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