agreement to arbitrate exists as to each class member and (2) class action arbitration is so fundamentally different from bilateral arbitration that it implicates the type of controversy the parties agreed to submit to arbitration. Both rationales turn on the parties’ expectations, thus protecting unwilling parties from compelled arbitration of matters they reasonably expected a judge, not an arbitrator, would decide. But most courts to consider the issue have focused on the second rationale.
With the benefit of a more full-bodied jurisprudential debate, we are persuaded that—for either or both of the proffered rationales—determining whether the parties have agreed to arbitrate disputes as a class is a threshold question of arbitrability.
After that, Texas’s highest court said class arbitration changes the nature and raises the stakes of arbitration proceedings.
In class arbitration, an arbitrator’s award “no longer resolves a single dispute between the parties to a single agreement, but instead resolves many disputes between hundreds or perhaps even thousands of parties.” As a general proposition, “[g]ateway questions are fundamental to the manner in which the parties will resolve their dispute—whereas subsidiary questions, by comparison, concern details. And whether the parties arbitrate one claim or 1,000 in a single proceeding is no mere detail.”
The court next stated:
Considering the “obvious,” “structural,” and “fundamental” differences between bilateral and class arbitration, which “change the nature of arbitration altogether,” we hold that the question of class arbitration is more akin to what type of controversy shall be arbitrated—a question for the courts—not a procedural question presumptively for the arbitrator. The distinctions between bilateral and class arbitration implicate the principal characteristic of gateway issues—namely, the expectation that a judge would ordinarily decide arbitrability of such matters.
Concluding that the threshold issue here is a gateway matter also aligns, at least by analogy, with our view that whether a nonsignatory is bound to an arbitration agreement is a gateway matter for judicial determination. Because individual class members may have individual defenses to arbitration—here for example, the limited warranty allows homeowners with VA or FHA financing to elect a judicial remedy—the availability of class arbitration relates to “whether the parties are bound by a given arbitration clause” and implicates “whose claims an arbitrator may decide.” Thus under either of the prevailing rationales, arbitrability of class claims is presumptively for the court, but ultimately depends on what the parties’ contract says about the matter.
The Texas Supreme Court then said, “delegation to the arbitrator cannot be inferred from silence,” before holding there was no agreement to arbitrate class claims based on either the terms of the arbitration agreement or the conduct of the parties.
Finally, the Supreme Court of Texas concluded:
Considering the fundamental differences between bilateral and class arbitration, and the bedrock principle that a party cannot be forced to arbitrate any dispute absent a binding agreement to do so, we hold that a court must determine, as a gateway matter, whether an arbitration agreement permits class arbitration unless the parties have clearly and unmistakably agreed otherwise. Class arbitration implicates what must be arbitrated and who must arbitrate, matters that are presumptively for the court’s determination. Because the arbitration agreements at issue here are silent as to arbitrability and do not mention class claims at all, the lower courts correctly determined HOME was not bound to arbitrate the Robinsons’ putative class claims. We affirm the court of appeals’ judgment.
You may find more information about this case on the Texas Supreme Court’s website.
Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.
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