Arbitration is supposed to be a less formal, more efficient way of resolving a dispute. More and more, though, we see certain threshold issues—like whether a dispute is ‘arbitrable’ in the first place—undermine the benefits of this supposedly streamlined process. Any clarity from the courts when it comes to issues of arbitrability, therefore, is a good thing to practitioners (and their clients) in this increasingly litigated area.

In Rickenbaugh v. Power Home Solar, LLC, 2019 NCBC 79 (N.C. Super. Ct. Dec. 20, 2019), the Business Court brought some clarity to this area, rolling out several (nearly) bright-line rules with respect to arbitrability. See Order and Opinion.

Take-Aways:

  • The FAA applies to any contract involving interstate commerce—no matter what the parties say in their choice-of-law provision.
  • Where a contract incorporates the AAA Rules, questions of substantive arbitrability are for the arbitrator, not the court.
  • Where the parties have agreed for the arbitrator to determine the scope of the arbitration, the question of class arbitrability is one for the arbitrator, not the court.

Background:

The Rickenbaugh plaintiffs purchased a “solar energy system” from the defendant Power Home Solar. According to the Rickenbaughs, they did so based on Power Home’s representation that the system “was guaranteed to save [them] at least 97% on their energy bills.” Rickenbaugh, 2019 NCBC at ¶ 5. The parties’ contract included an arbitration provision, which provided that any dispute between them would be arbitrated “as provided by North Carolina & South Carolina law.” Id. ¶ 6 (caps removed).

The Rickenbaughs had the system installed, but their actual energy savings, they contend, was only a “fraction” of the 97% energy savings promised by Power Home. Id. ¶ 7. The Rickenbaughs complained to Power Home, who allegedly “refused to provide the promised energy savings or otherwise afford them a remedy.” Id. ¶ 7. The Rickenbaughs thereafter filed a class action complaint against Power Home, on behalf of themselves and potentially “more than 10,000 people” allegedly defrauded by Power Home “throughout the United States.” Id. ¶ 8.

The case was designated to the Business Court, where Power Home moved to dismiss or, in the alternative, compel bilateral arbitration (despite the “class action” complaint) based on the arbitration provision in the parties’ contract.

In addressing the motion, the Court considered several arbitrability-related questions:

  • Which law applied to the parties’ arbitration agreement—federal or state law?
  • Who decided whether the dispute was arbitrable—the arbitrator or the court?
  • Who decided whether class arbitration was available—the arbitrator or the court?

Analysis:

  1. Which Law Applies?

As noted, the parties’ contract provided that any dispute between them would be arbitrated “as provided by North Carolina & South Carolina law.” So, state law applied, right? Not so fast.

The Court observed that any contract “involving interstate commerce” is governed by the Federal Arbitration Act (FAA). Id. ¶ 13. And this was true regardless of any choice-of-law provision in the parties’ contract. Id. ¶ 15.

The question, then, was whether the parties’ contract “involved interstate commerce.”

The Court said yes – the contract involved interstate commerce because:

  • Diversity of citizenship existed between the parties: Plaintiffs were residents of North Carolina, while Power Home was a Delaware LLC;
  • Plaintiffs’ claims were based on Power Home’s sale and installation of its energy efficiency system to customers both inside and outside North Carolina and its allegedly fraudulent scheme to deceive customers in at least five states; and
  • Although Power Home denied Plaintiffs’ claims, it did not deny that its conduct at issue occurred both inside and outside North Carolina.

Id. ¶¶ 13-14. Accordingly, the FAA applied.

  1. Who Decides Arbitrability?

Next, knowing that the FAA applied, the question became: Who gets to apply it – the arbitrator or the court?

Presumptively, questions of substantive arbitrability—like whether a particular dispute falls within an arbitration provision—are for the court, not the arbitrator, to decide. This presumption can be overcome, though, where there is “clear and unmistakable” evidence that the parties agreed to have the arbitrator decide arbitrability. Id. ¶¶ 17-18.

Under the FAA, one way for the parties to “clearly and unmistakably” delegate arbitrability to the arbitrator is by incorporating the American Arbitration Association (AAA) Rules into their agreement. Id. ¶ 19. This is because, under the AAA Rules, arbitrability is specifically delegated to the arbitrator. In particular, the AAA Construction Rules provide that “[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” Id. ¶ 20 (quoting AAA Construction Rule 9(a)).

Here, the parties had agreed that “any dispute” relating to their agreement would be settled through arbitration “in accordance with the Construction Industry Rules of the American Arbitration Association.” Id. ¶ 20. The Court also noted that “nearly identical” language had been held sufficient to delegate issues of substantive arbitrability to the arbitrator. Id. ¶ 21 (citing Epic Games, Inc. v. Murphy-Johnson, 247 N.C. App. 54, 785 S.E.2d 137 (2016)). Accordingly, “deem[ing] itself bound by [Epic Games],” the Court concluded that by incorporating the AAA Rules into their contract, the parties had “clearly and unmistakably” agreed to arbitrate issues of substantive arbitrability. Id. ¶ 21.

  1. Who Decides Class Arbitrability?

The Court next addressed an issue of first impression in North Carolina: Who decides whether class arbitration is available?

The Court observed that, unlike bilateral arbitration, class arbitration “raises serious due process concerns by adjudicating the rights of absent members of the plaintiff class . . . with only limited judicial review.” Id. ¶ 23 (quoting Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407, 1416 (2019)). Because of these concerns, “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” Id. ¶ 24 (quoting Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 684 (2010)).

Power Home argued that, under this standard, the parties’ “incorporation of the AAA Construction Rules in [their contract], without more, cannot constitute clear and unmistakable evidence that the parties agreed for an arbitrator to decide the availability of class arbitration.” Id. ¶ 25. The Court disagreed.

The Court noted that the AAA Construction Rules, incorporated by the parties into their contract, provided that “the arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the . . . scope . . . of the arbitration agreement.” Id. ¶ 30. And based on the plain meaning of the word “scope,” the Court reasoned, the question of whether arbitration could proceed on behalf of a class concerned the scope of the arbitration. Id. ¶¶ 33-34.

The Court found further support for its decision not only in cases from other jurisdictions, but also in the AAA’s “Supplementary Rules.” In fact, the Supplementary Rules explicitly provided that the arbitrator “shall determine as a threshold matter . . . whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class.” Id. ¶ 31.

Accordingly, based on the AAA Rules and Supplementary Rules, the plain meaning of the word “scope,” and supporting cases from other jurisdictions, the Court concluded that the parties had “clearly and unmistakably” delegated the question of class arbitrability to the arbitrator.

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Matt Krueger-Andes is a litigation associate in Fox Rothschild’s Charlotte office.  He regularly represents clients in the Business Court and advises on Business Court and other business litigation-related matters.  He is also a former law clerk to the Honorable Louis A. Bledsoe, III, Chief Judge of the North Carolina Business Court.