Arbitration clauses and class actions: the cross-border dialogue continues in light of recent SCC and SCOTUS jurisprudence
The policy rationales that underpin enforcing arbitration agreements may potentially be at odds with those underpinning the class actions regime (see our previous posts here and here). These policy rationales collide when confronting the question of whether plaintiffs can waive their right to participate in a class action through a mandatory arbitration clause and, if so, when this is permissible. Canada and the United States continue to have different approaches to the question of who decides whether a dispute is arbitrable – the arbitrator or the court? With respect to enforcement in the class action context, courts in the United States tend to enforce arbitration clauses such that class actions are precluded. However, in Canada an arbitration clause that acts as a barrier to dispute resolution may be unenforceable and precluded by certain legislation.
Distinct presumptions regarding jurisdiction to consider arbitrability
When considering whether a class action can proceed in the face of a mandatory arbitration clause, there is a threshold question of whether this decision should be made by a court or arbitrator. On January 25, 2021, the Supreme Court of the United States (“SCOTUS”) issued its order in Henry Schein Inc. v Archer and White Sales Inc. [PDF] – a much awaited decision on the subject of arbitrability. “Arbitrability” refers to whether a dispute should be decided through arbitration pursuant to an arbitration agreement or by the court. Much like the rules of other arbitral institutions, the American Arbitration Association (“AAA”) rules provide that questions of arbitrability are to be submitted to the arbitrators. In this case, the issue was who should determine arbitrability when the arbitration agreement provided for arbitration under the AAA rules but excluded “actions seeking injunctive relief” and the claimant sought injunctive relief in addition to damages.
This case was previously considered by SCOTUS in 2019, before being remanded to the United States Court of Appeals for the Fifth Circuit. The Fifth Circuit determined that the clause at issue did not “clearly and unmistakably” allocate the question of arbitrability to the arbitrators by virtue of selecting the AAA rules. Therefore, the question before SCOTUS was whether a provision in an arbitration agreement that exempts certain claims from arbitration negates what would otherwise be a delegation of questions of arbitrability to an arbitrator. This recent SCOTUS dismissal leaves the United States Court of Appeals for the Fifth Circuit decision in place, namely that a federal district court, rather than an arbitrator, should decide whether the dispute is arbitrable when there is a carve-out in the arbitration clause. Therefore, the standard remains that courts decide threshold issues unless the parties have “clearly and unmistakably” indicated their intent to delegate such issues to an arbitrator. The Fifth Circuit held that this standard was not met in the clause at issue.
By contrast, in Canada the presumption known as the “competence-competence” principle is that when an arbitration clause exists, challenges to the jurisdiction of the arbitrator are first referred to the arbitrator rather than a judge. The applicability of this presumption was recently confirmed by the Supreme Court of Canada (“SCC”) in the Uber Technologies Inc. v Heller decision released on June 26, 2020. Notably however, there are exceptions. As discussed in our previous post, the SCC in Dell Computer Corp v Union des consommateurs and Seidel v TELUS Communications Inc set two exceptions: the court can rule on arbitral jurisdiction when it is (i) a pure question of law, or (ii) a question of mixed fact and law requiring only “superficial consideration” of the evidentiary record. The SCC added the third narrow exception in Uber, that courts should not refer challenges to an arbitrator if there is a real prospect that if the court does not hear determine the jurisdiction issue, the challenge will never be resolved.
Continued divergence in the consumer contract context
The two jurisdictions differ beyond this threshold issue of jurisdiction and arbitrability. This recent Henry Schein decision builds upon a history of divergent approaches by Canadian and United States courts more generally with respect to the interplay between arbitration clauses and class actions – which has played out in the consumer contract context. As we have previously written here and here, arbitration clauses in consumer contracts have generally been upheld in the United States so as to preclude class actions, as exemplified in SCOTUS decisions AT&T v Concepcion and Italian Colors v American Express.
By contrast, Canadian legislation and case law has tended to find arbitration clauses unenforceable in contexts where a power imbalance exists, such as in the consumer protection context. In fact, consumer protection legislation in Canada permits class proceedings to be commenced in the face of arbitration clauses. In Ontario for example, mandatory arbitration clauses are not permitted under the Consumer Protection Act (the “Act”). Case law has been consistent with this approach. As described in our previous blog, the Ontario Superior Court of Justice certified a class proceeding despite the existence of an arbitration clause in the consumer contract in Wellman and Corless v. TELUS and Bell. In the 2019 TELUS decision [PDF], the majority of the SCC held that the arbitration clause applied to business customers, but not to consumers protected by the Act. Most recently, in Uber the SCC held that Uber’s arbitration agreement with its drivers was unconscionable and invalid as we discussed in our previous post, since Uber drivers were contractually required to arbitrate complaints, where starting a claim could cost more than $7000 USD. Therefore, an arbitration clause that acts as a barrier to dispute resolution is likely to be unenforceable. This is consistent with the approach the SCC has previously taken in cases such as TELUS to find arbitration clauses unenforceable in contexts where power imbalances exist.
The approaches with respect to the interplay of the class actions and arbitration regimes remain different in Canada and the United States. In the United States, Henry Schein also serves as a cautionary tale relating to the importance of drafting to meet the standard of “clearly and unmistakably” indicated intent of arbitrability when desired. Therefore, for companies that operate on both sides of the border, it is important to keep jurisdiction in mind when drafting contracts to prevent undesirable consequences with respect to potential disputes. An arbitration clause in a Canadian contract that does not “clearly and unmistakably” allocate the question of determining arbitrability to arbitrators may not be arbitrable in the United States. Further, a company’s standard arbitration clause in its United States consumer or employment contracts will require significant adaptation or may not work at all in Canada.
 For further details on the relevant legislation in other provinces, see our previous posts here and here.