8th Circuit Holds Courts Should Decide Whether Class Arbitration is Authorized

The Eighth Circuit recently considered whether a court or an arbitrator should determine whether an arbitration agreement authorizes class arbitration, and held that courts should make this decision due to the risks incurred by defendants and the difficulties of partaking in class arbitration.

The dispute arose between a pharmacy benefit manager (“the manager”) in charge of reimbursing pharmacies who furnish prescription drugs to individuals, and four pharmacies who have agreements with the manager for reimbursement.  The agreements between the manager and the pharmacies all had arbitration clauses which state that any disputes which arose under the agreement would submit to binding arbitration in accordance with the rules for the conduct of arbitration of the American Arbitration Association (“AAA”).

When a dispute did eventually arise, the four pharmacies filed a demand for class arbitration with AAA on behalf of 85 similarly situated pharmacies.  The manager sought summary judgment in district court to prevent the pharmacies from proceeding with class arbitration, claiming that each pharmacy must submit to bilateral arbitration instead.  The District Court denied summary judgment and held that the question of whether arbitration agreements allow class arbitration is one for the arbitrator to decide.

The Eighth Circuit reviewed the District Court’s decision, defining the determinative issue as whether the question of class arbitration is substantive in nature, and hence one for the court to decide, or procedural in nature, and therefore a question for the arbitrator.

The Circuit Court concluded that it is the court, not the arbitrator, who should decide whether class arbitration is contemplated by a particular arbitration agreement due to the following considerations: (1) the benefits of arbitration are substantially lessened in class arbitration; (2) confidentiality is lost or becomes more difficult in class arbitration; (3) class arbitration brings the bet-the-company stakes of class-action litigation into the realm of arbitration without the safety net of multilayered judicial review; and lastly (4) class arbitration raises important due process concerns.   For these reasons, the Circuit Court reversed the District Court’s order denying summary judgment, and remanded the case for further proceedings.

For more information, the opinion can be found here: http://media.ca8.uscourts.gov/opndir/17/07/163275P.pdf.