Pedcor Management Co., Inc. Welfare Benefit Plan v. Nations Personnel of Texas, Inc.

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT August 13, 2003

__________________________ Charles R. Fulbruge III
Clerk
No. 02-20878
__________________________

PEDCOR MANAGEMENT COMPANY, INC.
WELFARE BENEFIT PLAN,
Appellant,

versus

NATIONS PERSONNEL OF TEXAS, INC.; HUMAN RESOURCE SOLUTIONS INC., a
corporation; EMPLOYEE WELFARE BENEFIT PLAN OF HUMAN RESOURCE
SOLUTIONS INC.; COMPREHENSIVE EMPLOYEE SOLUTIONS; EMPLOYEE WELFARE
BENEFIT PLAN OF COMPREHENSIVE EMPLOYEE SOLUTIONS; TOTAL LEASING
CO., a corporation; EMPLOYEE WELFARE BENEFIT PLAN OF TOTAL LEASING
CO.; ROCK CITY MECHANICAL INC.; EMPLOYEE WELFARE BENEFIT PLAN OF
ROCK CITY MECHANICAL INC.; BUREAU OF WHOLESALE SALES
REPRESENTATIVES INC.; EMPLOYEE WELFARE BENEFIT PLAN OF CONNELLY
MANAGEMENT INC.; CONNELLY MANAGEMENT EMPLOYEE PLAN; FAMILY EXPRESS
CORP.; CONTINENTAL DESIGN & ENGINEERING INC.; CONTINENTAL
INTERNATIONAL INC.; R & R MACHINE & ENGINEERING INC.; MID-CITY
OFFICE SYSTEMS INC.; BROCKTON COMPANIES LP,
Plaintiffs-Appellees.

versus

NORTH AMERICAN INDEMNITY, NV, a corporation of Belgium,

Defendant-Appellee.

___________________________________________________

Appeal from the United States District Court
for the Southern District of Texas
___________________________________________________

Before WIENER, CLEMENT and PRADO, Circuit Judges.

WIENER, Circuit Judge:

Appellant Pedcor Management Company, Inc. Employee Welfare

Benefit Plan (“Pedcor”) challenges the district court’s class

certification order for arbitration of claims brought by
Plaintiffs-Appellees Employer Self-Funded ERISA Plans (“Plans”)

against Defendant-Appellee North American Indemnity, NV (“NAI”).

For the following reasons, we vacate and remand.

I. FACTS AND PROCEEDINGS

NAI is a Belgian-incorporated insurance company that entered

into reinsurance contracts with 408 Plans throughout the United

States. The arbitration agreement of each of these contracts

requires, in relevant part, that (1) “any dispute between the

parties hereto in connection with the Agreement” be submitted to

arbitration; (2) as a general matter each party chooses one

arbitrator, and the two chosen arbitrators then select a third to

constitute a panel; and (3) “[a]rbitration shall be governed by the

laws of the State of Texas.” There is no express provision in the

clause regarding consolidation or class treatment of claims in

arbitration.

This dispute arose when NAI allegedly breached its reinsurance

contracts with the Plans by defaulting on payment of claims. NAI

originally sued American Heartland Health Administrators (“AHHA”),

the third party administrator of the Plans, for negligent

underwriting of the Plans. Several individual Plans then

successfully intervened as plaintiffs against NAI.

The district court denied NAI’s motion to dismiss its action

without prejudice and entered a take-nothing judgment in NAI’s

2
original suit against AHHA.1 The court subsequently held a hearing

to discuss with the intervening Plans the possibility of certifying

a class for arbitration proceedings against NAI. Pedcor’s counsel,

who had been granted leave to appear as amicus curiae in the

proceedings, participated in the hearing and filed written

suggestions advising against class certification. In preparation

for arbitration, the court nevertheless certified a class “to

consist of all employer plans that bought reinsurance through North

American Indemnity, N.V., after January 1, [2000], whose claims

have not been paid.”2 Pedcor timely appealed the certification

order.

II. ANALYSIS

A. Standard of Review

As a general matter, we “will reverse a district court’s

decision to certify a class only upon a showing that the court

abused its discretion, or that it applied incorrect legal standards

in reaching its decision.”3 Thus, the certification order itself

is reviewed for abuse of discretion, but whether the district court

1
NAI filed no opposition to the class certification motion,
but did commence litigation in Belgium allegedly on the same
matters.
2
The original order lists the date of January 1, 2002, but
that was corrected later to be 2000. The district court also
stated that “[a]s soon as the class is certified and the periods
have expired I will then compel arbitration.”
3
James v. City of Dallas, 254 F.3d 551, 562 (5th Cir. 2001)
(quoting Mullen v. Treasure Chest Casino, LLC, 186 F.3d 620, 624
(5th Cir. 1999)).

3
applied the correct legal standards is a question of law that we

review de novo.4 In this case, the questions whether the district

court applied the correct legal standards or abused its discretion

are pretermitted by recent Supreme Court precedent.

B. Effect of Greentree Financial Corporation v. Bazzle

In Green Tree Financial Corporation v. Bazzle,5 which was

issued subsequent to the certification order and to the parties’

initial briefing in this court, the Supreme Court addressed a state

court’s decision ordering class arbitration under state law in the

context of an arbitration agreement that was silent about whether

class arbitration was forbidden or allowed.6 After concluding that

the agreement did not expressly forbid class arbitration, a

plurality of the Court held that “[u]nder the terms of the parties’

contracts, the question —— whether the agreement forbids class

arbitration —— is for the arbitrator to decide.”7

It is well established that when we are confronted with a

plurality opinion, we “look to ‘that position taken by those

Members who concurred in the judgments on the narrowest grounds.’”8

4
Id.
5
__ U.S. __, 123 S.Ct. 2402 (2003).
6
123 S.Ct. at 2404 (citing Bazzle v. Green Tree Financial
Corp., 351 S.C. 244, 569 S.E.2d 349 (2002)).
7
Id. at 2407.
8
Campbell v. St. Tammany Parish Sch. Bd., 64 F.3d 184, 189
(5th Cir. 1995) (quoting Marks v. United States, 430 U.S. 188,
193 (1977).

4
In Green Tree, Justice Stevens, whose concurrence in judgment

constituted the fifth vote, dissented to the extent that he would

have permitted the state court decision allowing class arbitration

to stand. He reasoned that the decision was correct as a matter of

law, i.e., nothing in the court’s application of state law to allow

class arbitration violated the FAA, and he emphasized that the

petitioner challenged only the merits of that decision, not whether

it was made by the right decision-maker.9 Nevertheless, Justice

Stevens also stated that (1) “[a]rguably the interpretation of the

parties’ agreement should have been made in the first instance by

the arbitrator, rather than the court,” and (2) “because Justice

BREYER’s opinion expresses a view of the case close to my own, I

concur in the judgment.”10

The basis on which Justice Stevens would have decided the case

—— that the state court judgment was correct as a matter of law ——

fails to constitute the most narrow grounds on which the case was

decided. The four-member plurality specifically rejected the legal

interpretation of the state court because it was a decision by the

wrong decision-maker. The grounds of the Stevens concurrence also

differed from the three-member dissent which would have upheld the

state court’s ability to make the decision but would have reversed

9
Green Tree, 123 S.Ct. at 2408 (Stevens, J., concurring in
judgment and dissenting in part).
10
Id. at 2408-09.

5
on the merits of that court’s decision to allow class arbitration.11

Justice Stevens did express his agreement, however, with the

principle laid down by the plurality that arbitrators should be the

first ones to interpret the parties’ agreement. As a result, the

plurality’s governing rationale in conjunction with Justice

Stevens’s support of that rationale substantially guides our

consideration of this dispute.

In arriving at its decision, the plurality relied on two

considerations. First, it found that the contract’s provision to

submit to arbitration “all disputes, claims, or controversies

arising from or relating to this contract or the relationships

which result from this contract” reflected the parties’ intent to

commit a broad scope of questions to arbitration, including the

class arbitration question because that issue “relat[ed] to the

contract.”12 Second, the plurality reasoned that there exists only

a narrow exception for certain gateway matters that parties

normally expect a court rather than an arbitrator to decide, which

include (1) “whether the parties have a valid arbitration agreement

at all” and (2) “whether a concededly binding arbitration clause

11
Id. at 2409 (Rehnquist, C.J. dissenting, joined by
O’Connor, J. and Kennedy, J.). Justice Thomas dissented
separately based on his belief that the FAA does not apply to
proceedings in state courts. Id. at 2411 (Thomas, J.,
dissenting).
12
Id. at 2407 (emphasis in original).

6
applies to a certain type of controversy.”13 As the question

whether a contract forbids class arbitration concerns the “kind of

arbitration proceeding the parties agreed to,” and not “the

validity of the arbitration clause []or its applicability to the

underlying dispute between the parties,” the plurality concluded

that arbitrators are “well situated to answer that question.”14 In

sum, because the scope of the arbitration agreement itself was

broad, and the issue there concerned only the kind of arbitration

proceeding agreed to, the plurality, plus Justice Stevens, i.e.,

the Court, held that “this matter of contract interpretation should

be for the arbitrator, not the courts, to decide.”15

The clarity of Green Tree’s holding —— that arbitrators are

supposed to decide whether an arbitration agreement forbids or

allows class arbitration —— leaves us to decide only whether the

instant case is sufficiently analogous to Green Tree to come within

its rule. That the district court ordered a type of class

arbitration here is self-evident.16 Appellees assert that the

district court did not have in mind a traditional class action, but

rather a procedure with one arbitration panel and 408 separate

arbitration proceedings. This procedure, even if accurately

13
Id.
14
Id. (emphasis in original).
15
Id.
16
The court certified a class of employer plans and
intended to compel arbitration.

7
described, does not alter the conclusion that the district court

certified a class for arbitration. Furthermore, the arbitration

provision states: “In the event of any dispute between the parties

hereto in connection with the Agreement, such dispute shall be

submitted to arbitration” (emphasis added). As in Green Tree, the

scope of questions committed to arbitration in the arbitration

provision of the reinsurance contracts is broad, and whether class

arbitration is allowed is similarly a dispute “in connection with

the Agreement.”

Two additional aspects of the Court’s holding in Green Tree,

which we address out of an abundance of caution, also fail to

distinguish it from the instant case. First, although Green Tree

held that whether an arbitration agreement forbids class

arbitration is a question for the arbitrator to decide, the Court

nevertheless made the initial determination that the language of

the arbitration agreement did not clearly forbid class

arbitration.17 The Court stated that it “must deal...at the outset”

with the argument that the contracts forbid class arbitration, “for

if it is right, then the South Carolina court’s holding [that the

contracts were silent] is flawed on its own terms.”18 This

preliminary analysis appears to be in response to the dissent’s

(and petitioner’s) argument to the contrary. But even if the South

17
Id. at 2406.
18
Id.

8
Carolina court’s holding is “flawed on its own terms,” it is

unclear why the Court would explore this issue in the first place

if its ultimate conclusion was that a court, regardless of whether

its interpretation of the law is right or wrong, is simply the

wrong decision-maker. That is, if the arbitration provision

clearly did forbid class arbitration, then the arbitrators could ——

and under Green Tree should —— make this call without any prior

analysis by a court. In short, under the Court’s holding, it

should not be necessary for a court to decide initially whether an

arbitration agreement clearly forbids class arbitration.

Nevertheless, assuming arguendo that we should address this

issue, we conclude that the arbitration agreement in this case, as

in Green Tree, does not clearly forbid class arbitration. In Green

Tree, the Court concluded that an arbitration clause providing that

“disputes ‘shall be resolved...by one arbitrator selected by us

[Green Tree] with consent of you [Green Tree’s customer]’” did not

clearly forbid class arbitration.19 Here, the arbitration provision

states in part:

As soon as one party demands arbitration and has named an
arbitrator, the other party binds itself to name an
arbitrator within one (1) month and the two arbitrators
shall then within a further period of one (1) month
select a third arbitrator. If either party refuses or
neglects to name an arbitrator within the specified
period, the requesting party may name an arbitrator for
the other party.

Unlike the limited language in Green Tree, which outlines

19
Id. at 2406 (brackets in original) (citation omitted).

9
relatively simply procedures for the selection of one arbitrator,

this provision's contemplation of three-arbitrator panels could be

construed as less amenable to class arbitration, at least at first

glance. As a logistical matter, it is unclear exactly how a class

would organize itself, given the procedures for appointing multiple

arbitrators. In light of Green Tree, however, the American

Arbitration Association is beginning to provide some assistance in

organizing consolidated or class arbitrations. More importantly,

despite any potential logistical hurdles, the agreement contains no

express provisions regarding the permissibility of class

arbitration. In light of such silence, we are satisfied that it

“is not completely obvious” whether the agreement forbids

arbitration.20

The second aspect of Green Tree that potentially differs from

this case is the choice-of-law provision of the contracts. In

Green Tree the excerpts of the arbitration agreement reproduced in

the opinion expressed that the arbitration was to be governed by

the FAA,21 and in the instant case, the arbitration provision states

that “[a]rbitration shall be governed by the laws of the State of

Texas.”22 This facial difference, however, evaporates when we

examine the respective arbitration provisions and relevant law in

20
Id. at 2406.
21
Id. at 2405.
22
ROA:1, at 895.

10
more detail. The arbitration agreement in Green Tree is not

limited to agreements governed solely by the FAA. Although the

Court explicitly took the case to determine whether the South

Carolina court’s holding was consistent with the FAA,23 it made no

attempt to limit its holding to contracts governed solely by the

FAA. In fact, the Court indicated that the question whether the

arbitration agreement was silent about class arbitration was “a

matter of state law.”24 In his concurrence, moreover, Justice

Stevens stated that “[t]he parties agreed that South Carolina law

would govern their arbitration agreement.”25 These statements

illustrate that the scope of Green Tree’s holding is not limited to

contracts governed exclusively by the FAA.

Because Green Tree applies to arbitration agreements governed

by a hybrid of both the FAA and state law, the instant case would

be distinguishable, if at all, only if the arbitration provision at

issue here were governed exclusively by state arbitration law. The

resolution of this issue depends on how we interpret the parties’

selection of the “laws of the State of Texas” as their choice-of-

law, and, more specifically, whether that language excludes the

applicability of the FAA. In Volt Information Sciences, Inc. v.

Stanford University, the Supreme Court held that parties may

23
123 S.Ct. at 2406.
24
Id. at 2405.
25
Id. at 2408 (Stevens, J., concurring in judgment and
dissenting in part).

11
“specify by contract the rules under which that arbitration will be

conducted,” and that “enforcing those rules according to the terms

of the agreement is fully consistent with the goals of the

FAA....”26 Relying on Volt, we have held that, just as parties may

select the arbitral rules governing arbitration, they may also

“specify the law governing interpretation of the scope of the

arbitration clause.”27

When we heed the parties’ selection of the “laws of the State

of Texas,” our review of these laws demonstrates that this choice-

of-law provision encompasses the FAA as well as state-specific law.

In L & L Kempwood Associates v. Omega Builders, Inc., the Texas

Supreme Court reiterated that the FAA is part of the substantive

law of Texas and held, as a result, that the FAA applies in an

arbitration agreement unless the choice-of-law provision

“specifically exclude[s] the application of federal law....”28 As

the FAA is part of Texas law, the parties’ covenant that

“arbitration shall be governed by the laws of the State of Texas,”

means that this choice-of-law provision includes both the FAA and

applicable state law. Furthermore, because this contractual

26
489 U.S. 468, 479 (1989).
27
Ford v. NYLCare Health Plans, Inc., 141 F.3d 243, 248
(5th Cir. 1998) (emphasis added).
28
9 S.W.3d 125, 127-128 & n.15 (Tex. 1999) (finding that
the contractual phrase “the law of the place where the Project is
located” did not specifically exclude the application of federal
law even though the contract project was located in Houston).

12
language does not specifically exclude the application of federal

law, we conclude that the FAA applies to this agreement as well.

The fact that the FAA would presumptively apply to this agreement,

as a contract involving interstate commerce,29 further convinces us

of the soundness of the Texas rule that the parties must expressly

exclude the applicability of the FAA if they want only state law to

apply. In short, the choice-of-law differences between Green Tree

and this case are more apparent than real. Because Green Tree

applies, at a minimum, to arbitration agreements under the FAA, and

because the arbitration provision in this case also incorporates

the FAA, the Court’s holding is applicable here.30

Assuming the concurrent applicability of Texas law, our

research has revealed nothing in Texas arbitration law mandating,

as a matter of law, that a court rather than an arbitrator

determine whether an arbitration agreement forbids class

arbitration. Texas arbitration law concerning international

commercial disputes, which would appear to apply to this dispute if

29
Volt Information Sciences, Inc. v. Stanford Univ., 489
U.S. 468, 476 (1989) (“It is undisputed that this contract falls
within the coverage of the FAA, since it involves interstate
commerce....”). Because the reinsurance contracts at issue
involve “[c]itizens of different states engaged in performance of
contractual operations in one of those states,” it is “a contract
involving commerce under the FAA.” Del E. Webb Constr. v.
Richardson Hosp. Auth., 823 F.2d 145, 147 (5th Cir. 1987)
(citation and internal quotation marks omitted).
30
Inasmuch as we conclude that the instant arbitration
agreement is covered by the FAA, we express no opinion on whether
arbitration agreements governed exclusively by state arbitration
law would by controlled by the Court’s holding in Green Tree.

13
the arbitration should ultimately take place in Texas,31 does

provide for court-ordered consolidation of arbitration

proceedings.32 This provision does not require courts to make this

decision, however; it only states permissively that a district

court may order consolidation on application of one party with the

consent of the other parties.33 The provision also “does not

prevent the parties to two or more arbitrations from agreeing to

consolidate...and taking any step necessary to effect that

consolidation.”34 In short, this section may not clearly assign

consolidation decisions to arbitrators, but neither does it require

a court to make such a decision. Furthermore, it is well

established that the FAA preempts state laws that contradict the

purpose of the FAA by “requir[ing] a judicial forum for the

resolution of claims which the contracting parties agreed to

resolve by arbitration.”35 Thus, even if Texas law contained a rule

31
4 Tex. Civ. Prac. & Rem. § 172.001(b) (2003). As Pedcor
points out, this case involves an international agreement because
the places of business of the parties are located in different
States - Pedcor is located in Indiana and NAI in Belgium. See 4
Tex. Civ. Prac. & Rem. §§ 172.003(a) & (d). Otherwise, section
172.001 provides that “[t]his chapter applies to international
commercial arbitration and conciliation, subject to any agreement
that is in force between the United States and another state or
states.” Id.
32
4 Tex. Civ. Prac. & Rem. § 172.173.
33
4 Tex. Civ. Prac. & Rem. § 172.173(a).
34
4 Tex. Civ. Prac. & Rem. § 172.173(c).
35
Southland Corp. v. Keating, 465 U.S. 1, 10 (1984).

14
contrary to Green Tree, i.e., that courts may decide the class

arbitration question, the simultaneous applicability of the FAA to

this case would appear to preempt any contrary state law.36

Finally, we note that Green Tree has effectively overruled our

holding in Del E. Webb Construction v. Richardson Hospital

Authority, which both parties discussed in relation to a district

court’s authority to order class arbitration when the agreement is

silent.37 In Del E. Webb, after discussing the Supreme Court’s

statement that questions on procedural matters are to be decided by

the arbitrator because they are usually intertwined with the merits

of the underlying dispute, we stated that “[t]he question of

consolidation, however, is for the district court because the court

36
In its most recent submission to us, Pedcor asserted that
Texas law, specifically the recent Texas appellate court decision
of In re John M. O’Quinn,P.C., actually requires a court, instead
of an arbitrator, to decide whether an agreement permits class
arbitration. No. 12-02-00352-CV, 2003 WL 21468619 (Tex. Ct. App.
June 25, 2003). This case, however, only held that the court had
to decide the class arbitration issue because the parties chose
the AAA Commercial Arbitration Rules to apply. Id. at *5. At
the time, these rules required a trial court to certify a class
first because the AAA had no procedure for class arbitration.
Id. Although the court indicated that Green Tree was
inapplicable, the court also stated that its holding was “limited
to the particular facts of [the] case” and that it was “not
address[ing] whether, as a general proposition, class
certification is a matter for the trial court or for the
arbitrator.” Id. at *4, n. 1. Furthermore, in light of Green
Tree, the AAA has stated that it will administer demands for
class arbitration in particular circumstances, and is developing
rules to accommodate these types of cases. See American
Arbitration Association: Policy on Class Arbitration, available
at http://www.adr.org/index2.1.jsp?JSPssid=15778&JSPsrcupload\
LIVESITE\Rules_Procedures\Topics_Interest\AAA%20Class%20Action%20
policy.htm (July 11, 2003).
37
823 F.2d 145.

15
must determine only whether the contract provides for consolidated

arbitration, a question free of underlying facts.”38 As a result,

we agreed with the Second and Ninth circuits that “district courts

should decide the issue [of consolidation].”39 To the extent that

the issue of consolidation in arbitration is analogous to class

arbitration, Green Tree’s holding that arbitrators, not courts,

decide whether an agreement provides for class arbitration would

appear to overrule Del E. Webb’s holding to the contrary.

As we hold today that, pursuant to Green Tree, arbitrators

should decide whether class arbitration is available or forbidden,

we do not address the parties’ other arguments on appeal, most of

which depended on the now-flawed premise that a district court

maintains the initial authority to order class arbitration.

III. CONCLUSION

For the foregoing reasons, we vacate the certification order,

and remand to the district court for proceedings consistent with

this opinion.

VACATED AND REMANDED.

38
Id. at 150.
39
Id. at 149-50.

16