The United States Court of Appeals for the Third Circuit held en banc in Puleo v. Chase Bank USA, N.A. that the validity of a class action waiver in an arbitration agreement presented an issue of arbitrability, and therefore, must be decided by the court and not by an arbitrator. In doing so, the Third Circuit (over a four-judge dissent) joined the First, Second, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, and Eleventh Circuits in holding that a plaintiff's unconscionability challenge to a class action waiver in an arbitration agreement presents a threshold challenge to arbitrability, which is a question for the court.
The plaintiffs in Puleo brought a claim against Chase Bank USA complaining about interest rate increases, which were governed by their cardholder agreement with Chase. The cardholder agreement contained an arbitration agreement, which included a clause forbidding the plaintiffs from bringing a class action against Chase either in court or in arbitration. Ignoring the arbitration agreement and the included class action waiver, the plaintiffs brought a putative class action in Pennsylvania state court. Chase removed to federal court and moved to compel plaintiffs to bring their individual claim in arbitration and dismiss the class claim. Even though the plaintiffs agreed that the claim should be transferred to arbitration, they argued that the class claim also should be submitted to arbitration because the class action waiver was unconscionable. The District Court disagreed, dismissing the class claim and compelling arbitration on the plaintiffs' individual claim only.
Before the Third Circuit on appeal, plaintiffs argued that their unconscionability challenge to the class action waiver should have been decided by an arbitrator, not the District Court. The Third Circuit rejected plaintiffs' argument, and following the unanimous view of the First, Second, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, and Eleventh Circuits, held that "an unconscionability challenge to an arbitration agreement presents a question of arbitrability because such a challenge calls the 'valid[ity]' of the arbitration agreement itself into question."
Plaintiffs attempted to argue that they were not raising a threshold challenge to the validity of the arbitration agreement itself because they had agreed to arbitrate. Instead, plaintiffs argued, their challenge was to the arbitration procedure, an issue that they maintained was for the arbitrator to decide. The Third Circuit rejected that argument as well, reasoning that since the Federal Arbitration Act (FAA) confers the right to arbitrate only in the manner agreed upon by the parties, the question of whether to proceed as a class necessarily was a threshold issue of arbitrability. That is because in order to arbitrate as a class, the plaintiffs would have had to obtain an order from the District Court compelling class arbitration, thus invalidating the class waiver. And the court could not have ordered class arbitration without violating the FAA because it would have ordered the parties to arbitrate claims outside of their agreement. As such, the Court reasoned, whether to proceed as a class presented a threshold issue to be decided by the courts.
Further, the Court held that issues of arbitrability concern what the parties would expect the court to address as a threshold matter when they agreed to arbitrate. As the arbitration agreement stated that an arbitrator had no authority to proceed over a class action, the Court held that the parties reasonably would expect a court to decide the class issue as a threshold matter. The Court also held that the plaintiffs' argument was not saved by the arbitration agreement's severability clause because the class action waiver itself was not unconscionable, and thus the Court did not need to reach the issue of whether the clause could be severed.
In Puelo the Third Circuit has made clear that courts must decide challenges to class waiver clauses in arbitration agreements. The Court held that if the parties wish to contract around the rule that courts decide issues of arbitrability they can do so, but that they must expressly state in their agreement their desire to arbitrate the question of arbitrability.
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