Arbitration Is One Thing That Isn’t Bigger In Texas

In a decision issued at the end of November in Robinson v. Home Owners Management Enterprises, Inc.,[1] the Texas Supreme Court addressed whether the availability of class arbitration under the Federal Arbitration Act is an issue for the arbitrator or the court to decide and whether an arbitration agreement permitted class arbitration.  The Court held that the availability of class arbitration is a gateway issue for a court to decide unless the arbitration agreement expressly and unmistakably provides for the issue to be decided by an arbitrator.  The Court also held that the arbitration agreement at issue did not permit class arbitration because an arbitration agreement’s silence or ambiguity as to the availability of class arbitration is insufficient to permit class arbitration.

The underlying dispute arose from construction defect claims brought against a home warranty company.  The homeowners brought claims against the warranty company for defects in the construction of their home, and that dispute grew into a putative class action on the overly broad releases the warranty company required homeowners to sign before the warranty company would perform any repairs to a home.  After the home purchasers filed a lawsuit for defects in their home, the home warranty successfully moved to compel arbitration.  The homeowners then moved to amend to add class action claims alleging the warranty company refused to cover home repairs it was obligated to cover unless homeowners would sign releases of claims.  The home warranty company was successful in having the trial court dismiss the class action claims, and the homeowners appealed.

The Court contrasted gateway arbitrability issues with procedural or subsidiary issues and defined gateway arbitrability issues as whether a valid arbitration agreement exists and whether the arbitration agreement applies to a particular type of claim.  The Court found the distinction and having courts decide gateway arbitrability issues necessary to prevent forcing parties to arbitrate disputes they did not agree to arbitrate.  The Court noted that the determination and delegation of that determination takes on greater importance given the narrow appellate review available for arbitrators’ decisions.

The Court acknowledged it previously held, relying on the United States Supreme Court’s decision in Green Tree Financial Co. v. Bazzle,[2] that class action arbitrability is an issue for the arbitrator to decide.  Finding the United States Supreme Court’s opinions subsequent to the Bazzle plurality opinion cast doubt on the import of Bazzle for class arbitrability, the Court reconsidered and overruled its earlier opinion holding class arbitrability is an issue for the arbitrator.  The Court stated that since Bazzle the “jurisprudential landscape has evolved to provide a clearer, and distinctly different perspective” because the US Supreme Court had since “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 Court relied on the US Supreme Court’s opinions in Stolt-Nielsen[3] and Oxford Health Plans,[4] as explicitly clarifying that Bazzle did not state federal law on class arbitrability as it being an issue for the arbitrator.  The Court also relied on the numerous federal circuit court opinions issued since Stolt-Nielson and Oxford Health Plans, all holding that class arbitrability is a gateway issue for an arbitrator.

The Court viewed earlier decisions in other jurisdictions deciding the issue as considering two lines of reasoning: (1) that class arbitrability is a contract formation issue because it goes to what claims and parties are subject to the agreement, and (2) that class arbitration is fundamentally different from bilateral arbitration to the extent that agreeing to bilateral arbitration is not an agreement to class arbitration.  On the fundamental difference rationale and as other courts have reasoned, the Court reasoned that class arbitration is fundamentally different from bilateral arbitration and this fundamental difference renders class arbitration outside parties’ agreement to arbitrate unless the parties explicitly agreed to class arbitration.  Specifically, the Court held “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.”

Turning to the gateway question of class arbitrability, the Court relied on Stolt-Nielsen and Lamps Plus, Inc. v. Varela[5] as establishing that a court cannot compel class arbitration under the FAA when an agreement is only silent or ambiguous as to the availability of class arbitration.  Instead, for class arbitration to be available, an arbitration agreement must expressly provide for class arbitration. While maybe groundbreaking in terms of Texas arbitration law, the Robinson decision does not break any new ground for arbitration under the FAA.  Rather, the decision represents one more nail in the coffin for class arbitration, joining with the multiple federal circuit courts in holding that the availability of class arbitration is a gateway arbitrability issue for courts to decide.  As required, the decision also follows the precedent set by Lamps Plus, which was covered previously here.  With courts determining the availability of class arbitration, a clear presumption by courts against class arbitration, and the requirement that an arbitration agreement expressly provide for class arbitration for it to be available, class arbitration seems dead.

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[1] Robinson v. Home Owners Management Enterprises, Inc., — S.W.3d —, 2019 WL 6223128 (Tex. Nov. 22, 2019).

[2] 539 U.S. 444 (2003).

[3] Stolt-Nielsen S.A. v. AnimalFeeds Intl. Corp., 559 U.S. 662 (2010).

[4] Oxford Health Plans LLC v. Sutter, 569 U.S. 564 (2013).

[5] Lamps Plus, Inc. v. Varela, — U.S. —, 139 S. Ct. 1407 (2019).