Where an agreement provides that “any dispute… arising out of the agreement” would be settled by binding arbitration in accordance with “the Rules of the American Arbitration Association,” such language provides “clear and unmistakable evidence” of the parties’ agreement to delegate certain substantive issues—like the availability of class arbitration—to the arbitrator.  Rickenbaugh v. Power Home Solar, LLC, 2019 NCBC 79 (J. Bledsoe).  As such, when agreements incorporate AAA’s Rules, the Business Court will compel arbitration but leave it to the arbitrator to determine whether class wide arbitration is available.

Plaintiffs are North Carolina homeowners.  Defendant Power Home Solar, LLC (“Power Home”), a nation-wide solar installation company, contacted Plaintiffs to discuss Power Home’s “standard energy savings package.” Power Home’s representative allegedly promised Plaintiffs savings in excess of 90% on their energy bills if they purchased its energy package.  Based upon these representations, Plaintiffs entered into an agreement with Power Home to purchase the energy package and have it installed (“Agreement”).  The Agreement contained an arbitration provision that stated, “[A]ny dispute arising out of …any aspect of this agreement…shall be settled by binding arbitration in accordance with the Construction Industry Rules of the American Arbitration Association…” Power Home installed the energy package, but Plaintiffs did not experience the drop in energy bills they were expecting. Plaintiffs filed a putative class action against Power Home in Mecklenburg County Superior Court on behalf of themselves and other Power Home customers. Power Home filed a motion to dismiss or, in the alternative, to compel bilateral arbitration (thereby effectively precluding class-wide arbitration).  In its Motion, Power Home argued that the Agreement clearly required Plaintiffs to arbitrate their claims and, because the Agreement had no clear language permitting class wide arbitration, the Court should determine whether Plaintiffs could maintain a class wide arbitration.  Plaintiffs disagreed and contended, at a minimum, the inclusion of AAA’s Rules meant that the arbitrator, and not the Court, had to decide whether the Agreement allowed for class wide arbitration.

In its decision, the Business Court compelled Plaintiffs to arbitrate, but agreed with Plaintiffs that the arbitrator—and not the Court—would decide whether class wide arbitration was permitted. While a court typically decides questions of “substantive arbitrability” (e.g., whether the parties are bound by a given arbitration clause, whether the arbitration clause applies to a particular type of controversy, etc.), the Business Court recognized that the parties can delegate “substantive arbitrability” questions to the arbitrator so long as there is “clear and unmistakable evidence” of an agreement to so delegate. Because AAA’s Construction Rules empower the arbitrator to determine the “scope” of the arbitration agreement, the Business Court followed numerous federal court decisions and held the Agreement’s incorporation of AAA’s Rules provided “clear and unmistakable evidence” that Plaintiffs and Power Home had delegated the issue of the arbitrability of their personal claims to the arbitrator. (Opinion, ¶¶21,31,32).   However, the Business Court also recognized whether the inclusion of AAA’s Rules constituted “clear and unmistakable evidence” that the parties’ had agreed to delegate the question of class wide arbitration to the arbitrator was an issue that had divided federal circuit courts and had not been definitively answered by the U.S. Supreme Court. (Id., ¶¶25,27,28).  Acknowledging the “fundamental difference” between class arbitration and bilateral arbitration, as well as the potential due process concerns for allowing an arbitrator to determine the existence of a class (Id., ¶¶23,27), the Business Court nonetheless sided with those federal circuit courts that have concluded the incorporation of AAA’s Rules constitutes “clear and unmistakable evidence” to delegate the question of class wide arbitration to the arbitrator. (Id., ¶33).  As a result, the arbitrator—and not the Business Court—would determine the availability of class wide arbitration. (Id., ¶34).

Based upon this decision, a business which incorporates any of the Rules of the American Arbitration Association into its arbitration agreements should understand that it is agreeing that an arbitrator—and not a judge—will decide whether an agreement permits class wide arbitration and, correspondingly, whether a class can be certified, whether a class action can be maintained, etc. All such decisions will be made with limited opportunity for judicial review.  In order to avoid such a result, a business would be well served to provided explicit language in its arbitration agreements that requires any issue about the availability of class wide arbitration to remain with the court.

Additional legal points from this decision:

• Although the agreement at issue in this case involved AAA’s Construction Rules, the same language involving the expansive “scope” of the arbitrator’s power that is contained in the Construction Rules (and which the Business Court relied on in reaching its decision that “clear and unmistakable evidence” existed) is the same language used in AAA’s Commercial Arbitration Rules and AAA’s Consumer Arbitration Rules. See American Arbitration Association Commercial Arbitration Rules and Mediation Procedures, §R-7(a); American Arbitration Association Consumer Arbitration Rules, §R-14(a).  As such, the Business Court’s reasoning would likely apply regardless of which AAA Rules are employed.

• Although the rules for AAA do not contain class arbitration procedures, class arbitration procedures are provided for in AAA’s Supplementary Rules for Class Arbitration which, by their own terms, are incorporated into “any of the rules of [AAA] where a party submits a dispute to arbitration…” (Opinion, ¶31).