PHILADELPHIA (Legal Newsline) - A federal appeals court ruled in an oil and gas leasing case earlier this month that district courts, not arbitrators, must determine whether arbitration clauses permit class action arbitration.

The U.S. Court of Appeals for the Third Circuit, in a precedential opinion filed Jan. 5, said district courts can make such a determination in the absence of a clear agreement giving authority to an arbitrator.

The Third Circuit, in its decision, rejected the argument that by incorporating American Arbitration Association, or AAA, rules into an arbitration provision, an arbitrator is required to determine the question of arbitrability.

“Based on the language of the Leases themselves, the nature and contents of the various AAA rules, and the existing case law, we conclude that the Leases do not ‘clearly and unmistakably’ delegate the question of class arbitrability to the arbitrators,” Judge Robert E. Cowen wrote for the three-judge panel.

Defendant Scout Petroleum LLC appealed to the Third Circuit from the orders of the U.S. District Court for the Middle District of Pennsylvania granting plaintiff Chesapeake Appalachia LLC’s motions for summary judgment and for an order vacating a decision by the arbitrators and denying Scout’s own motion to dismiss the complaint as well as its motion for reconsideration.

The oil and gas leases at issue state that, in the event of a disagreement between the lessor and lessee concerning the lease, performance “thereunder” or damages caused by the lessee’s operations, “all such disputes” shall be resolved by arbitration in accordance with AAA rules.

Chesapeake had entered into leases with Scout in 2008. In 2014, Scout filed an arbitration demand against Chesapeake on behalf of itself and similarly situated lessors, alleging Chesapeake paid insufficient royalties.

In the answering statement it filed with the AAA, Chesapeake objected to class arbitration on the grounds that “[it] did not agree to resolve disputes arising out of the leases at issue in ‘class arbitration,’ nor did Chesapeake agree to submit the question of class arbitrability -- i.e., whether claimants may proceed on a class basis in arbitration -- to an arbitrator.”

Soon after, Chesapeake filed a declaratory judgment, asking that a district court -- not arbitrators -- must decide whether class arbitration is available and that leases do not permit class arbitration.

Judge Matthew W. Brann entered an order granting summary judgment to Chesapeake, finding the contract is “silent or ambiguous as to class arbitration, far from the ‘clear and unmistakable’ allowance needed for an arbitrator, and not a court, to turn to the clause construction question.”

The Third Circuit agreed.

“Given the actual language of the Leases themselves, the nature and terms of the various AAA rules, and the existing case law, we determine that the District Court was correct when it concluded that the Leases are ‘far from the clear and unmistakable allowance needed for’ the arbitrators to decide the question of class arbitrability,” Cowen wrote in the Third Circuit’s 46-page opinion.

“We acknowledge that Scout offers one reasonable interpretation of the Leases. As a sophisticated business, Chesapeake could have (and, at least in retrospect, should have) drafted a clearer arbitration agreement. Nevertheless, it is not our role to ascertain whether one, among various competing interpretations of an arbitration agreement, is reasonable under ordinary principles of contractual interpretation, assess whether in hindsight a better arbitration agreement could have been written, or determine whether the arbitrators possess the power to decide other questions of arbitrability. Instead, the Court must determine whether the Leases clearly and unmistakably delegate the specific question of class arbitrability to the arbitrators.

“We conclude that the Leases do not meet such an onerous burden.”

The Third Circuit called the incorporation of AAA rules a “daisy-chain of cross-references,” requiring the court to jump from the leases to the AAA rules to the Commercial Rules and the Supplementary Rules.

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