The Sixth Circuit Court of Appeals has held that private arbitral rules cannot expand an Article III court’s jurisdiction to hear an appeal by circumventing the requisite showing of ripeness. Accordingly, the Court held that a clause construction award was not subject to judicial review under the Federal Arbitration Act, partly because the arbitrator had only determined that arbitration might proceed on a class-wide basis, not that it would proceed on a class-wide basis.
InDealer Computer Services, Inc. v. Dub Herring Ford, No. 07-1819, 2008 WL 4911169 (6th Cir. Nov. 18, 2008), a group of automobile dealers obtained computer systems from Dealer Computer Services (DCS). The contracts all contained broadly-worded arbitration agreements invoking the rules of the American Arbitration Association (AAA).
After problems arose with the systems, the dealers filed a class action arbitration claim against DCS with the AAA. DCS objected to class treatment of the claim, but the AAA arbitration panel issued a clause construction award holding that nothing in the parties’ agreement precluded class arbitration.
DCS moved to vacate the clause construction award with the district court, alleging that the panel both exceeded its powers and engaged in manifest disregard of the law. The dealers countered by filing a motion to dismiss, maintaining that the federal court was without jurisdiction to hear the controversy. The district court denied both motions. Dealer Computer Servs., Inc. v. Dub Herring Ford, No. 07-10263, 2007 WL 1560204 (E.D. Mich. May 29, 2007). DCS appealed.
On appeal, the Court examined, as a preliminary matter, its jurisdiction to hear the dispute, considering the likelihood that the harm alleged would come to pass, the hardship imposed by denying relief, and the sufficiency of the available record.
The Court held that there was no present likelihood of harm from declining jurisdiction because the award merely established that nothing in the agreement precluded class arbitration, not that arbitration would proceed on a class-wide basis. The Court noted that before class-wide arbitration would ever proceed, the arbitrator would have to decide whether the claim satisfied several requirements analogous to those for class action litigation under Fed. R. Civ. P. 23, such as numerosity, commonality of questions of law and fact, typicality, and adequacy of representation. The Court found that a challenge to the award would not be ripe until such a determination had been made.
Furthermore, the Court found no hardship in denying review at this point and awaiting the arbitrator’s Rule 4 determination, noting it “should remain reluctant to invite a judicial proceeding every time the arbitrator sneezes.”
The Court was unpersuaded by the district court’s assertion that it enjoyed jurisdiction to review the award under AAA Supplementary Rule 3, which calls for an arbitrator to temporarily “stay all proceedings following the issuance of the Clause Construction Award…to permit any party to move a court of competent jurisdiction to confirm or to vacate the Clause Construction Award.” As the Court noted, a private arbitral organization does not have authority to waive an Article III court’s ripeness requirements merely because it would prefer to provide an opportunity for judicial review at that stage.
Accordingly, the Court vacated the district court orders and instructed the district court to dismiss the matter for lack of jurisdiction.