There is only one case in today’s “Highlights,” but it is an important one from the Fifth Circuit.  The court deals with a multitude of issues.  Perhaps most importantly, Judge Jones and her colleagues address whether a general delegation clause, like the incorporation of an institution’s rules, vests the arbitrator with authority to decide whether a matter proceeds as a class arbitration.  However, there are also questions of direct benefit estoppel, how to manage a class arbitration,  and the effect of a late award.  Plus, the opinion is worth reading just for the unusual factual background.

Delegation of the Availability of Class Arbitration; Direct Benefits Estoppel; Failure to Meet Time Limits in the Arbitral Rules

I am not even going to try to detail the procedural background of Sullivan v. Feldman, 2025 U.S. App. LEXIS 5637 (5^th Cir. March 11, 2025), in this limited space.  The Court describes the parties’ proceedings as “the Bleak House of arbitration.”[1]  The parties filed nine separate arbitrations, each with a different arbitrator.  Four of those proceedings went to award, with conflicting results; five of the proceedings were withdrawn or did not go forward before the District Court ruled.  The arbitrators in the four pending cases held a joint evidentiary hearing.  However, despite hearing the same evidence, the arbitrators reached startlingly different conclusions.  Three of them denied Claimants’ application for class certification, but one arbitrator allowed such relief. While all awarded damages against the some of the same respondents, the amount of those damages ranged from low of about $1.5 million to a high of roughly $89 million; the higher award came from the arbitrator who allowed class arbitration. One arbitrator held that an officer of one Respondent was liable, while three other arbitrators did not.  Despite the disparity among the awards, the District Court confirmed all four. This appeal ensured.

1. Delegation of the Availability of Class Arbitration – Applying doctrines regarding the delegation of threshold issues and the usual limited review of an arbitration award, the Court of Appeals affirms the lower court’s confirmation of the class award. In doing so, Judge Jones, writing for herself and Judges Smith and Ho, “reluctantly” follows Circuit authority in Work v. Intertek Resource Solutions, Inc. 102 F. 4^th 769 (5^th 2024). That panel held that the incorporation of the JAMS rule allowing the arbitrator to decide jurisdictional issues, including disputes as to the proper parties to the arbitration, delegated the classing question to the arbitrator. Characterizing Work as an “outlier,” the Sullivan panel opines that the precedent goes too far in holding that a general delegation of jurisdictional disputes to the arbitrator constitutes “clear and unmistakable evidence” that the parties intended to delegate this threshold question of arbitrability to the arbitral tribunal.  The court cites to Lamps Plus, Inc. v. Varela, 587 U.S. 176 (2019)(silence is not a basis for holding that the parties agreed to class certification); First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)(clear and unmistakable evidence is required to hold that the parties agreed to class arbitration); and numerous other SCOTUS authorities.  In this case, the parties’ agreement invoked the AAA’s rules which, like those of JAMS, allow the arbitrator to decide his or her own authority.  Judge Jones cites to cases from outside the Fifth Circuit holding that incorporation of such institution rules does not provide that “clear and unmistakable” direction.  She also questions whether the pre-Lamp authorities upon which Work relied are still viable. Having decided that Circuit precedent requires it to uphold the trial court’s decision to delegate class arbitration issues to the arbitrator, the court adopts the usual deference standard and confirms the one award’s allowance of class arbitration.  However, in a lengthy footnote, the panel criticizes the method by which the arbitrator reached that decision, deeming it “in tension with required federal court practices, which protect the constitutional due process rights of defendants.”  The arbitrator’s procedure, Judge Jones opines, may have inadequately considered the predominance of common questions of fact or law, the commonality of those questions, and the effect of state law variations in this multi-state proceeding.  For anyone championing or opposing an arbitrator’s classing of a proceeding, footnote 2 of this opinion is invaluable in putting together a checklist for counsel’s position.
2. Untimely Award – The arbitration agreement provided that the proceeding was “to be concluded within four months. . . .” The arbitrators decided that the four-month provision was “inconsistent with due process” and unconscionable.  The arbitration provision invokes the AAA Commercial Rules.  Rule 7(a) thereof provides that the arbitrator decides his or her own jurisdiction. Relying SCOTUS‘s holding in Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 569 (2013), that the only question for a reviewing court is whether the “arbitrator[s] (even arguably) interpreted the parties’ contract, not whether [they] got its meaning right or wrong,” the court rejects Respondents’ argument that the untimeliness voids the award. (Brackets in opinion).  However, arbitrators, be very, very careful in relying upon Sullivan to justify a late award absent party consent.  There are plenty of authorities out there holding that an untimely award must be vacated; they vary by state, so I’ll leave the research to you.  But, bottom line – do not get yourself into a jam; issue your award in a timely fashion, regardless of the all-nighters involved.
3. Direct Benefits Estoppel – One of the arbitrators held that Carlson, the president of Capstone Associated Services, one of the parties to the arbitrations, was subject to the arbitration provision and held him liable, even though he was not a signatory to the agreement which contained the arbitration clause. Under applicable Texas law, a non-signatory is bound by an agreement, including an arbitration agreement, if he or she receives invokes the benefits thereof, and Carlson did go forward in two of the arbitrations which were proceeding under the signatories’ agreement.  However, in each case he did so to object to his inclusion as a respondent and to assert defenses.  As Judge Jones opines, he did not “initiate arbitration to get the benefit of that contract.”  Rather, he sought a determination “that he could not be bound to arbitrate, or if he could be, he was innocent.”  Further, although the court does not find it necessary to reach the issue, it opines in dictum that it is “highly questionable” as to whether Carlson had adequate “notice” of the proceeding which found him liable for $100 million.  A state court had restrained the arbitrator in one case from proceeding against him.  Thereafter, the claimants withdrew him from that proceeding. When the arbitrator in that proceeding was replaced, the new arbitrator never named him any captions, but merely incorporated pleadings that predated the withdrawal

Since Carlson did not sign the agreement with the arbitration clause and there was no valid claim for direct-benefit estoppel, the panel vacates the award as to Carlson.

Remedy

So how to unwind the mess?  As if nine arbitrations were not enough, two parties had filed a tenth arbitration before a tenth arbitrator, seeking to resolve the conflict among the four awards.  However, the District Court had previously enjoined any further arbitrations.  After an emergency hearing, the District Judge ordered that Arbitration Ten should not go forward until the court issued an opinion on the propriety thereof.  Probably because he or she was awaiting this decision by the Court of Appeals, the District Judge had not acted on the motion since November 2023.  As part of its mandate, the Court of Appeals vacates the stay, presumably allowing the tenth arbitration to go forward.  However, the opinion closes with a wish.  “The parties remain free to arbitrate another day. For the sake of sanity, judicial efficiency and economics, this court hopes their disagreements will be finally resolved.”

A couple of thoughts.  First, I never second guess counsel’s judgments; I had to make too many hard decisions myself over the course of a trial lawyer’s career and you never know the strategic considerations at play.  However, I have to wonder why the claims were never consolidated into a single arbitration.  While advocates always want a presumably favorable arbitrator or judge for the specific issues which will be raised, this proliferation of proceedings seems doomed to raise extraneous issues.

Second, Judge Jones in her criticism of Work’s holding on the delegation of class arbitration decisions does everything except stamp in red “PLEASE EN BANC THIS CASE” across the front page of the opinion.  It will be interesting to see if the Feldman parties ask the entire Circuit to weigh in – an intriguing prospect since the Chief Judge was on the Work panel.[2]  Also, in light of the conflict between Work and the other Circuit courts to which Judge Jones cites and the prevalence of arbitration clauses delegating threshold questions through the incorporation of tribunal rules, will anyone seek cert. from SCOTUS on the question?   Watch this space.

There were two other significant Circuit decisions this week, both from the Fourth Circuit – Johnson v. Continental Finance Co., 2025 U.S. App. LEXIS 5610 (4^th Cir. March 11, 2025)(illusory contracts) and Dhruva v. Curiositystream, Inc., 2025 U.S. App. LEXIS 5502 (4^th Cir. March 10, 2025)(incorporation of an arbitration clause through a website screen).  Because of the importance of Sullivan, there’s not room to discuss those today without Highlights becoming too long.  More on them next issue.

Have a good weekend.

David A. Reif
Reif ADR
Dreif@reifadr.com
Reifadr.com

[1] Bleak House is Dickens’ novel about Jarndyce v. Jarndyce, which involved a testator’s conflicting wills and lasted so long that the only person with memory of the whole case was a clerk.

[2] Work was decided on May 4, 2024, by Chief Judge Richman and Judge Graves and Wilson.