By Taylor Anderson
On March 28, 2016, the Fourth Circuit issued its published opinion regarding the civil case Del Webb Communities, Inc. v. Carlson. Appellant PulteGroup, Inc. and its subsidiary Del Webb Communities, Inc. (together, “Pulte”) appealed the district court’s denial of its partial summary judgment motion and dismissal of its Petition compelling bilateral arbitration. On appeal, Pulte contends that the district court erred in concluding that whether an arbitration clause permits class arbitration is a procedural question for the arbitrator to decide. Instead, Pulte argued that this question is one of arbitrability; therefore, the court is to determine the answer to that question. For the reasons that follow, the Fourth Circuit reversed, vacated, and remanded the district court’s conclusions.
Sales Agreement for Hilton Head, South Carolina House
Respondents Roger and Mary Jo Carlson (together, “Carlsons”) signed a sales agreement with Pulte for the purchase of a lot and construction of a home in Hilton Head, South Carolina. The agreement contained an arbitration clause which stated, “Any controversy or claim arising out of or relating to this Agreement or Your purchase of the Property shall be finally settled by arbitration . . . . Any party to this Agreement may bring action . . . to compel arbitration . . . .”
After they noticed several construction defects in their new home, the Carlsons brought suit against Pulte. The Carlsons later amended their complaint to add class-action allegations because their lawsuit was one of approximately 140 like cases pending against Pulte. The Carlsons contended that the question of class-arbitration was a procedural question and therefore the arbitrator would decide whether class arbitration was appropriate and contemplated under the sales agreement. Pulte filed a petition in federal court arguing that whether the sales agreement authorized class arbitration was a question of arbitrability for the court to determine—not a procedural question for the arbitrator. Later, Pulte filed a motion for partial summary judgment, which was the subject of the appeal, as to whether class arbitration was appropriate was a question for the arbitrator or the court to decide.
The federal district court dismissed Pulte’s Petition and denied Pulte’s motion for partial summary judgment. The district court reasoned that whether the arbitration clause permits class arbitration is a simple contract interpretation issue. Since the question “concerns the procedural arbitration mechanisms available to the Carlsons,” the threshold inquiry is a question for the arbitrator rather than for the court. This appeal followed.
Initial Subject Matter Jurisdiction Issue
As an initial matter, the Fourth Circuit addressed the Carlsons’ contention that the district court never had subject matter jurisdiction over Pulte’s Petition and partial motion for summary judgment. Although the Carlsons asserted several arguments as to why the district court did not have subject matter jurisdiction, the Fourth Circuit easily found subject matter jurisdiction based on diversity because both the amount-in-controversy and the complete diversity requirements were met in this case. The Carlsons’ claim was $75,000 plus treble damages and attorneys’ fees, which satisfied the “statutory floor.” Additionally, the Carlsons are South Carolina citizens and the Pulte parties are Michigan and Arizona citizens, making the parties completely diverse.
Class Arbitration Question is One of “Arbitrability”
The Fourth Circuit started out by stating its holding: the question of whether an arbitration clause permits class arbitration is a gateway question of arbitrability for the court to decide. First, the Fourth Circuit cited United States Supreme Court precedent stating that in determining the contractual nature of arbitration agreements, the court should be careful to avoid forcing parties to resolve their disputes through means not intended at the time of contract formation.
Next, the Fourth Circuit defined a “procedural” question in the context of arbitration. Procedural questions arise once the obligation to arbitrate a matter is established, and may include such issues as the application of statutes of limitations, notice requirements, laches, and estoppel. The Fourth Circuit, backed by Supreme Court precedent, explained that these are questions for the arbitrator because the questions do not present any legal challenge to the arbitrator’s underlying power and the parties would likely expect that an arbitrator would decide procedural questions.
Questions of arbitrability, on the other hand, are completely different. The Fourth Circuit stated that “[w]hen the answer to a question ‘determine[s] whether the underlying controversy will proceed to arbitration on the merits,’ that question necessarily falls within the ‘narrow circumstance[s]’ of arbitrable issues for the court to decide.” In this case, the question of whether class arbitration was allowed under the agreement went directly to whether the arbitrator was granted the power to hear class arbitration. That is, whether the agreement indicated that the controversy can proceed to arbitration at all. Because the parties were not explicit in the agreement that the arbitrator would decide whether their agreement authorizes class arbitration, a court is to decide whether class arbitration is allowed under the agreement. For this reason, the Fourth Circuit held that the district court erred in concluding that the question was a procedural one for the arbitrator.
Judgment Reversed, Vacated, and Remanded
The Fourth Circuit held that the parties did not unmistakably provide that the arbitrator had the power to decide whether their agreement authorizes class arbitration, and for that reason, the district court erred in concluding that the question was a procedural one for the arbitrator. Therefore, the Fourth Circuit reversed the district court’s order denying Pulte’s motion for partial summary judgment, vacated the judgment dismissing the Petition, and remanded the case for further proceedings.