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It is the Responsibility of the Court to Make a Determination Regarding a Challenge to a Class Action Waiver in an Arbitration Agreement

Thomas Paschos
Thomas Paschos & Associates, P.C.

(Haddonfield, NJ)

In Puleo v. Chase Bank USA, --- F.3d ---, 2010 WL 1838762 (3d. Cir. (Pa.) May 10, 2010), Francis and Trish Puleo (the Puleos) brought suit challenging retroactive interest-rate increases on the account balances of their Chase Bank credit cards. Although the Chase Bank Cardmember Agreement governing their credit cards contained an Arbitration Agreement expressly barring class actions, the Puleos brought their suit in a representative capacity, arguing that the class action waiver was unconscionable. After Chase moved to compel arbitration, the Puleos urged the District Court to order the parties to arbitrate their class claims, notwithstanding the Arbitration Agreement's ban on class actions, but argued that the question of whether the class action waiver was unconscionable was a question for the arbitrator, not the court. The District Court rejected their arguments, concluding that the Puleos' challenge to the enforceability of the class action waiver was a question of arbitrability for the court to decide.

On appeal, the Puleos argued that the District Court never should have addressed the unconscionability of the class action waiver and instead should have left that issue to be decided by an arbitrator. Appellee Chase Bank argued that it was proper for the District Court to assess the unconscionability of the class action ban because the Puleos' unconscionability challenge to the class action waiver presented a question of arbitrability for the court to decide.

The Third Circuit acknowledged the well-settled general rule that when a contractual party challenges the validity of an arbitration agreement by contending that one or more of its terms is unconscionable and unenforceable, a question of arbitrability is presented. The Puleos' argued that this general rule should not apply to their case. The Puleos argued, among other things, that because they are willing to arbitrate (although not under the express terms of their Arbitration Agreement), no question of arbitrability existed.

The court found this argument self-contradictory, providing:

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. 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 FAA's directive that arbitration agreements be enforced in accordance with their terms. . . And without a court order compelling class arbitration, the Puleos could not have presented their class claims to the arbitrator-the rules of the American Arbitration Association (AAA) make plain that . . . a contract bans class arbitration, the AAA will not hear class claims unless an order of a court directs the parties to the underlying dispute to submit any aspect of their dispute involving class claims, consolidation, joinder or the enforceability of such provisions, to an arbitrator.

* * * * *

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.

The court also declined to agree with the Puleos' contention that because the parties' Arbitration Agreement contained a severability clause, the District Court erred in considering the unconscionability of the class action waiver.

The court therefore affirmed the District Court's order compelling the parties to arbitrate their claims on an individual basis and held that the District Court properly exercised its responsibility to decide issues of arbitrability and we thus will affirm.

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