Judges, and not arbitrators, should decide questions relating to the enforceability of a class action waiver in an arbitration clause because such questions present issues of “arbitrability” that are properly decided by courts, an en banc panel of the 3rd U.S. Circuit Court of Appeals has ruled.

“An unconscionable challenge to the provisions of an arbitration agreement is a question of arbitrability that is preemptively for the court, not the arbitrator, to decide,” U.S. Circuit Judge Julio M. Fuentes wrote for a six-judge majority in Puleo v. Chase Bank USA.

Judge Marjorie O. Rendell Disagreed

In dissent, U.S. Circuit Judge Marjorie O. Rendell disagreed, saying “a challenge to a class action waiver in the arbitration agreement does not implicate the arbitrator’s jurisdiction,” and therefore should not be considered a question of arbitrability.

Judge Lawrence F. Stengel Rejected The Consumer-Plaintiff’s Argument

The 6-4 decision upholds a ruling by U.S. District Judge Lawrence F. Stengel that rejected the consumer-plaintiff’s argument that the arbitrator should be allowed to decide whether the class action waiver was unconscionable.

Stengel went on to rule that the waiver was not unconscionable and ordered Francis and Trish Puleo to proceed to arbitration on their individual claims only.

In The Appeal

The Puleos challenged only the first half of Stengel’s ruling, arguing that Stengel should have sent the case directly to the arbitrator, allowing the arbitrator to tackle the question of unconscionability.

According to Court Records

Court records show that the case was argued before a three-judge panel — Rendell, Fuentes and Senior Judge Jane R. Roth — in July 2009.

But the panel never issued a decision. Instead, in December 2009, the court announced that it had voted to rehear the case en banc. Roth, a senior judge, was eligible to join the en banc court but did not attend the oral argument and cast no vote in the en banc decision.

In The Suit

The Puleos challenged the retroactive interest-rate increases on the account balances of their Chase Bank credit cards.

Francis Puleo’s Claim

Francis Puleo claimed that in March 2006, Chase retroactively increased his interest rate from 4.99 percent to 29.99 percent, causing him to incur $267 in increased finance charges. Trish Puleo likewise claimed that in November 2005, Chase retroactively increased her interest rate from 14.74 percent to 25.99 percent, causing her to incur $162 in increased finance charges.

Lawyers For Chase Argued

Lawyers for Chase argued that such increases — and the retroactive application of those increases to the Puleos’ existing balances — were permitted by the cardmember agreements, as well as by then-existing state and federal law.

But ever since the suit was filed, the entire focus of the litigation in federal court has been on whether the Puleos had the right to pursue their claims as a class action, or whether they had signed away that right, and the companion question of whether a judge or an arbitrator should decide whether the class action waiver was valid.

Stengel issued an order that compelled arbitration but held that the validity of the class action waiver was a “gateway dispute” and one that he considered a “question of arbitrability” for the court to decide. The waiver was valid, Stengel found, leaving the Puleos with only individual claims to pursue at arbitration.

On Appeal

The Puleos’ lawyers — Michael J. Quirk and Mark R. Cuker of Williams Cuker & Berezofsky — argued that Stengel erred by failing to recognize that their decision to agree to arbitrate meant that the issue of the class action waiver could not be considered a question of arbitrability.

Fuentes was unimpressed, saying he found the plaintiffs’ argument “self-contradictory.”

“In order to present their class claims to an arbitrator, the Puleos needed to obtain a court order that invalidated the arbitration agreement’s class action waiver and that compelled class arbitration,” Fuentes wrote.

“This is because unless it addressed the validity of the ban on class arbitration, the district court could not have ordered the parties to submit their dispute to class arbitration without running afoul of the [Federal Arbitration Act’s] directive that arbitration agreements be enforced in accordance with their terms,” Fuentes wrote.

“We decline to indulge the Puleos’ desire to have it both ways — i.e., to have the district court compel the parties to arbitrate class claims without first addressing the validity of the class action waiver,” Fuentes wrote.

Fuentes was joined by Chief Judge Theodore A. McKee and Judges Dolores K. Sloviter, Anthony J. Scirica, D. Brooks Smith and Kent A. Jordan.

In dissent, Rendell said the plaintiffs had a valid point that the majority was ignoring.

“Since it is clear that the parties agree that the case will go to arbitration — whether as a class action or as plaintiffs’ individual suit — there is no issue of “arbitrability,” and there is no issue as to the arbitrator’s jurisdiction,” Rendell wrote.

“No one — neither the court nor the arbitrator — needs to decide the “jurisdiction” of the arbitrator. The arbitrator has jurisdiction over the case; the case will be arbitrated — no ifs, ands, or buts,” Rendell wrote.

Rendell’s Disagreement With Fuentes

Rendell said her disagreement with Fuentes stemmed from “the unique features” of the case, including the fact that the arbitrability of the dispute was not at issue because the plaintiffs agreed the case should go to arbitration.

“No case cited by the majority supports the proposition that an unconscionability challenge to a single provision of an arbitration agreement necessarily raises a question of arbitrability, particularly where, as here, the party raising the unconscionability challenge concedes the validity of the rest of the arbitration agreement and has agreed to go to arbitration,” Rendell wrote in a dissent that was joined by Judges Thomas L. Ambro, D. Michael Fisher and Michael A. Chagares.

Chase Bank was represented in the appeal by Nancy R. Thomas and Robert S. Stern of Morrison & Foerster in Los Angeles.

Thomas declined to be interviewed about the ruling.

Quirk said no decision has yet been made as to whether the plaintiff will pursue any further appeals including a possible petition to the U.S. Supreme Court.

Guiliano Law Firm

The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Firm, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost to unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.

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