5th Circuit Dashes Class Action in Arbitration Setting

The interaction between arbitration and class/collective actions which seems to be continually evolving, took another positive step for employers in the 5th Circuit with today's decision in Reed v. Florida Metro University, Inc. (5th Cir 5.18.12).

Reed sued claiming that his on line Bachelor's degree in paralegal studies would not be recognized either by law schools, nor a police department where he sought employment. Since that was contrary to his understanding as to what the school told him, he filed suit claiming a violation of the Texas Education Code. He sought $51,000 plus attorneys fees, but also sought relief on behalf of a class of everyone who "contracted to receive distance education from Everest University Online while residing in Texas."

The defendant successfully moved to compel arbitration, but the Court deferred the decision as to whether it could be brought as a class action to the arbitrator.

Noting it was a close question, the arbitrator held that the matter could proceed as a class action. Reed sought affirmation of that ruling and the School asked that it be vacated on the ground the arbitrator exceeded his powers.  Judge Lee Yeakel in Austin denied the School's Motion to vacate award.

The 5th Circuit first addressed whether Judge Yeakel's decision to allow the arbitrator to decide whether or not the matter could proceed as a class action was correct and concluded that it was.

On the second issue, whether the arbitrator exceeded his powers in holding that it could proceed as a class action, the 5th Circuit found Judge Yeakel had erred. The Court reversed and held the arbitrator had exceeded his powers and since there was "only one possible outcome on the facts before us" held that the arbitration must proceed only between the two parties, rather than sending it back to the Arbitrator for reconsideration.

In doing so, the Court noted it was openly disagreeing with the 2nd Circuit's interpretation of the Supreme Court's decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corp. (U.S. 2010).  In Jock v. Sterling-Jewelers, Inc. (2nd Cir. 2011), cert. denied Mar. 19, 2012, the 2nd Circuit emphasized the deference to be given to the arbitrator, ultimately concluding that "whether the arbitrator was right or wrong in her analysis, she had the authority to make the decision, and the parties to the arbitration agreement or bound by it."

The 5th Circuit chose to respectfully disagree with the 2nd Circuit, holding instead that a court had to ensure that an arbitrator has a basis for his class arbitration determination, even while applying a deferential standard of review.

Emphasizing the Supreme Court's concerns about class action arbitration as expressed not only in Stolt-Nielsen,  but its subsequent decision in AT&T Mobility v. Concepcion (U.S. 2011), the 5th Circuit chose to emphasize the Supreme Court's view that there must be a showing that the parties consented to class action determination.

Although the Supreme Court may have had enough of class actions and arbitration for awhile, the 5th Circuit has done its best to tee up another one for them. In the mean time, employers whose arbitration agreements are silent on class actions can breathe a sigh of relief, at least in three states.