Third Circuit Rules That Courts, Not Arbitration Panels, Have Final Word On Class Action Arbitrability

In Brief

The history and proceedings of the Third Circuit's recent decision in Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, No. 15-1275, 2016 U.S. App. LEXIS 42 (3d Cir. Jan. 5, 2016), are a precautionary tale suggesting that companies should expressly state key "rules of their game" in arbitration provisions. This includes whether claims such as class actions are subject to arbitration and, in the event of a dispute, where the issue of arbitrability will be determined.

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Contracts containing agreements to arbitrate often provide for arbitration pursuant to the rules of an arbitration service provider such as the American Arbitration Association ("AAA"). It is not unusual, however, for such clauses to incorporate little (or no) detail regarding the arbitration process, decision-makers on disputed jurisdictional issues, or the availability of class, collective or other group claims. In just such a context, on January 5, 2016, the United States Court of Appeals for the Third Circuit held that it was for a court—not an arbitration panel—to decide whether classwide arbitration could proceed in an oil and gas royalty dispute. But before the Third Circuit ruled, another federal district court interpreted the exact same clause otherwise, as did an arbitration panel of three retired federal judges.

The Procedural History

In Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, No. 15-1275, 2016 U.S. App. LEXIS 42 (3d Cir. Jan. 5, 2016), plaintiff Scout Petroleum ("Scout") brought suit against Chesapeake Appalachia, LLC ("Chesapeake") alleging that Chesapeake underpaid royalties under lease agreements. Scout brought its claims as a classwide arbitration action before a AAA panel, based upon the following arbitration provision contained in the leases at issue:

ARBITRATION. In the event of a disagreement between Lessor and Lessee concerning this Lease, performance thereunder, or damages caused by Lessee's operations, the resolution of all such disputes shall be determined by arbitration in accordance with the rules of the American Arbitration Association.

Chesapeake Appalachia, 2016 U.S. App. LEXIS 42 at *3.

Chesapeake then filed a declaratory judgment action to stop the class arbitration in federal court, arguing that it had not consented to class arbitration. Id. at *9. While the federal action was pending, the arbitration panelconsisting of three retired federal judgesexamined the arbitration agreement and ruled that "'the...