The United States Court of Appeals for the Fifth Circuit ruled that an arbitrator exceeded his powers by ordering class arbitration without a sufficient contractual or legal basis for doing so.
Background
In Reed v. Florida Metropolitan University, Inc. No. 11-50509 (5th Cir. May 18, 2012) Plaintiff Jeffrey Reed obtained a bachelor’s degree in paralegal studies at Everest University Online’s (“Everest”) distance learning program. Everest is a brand of Defendant Corinthian Colleges, Inc. and Defendant Florida Metropolitan University, Inc. is a subsidiary of Corinthian Colleges (together, the “School”). Reed was assured from School officials that the degree would be accepted by educational institutions and employers. However, Reed later discovered that law schools would not recognize his degree , nor would the local police department, where he sought employment.
District Court
Reed filed a class action in a Texas state court alleging that the School violated certain provisions of the Texas Education Code when they solicited students in Texas without first having the required certification of approval from the Texas Workforce Commission. The School removed the action to the District Court, and then moved to compel individual arbitration pursuant to the arbitration provision of the Enrollment Agreement. The District Court found that (i) a valid arbitration agreement existed and (ii) the dispute was within the scope of that agreement. The District Court granted the School’s motion to compel arbitration. The District Court, however, declined to decide whether the parties’ agreement provided for class arbitration, and stated that the issue was “more appropriately decided by the arbitrator.”
The AAA arbitrator determined that the parties implicitly agreed to class arbitration and entered an award to that effect. Reed sought confirmation of the award and the School moved to vacate the award on the basis that the arbitrator exceeded his powers. The District Court confirmed the award and the School appealed.
Fifth Circuit
Whether the District Court Properly Referred the Class Arbitration Issue to the Arbitrator. Because the parties agreed that the arbitrator should decide the class arbitration issue, the Fifth Circuit held that the District Court correctly referred that issue to the arbitrator.
Whether the District Court Erred in Confirming the Arbitration Award. The Fifth Circuit agreed with the School and concluded the arbitration award was inconsistent with Stolt-Nielsen, and the arbitrator exceeded his authority by ordering the parties into class arbitration without a sufficient contractual or legal basis. Plaintiff had admitted before the arbitrator that the parties did not discuss whether class arbitration was authorized, and the arbitration agreement failed to address class arbitration. The Fifth Circuit said that “At most, the agreement in this case could support a finding that the parties did not preclude class arbitration, but under Stolt-Nielsen this is not enough.”
Accordingly, the Fifth Circuit reversed the District Court’s order confirming the award and remanded the case for further proceedings.
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