The earthquake that was the Concepcion decision (in April of 2011) is still sending aftershocks throughout the judicial system.  In last week’s ruling, the Third Circuit compelled individual arbitration in Homa v. American Express Co., 2012 WL 3594231(3d Cir. Aug. 22, 2012), a case in which the parties have been fighting about whether the plaintiff must arbitrate individually, or may bring a class arbitration, since 2007.

The plaintiff in this case sought to represent a class of AmEx cardholders alleging false marketing.  However, the arbitration clause in his credit card agreement explicitly waived any right to a class arbitration.  The plaintiff brought his case in NJ federal court court and argued that the class action waiver was unconscionable under a 2006 decision from New Jersey’s high court.  The plaintiff then rode this procedural roller coaster: the federal district court granted AmEx’s motion to compel individual arbitration (down); the Third Circuit reversed, based on the New Jersey state precedent and remanded for careful application of the Jersey law (up!); on remand, the parties conducted additional discovery (whee!);  AmEx then successfully moved to stay the case pending the Supreme Court’s Concepcion decision (car stuck upside down on loop); after Concepcion, the district court reinstated its initial ruling, and, in this opinion, the Third Circuit affirmed the mandate for individual arbitration (full stop; ride over).

The Third Circuit quoted its 2011 opinion in Litman, explaining the holding of Concepcion: “a state law that seeks to impose class arbitration despite a contractual agreement for individualized arbitration is inconsistent with, and therefore preempted by, the FAA.”

In response to the evidence the plaintiff had developed showing that enforcing the arbitration clause “would make it impossible for any person . .. to effectively vindicate his substantive statutory rights,” the court was apologetic, but firm: “Even if [plaintiff] cannot effectively prosecute his claim in an individual arbitration that procedure is his only remedy, illusory or not.”  In a footnote, the court backpedaled a bit “We are not implying that we believe that we are reaching an unfair result…we merely are recognizing that other persons might think that we are doing so.”  The Third Circuit thus joined a growing number of courts who apologetically enforce SCOTUS’s arbitration decisions.

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The Eleventh Circuit has decided to proactively preempt Florida law, before it could get in the way of the FAA by favoring class arbitrations (despite contract language precluding them).

In Pendergast v. Sprint Nextel Corp., __ F.3d. __, 2012 WL 3553466 (11th Cir. Aug. 20, 2012), a wireless customer wanted to bring a class action alleging improper roaming fees.  The arbitration agreements in the plaintiff’s contracts all waived class actions (for example: “We each agree not to pursue arbitration on a classwide basis”).  But the plaintiff argued that the waivers were unconscionable under Florida law, because they effectively shield Sprint from liability from claims that are too small for consumers to pursue on an individual basis.  Nevertheless, the district court granted Sprint’s motion to compel arbitration, and the plaintiff appealed.

In January of 2010, the Eleventh Circuit found that the appeal turned on unsettled questions of Florida unconscionability law and certified four of those questions to the Florida Supreme Court.  However, the decision in Concepcion came out before the Florida Supreme Court had spoken.  Sprint then successfully moved the Florida Supreme Court to decline jurisdiction in light of Concepcion and the case was bounced back to the Eleventh Circuit.  At that point, the Eleventh Circuit affirmed the district court.

The final time around, the Eleventh Circuit said that it doesn’t matter what Florida law says about the conscionability of precluding class actions.  Because either way, the language of the agreement must be enforced under the FAA.  (If the Sprint agreement were unconscionable under Florida law, then that common law rule would be preempted by the FAA under the reasoning of Concepcion and the agreement would be enforced.  If the Sprint agreement were hunky-dory under Florida law, then the agreement would also be enforced.)

This is the first time I have seen a court of appeals find that state law, which has not yet been made, is preempted!

With less colorful language than its last arbitration opinion, the First Circuit sided with the Second and Third Circuits in limiting the application of the 2010 Stolt-Nielsen decision on the availability of class arbitration.  Fantastic Sams Franchise Corp. v. FSRO Assoc. Ltd., __ F.3d __, 2012 WL 2402560 (1st Cir. June 27, 2012). Decisions from these three circuits suggest that as long as the party seeking a class action can show it did not stipulate that the agreement was “silent” on the availability of class arbitration, the courts (or the arbitrator) will consider arguments based on contractual interpretation and the parties’ actions to find the parties’ intent.

In Fantastic Sams, a coalition of 35 franchisees demanded arbitration against the franchisor for common violations of their agreements and statutes.  Twenty five of the agreements had arbitration clauses that prohibited class arbitration.  Ten agreements did not expressly prohibit class arbitration, and broadly provided for arbitration of “any controversy or claim arising out of or relating in any way to this Agreement.”  The franchisor brought a petition in federal court to compel the coalition members to arbitrate individually, relying on Stolt-Nielsen. 

The 25 franchisees whose contracts prohibited class arbitration were compelled to arbitrate individually.  But the remaining ten were not.  The First Circuit concluded that Stolt-Nielsen was not as broad as the franchisor argued: “We thus reject the very different precept, on which [the franchisor’s] argument depends, that there must be express contractual language evincing the parties’ intent to permit class or collective arbitration.  Stolt-Nielsen imposes no such constraint on arbitration agreements.”  The court focused on the fact that the Stolt-Nielsen parties had stipulated that their agreement was “silent” on class arbitration, whereas in this case it was possible the arbitrator could find evidence that the parties did intend to allow class or collective arbitrations.  The First Circuit noted its agreement with the Second and Third Circuit decisions on this point, but did not address the recent Fifth Circuit decision coming out in favor of the franchisor’s argument.

Furthermore, the First Circuit noted that Stolt-Nielsen did not clearly apply because this coalition of franchisees was not a “class action” and did not have the same issues that SCOTUS noted with class arbitrations.  (No absent parties, no certifying a class or providing public notice, etc.)

Finally, the court found that the question of whether the remaining ten franchisees could proceed in a collective arbitration was a decision for the arbitrator, because it characterized that question as a “procedural” one and because the agreements incorporated the AAA Rules, which delegate jurisdictional questions to the arbitrator. 

At least one lesson from these cases is: never stipulate your arbitration agreement is silent regarding the availability of class actions!  Give the courts some reason to distinguish your facts from the unusual facts in Stolt-Nielsen, if you want any chance of arbitrating as a class.

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The Fifth Circuit just issued a decision openly disagreeing with how the Second Circuit has interpreted both the Stolt-Nielsen decision and case law regarding the level of deference that courts owe arbitrators.  In Reed v. Florida Metropolitan Univ., Inc., __ F.3d __, 2012 WL 1759298 (5th Cir. May 18, 2012), the Fifth Circuit vacated an arbitration award that permitted class arbitration, acknowledging that SCOTUS’s “lengthy discussion of the significant disadvantages of class arbitration” in Stolt-Nielsen and Concepcion led the court to ditch the extraordinary deference it usually grants decisions by arbitrators.

Reed involved a potential class of students who attended undergraduate online learning programs, only to find out that graduate programs and employers did not recognize their online degrees.  The students’ Enrollment Agreements contained these key provisions: “any dispute arising from my enrollment at Everest University…shall be resolved by binding arbitration under the [FAA] conducted by the” AAA; and “any remedy available from a court under the law shall be available in the arbitration.”  Based on these provisions, the federal district court had compelled arbitration, but concluded that the arbitrator should decide whether the case could proceed as a class action in arbitration.  After interpreting the enrollment agreement and the relevant case law, the arbitrator ruled that the students could proceed as a class.  The district court confirmed that award.

The Fifth Circuit reacted like a guard dog, growling protectively about Stolt-Nielsen.  After confirming that the arbitrator (and not the court) had the power to decide whether the claims should proceed as a class in arbitration (based on the parties’ incorporation of the AAA rules, which now include Supplementary Rules clearly authorizing arbitrators to decide whether the arbitration clause permits class arbitration), the court launched into an eight page analysis of the merits of the arbitrator’s decision.  Why is that significant?  Because SCOTUS has said (and the Fifth Circuit even quoted) that “as long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority,” the arbitrator’s decision should be confirmed.  In Reed, the Fifth Circuit implicitly acknowledges that the arbitrator thoughtfully construed the enrollment agreement and the appropriate case law under the FAA, and had the authority to do so.  Even so, the Fifth Circuit vacated the arbitrator’s decision.

The Fifth Circuit held that neither of the contract clauses cited by the arbitrator (and quoted above) could properly be interpreted as allowing class arbitration.  It found the “any dispute” clause only reflects an agreement to arbitrate and is “not a valid contractual basis upon which to conclude that the parties agreed to submit to class arbitration.”  Similarly, it found the “any remedy” clause insufficient because “while a class action may lead to certain types of remedies or relief, a class action is not itself a remedy.”  In sum, said the Fifth, “the arbitrator lacked a contractual basis upon which to conclude that the parties agreed to authorize class arbitration.  At most, the agreement in this case could support a finding that the parties did not preclude class arbitration, but under Stolt-Nielsen this is not enough.”

Toward the end of the opinion, the Fifth Circuit acknowledged that the Second Circuit came to a different conclusion in Jock v. Sterling Jewelers, Inc., 646 F.3d 113 (2d. Cir. 2011).  The Second Circuit’s decision in Jock, confirming an arbitrator’s decision to permit class claims, was fundamentally determined by its understanding of the appropriate standard of review.  The Second Circuit noted that it could not decide whether the arbitrator correctly interpreted the arbitration agreement, but only whether the arbitrator had authority to do so and “whether the agreement or the law categorically prohibited the arbitrator from reaching” its conclusion.  What the Fifth Circuit failed to acknowledge is that the Third Circuit issued a decision just last month, agreeing with the Second Circuit.  See Sutter v. Oxford Health Plans LLC, __ F.3d __, 2012 WL 1088887 (3d Cir. April 3, 2012) (affirming an arbitrator’s decision to allow class arbitration based on an arbitration agreement that never mentioned class actions at all).

My own prediction is that the Supreme Court will not grant an appeal of these decisions, but will leave the circuit courts to try and develop a majority approach to this issue in the coming years.  As long as the existing cases about the deference courts must grant to arbitrators under Section 10 of the FAA remain good law, the approach of the Second and Third Circuits should be persuasive.

A few months ago I posted about actions that FINRA and the NLRB were taking in support of allowing class arbitration, and those agencies have recently taken additional actions that help consumers or employees with relatively low dollar claims.

The NLRB brought a complaint against 24 Hour Fitness USA, Inc.  The complaint alleges that 24 Hour Fitness’s requirement that all of its employees waive their rights to any type of collective or class action suits — whether in arbitration or litigation — “violates protections guaranteed by the National Labor Relations Act.”   The complaint cites seven instances where classes of employees were claiming wage and hour violations and 24 Hour Fitness moved to compel those plaintiffs to individual arbitrations. 

FINRA also recently approved a change in its arbitration rules.  In recognition that $25,00 is no longer the cutoff for “smallish” claims, FINRA raised the dollar limit for its simplified and streamlined arbitration from $25,000 to $50,000.  Cases under $50,000 can now be heard by one arbitrator on written submissions with expedited discovery.   This should help securities customers with lower damages afford to prosecute their claims.

Although courts and practitioners may think of the Stolt-Nielsen decision as the death knell of class arbitration, the Third Circuit’s ruling last week serves as a reminder that the Stolt-Nielsen did not deal a mortal blow.  In fact, in Sutter v. Oxford Health Plans LLC, __ F.3d __, 2012 WL 1088887 (3d Cir. April 3, 2012), the Third Circuit affirmed an arbitrator’s decision to allow class arbitration based on an arbitration agreement that never mentioned class actions at all.

The arbitration agreement at issue in this dispute over medical reimbursements succinctly provided: “No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration…”  (Before you criticize the drafters, let me point out that this agreement was executed in 1998, before the availability of class arbitration was a hot topic.)  The putative class of doctors initially brought their case in state court, and the court granted the insurer’s motion to compel arbitration, noting that the issue of whether the case could proceed on a class basis was for the arbitrator to determine. 

The arbitrator determined that the arbitration agreement allowed the doctors to proceed in arbitration as a class.  The arbitrator based his analysis on both the breadth of the arbitration agreement and the absence of any express carve-out for class arbitration, which led him to conclude the parties intended to authorize class arbitrations. 

After the arbitration proceeded on a class-wide basis, the insurer moved to vacate the arbitrator’s decision to allow the class-wide claim.  The insurer argued the arbitrator “exceeded his power” within the meaning of Section 10 of the FAA.  (It is probably safe to assume the insurer lost the arbitration, although the opinion does not say…)  The district court and Third Circuit both upheld the arbitrator’s decision. 

The extraordinary deference that courts grant arbitrators was critical to the decision; the Third Circuit noted that as long as an arbitrator “makes a good faith attempt” to interpret and enforce the contract, the court will not vacate the arbitrator’s decision.  Because the arbitrator in Sutter rooted his decision in an analysis of the text of the arbitration agreement, the court concluded “the arbitrator performed his duty appropriately” and his decision on class arbitration could not be vacated. 

This decision is important for other courts, counsel, and arbitratorswho are interpreting Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp., 130 S. Ct. 1758 (2010).  The Third Circuit recognized that “an arbitrator may exceed his powers by ordering class arbitration without authorization,” but also addressed some misconceptions about Stolt-Nielsen.  Most critically, the court emphasized that “Stolt-Nielsen did not establish a bright line rule that class arbitration is allowed only under an arbitration agreement that…expressly provides for aggregate procedures.”  Instead, it “established a default rule” that parties may not be compelled to class arbitration unless the contract indicates the party consented to class arbitration.   

What is the distinction?  It is that courts and arbitrators should not use the presence or absence of magic words like “class arbitration” or “class action” as the basis to rule on the availability of class arbitration, but instead must carefully analyze the contract to determine the parties’ intent.  The “default rule” mentioned in Sutter leaves the door open a smidge wider for arguments about the propriety of class arbitration than the “bright line rule”.  Just a smidge.


The Missouri Supreme Court just acknowledged that its 2010 decision, finding a class arbitration waiver was unenforceable under state law, is preempted by the FAA, pursuant to the rationale of ConcepcionIn Robinson v. Title Lenders, Inc., __ S.W.3d __, 2012 724669 (Mo. Mar. 6, 2012) and Brewer v. Mo. Title Loans, Inc., __S.W.3d __, 2012 WL 716878 (Mo. Mar. 6, 2012) (“Brewer II“), the Missouri Supreme Court bid farewell to case law that survived about one year.

In the 2010 decision, Brewer v. Missouri Title Loans, Inc., 323 S.W.3d 18 (Mo. 2010), the Missouri court reasoned that forcing individual arbitration would essentially deny consumers a remedy for their claims, and therefore the class arbitration waiver was unconscionable.  It refused to sever the class waiver and instead found the entire arbitration agreement was unenforceable.  After the U.S. Supreme Court decided Concepcion, that Court vacated and remanded Brewer.  (In Brewer II, the Missouri court goes out of its way to point out that it was not the only court who had an opinion vacated based on Concepcion — it gives a footnote shout out to five other decisions with a similar history.)

In two opinions issued on the same day, the Missouri Supreme Court said that it got the message of Concepcion.  In Robinson, it notes that “Concepcion invalidates this Court’s reasoning in Brewer I” and that “post-Concepcion, courts may not apply state public policy concerns to invalidate an arbitration agreement even if the public policy at issue aims to prevent undesirable results to consumers.”  While public policy concerns may be off the table, the court affirmed in Brewer II that  “Concepcion permits state courts to apply state law defenses to the formation of the particular contract at issue.”

Missouri was not ready to enforce the arbitration agreements at issue, however.  Instead, in a compromise of sorts, the Missouri courts seemed to agree to look harder for unconscionability that is unrelated to the class action waiver (and for reasons to distinguish the arbitration agreements from the one at issue in Concepcion).  In Brewer II, the Missouri court determined that under its general contract law precedent, the arbitration agreement was unconscionable because it was non-negotiable, its terms were one-sided, the arbitration requirement was unilateral, and the plaintiff had submitted affidavits from attorneys that it would not be cost-effective to pursue the claims on an individual basis.  (Brewer II was a 4-3 decision, with one dissenter writing “This case is nothing more than evidence of the majority’s refusal to abide by controlling federal law.”)  In Robinson, the court remanded the case to the trial judge to determine whether it is unconscionable under state law precedent that do survive Concepcion. 



Three state law decisions relating to arbitration were toppled recently, based on application of the U.S. Supreme Court’s preemption decision in Concepcion. 

In Kilgore v. Keybank, __ F.3d __, 2012 WL 718344 (9th Cir. Mar. 7, 2012), the Ninth Circuit held that California case law, which precluded arbitration of claims asking for public injunctive relief, was preempted by the Federal Arbitration Act.  The California rule (called the Broughton-Cruz rule) was based on the judgment of its highest court that only courts should address claims for  injunctive relief under public statutes (like the Consumers Legal Remedies Act and Unfair Competition Law), because courts are better suited for supervising injunctive relief and are more accountable to the public.  Although federal district courts had been split on how to apply Concepcion to the Broughton-Cruz rule, the Ninth Circuit held California’s rule was preempted.

The Ninth Circuit expressed reservation about its outcome, however, noting that forcing arbitration of public injunctive relief may “reduce the effectiveness of state laws like” the Unfair Competition Law and may not serve the purpose of the state legislature.  It also hinted that it felt the Broughton-Cruz rule was based upon sound policy judgments.  “These concerns, however, cannot justify departing from the appropriate preemption analysis as set forth by the Supreme Court in Concepcion.”  Id. at *10.   In order to clear up any confusion about whether state legislatures had the power to preclude arbitration of claims, the court clarified that those constraints must come from federal statutes.

The Ninth Circuit also applied Concepcion to clarify that a decision from the Washington Supreme Court, finding that class action arbitration waivers are unconscionable, is preempted by the FAA.  Coneff v. AT&T Corp., __ F.3d __, 2012 WL 887598 (9th Cir. Mar. 16, 2012). 

Finally, the Third Circuit applied Concepcion to find that a Pennsylvania precedent, which concluded class action waivers were generally unconscionable in consumer cases, was preempted.  Quilloin v. Tenet Healthsystem Philadelphia, __ F.3d __, 2012 WL 833742 (3d Cir. Mar. 14, 2012).  The Third Circuit cited its decision in Litman, where it found New Jersey precedent was preempted by the FAA, and noted “the Pennsylvania law is even more egregious than the New Jersey law” because it “has often prohibited class action waivers based on their arbitration-specific context.”  Id. at *9. 

As these decisions demonstrate, the Supreme Court’s ruling in Concepcion is likely to continue to play out for many more months, giving parties who are compelling arbitration good ammunition to counter state law precedent suggesting the arbitration agreement is unenforceable.

A reasonable person may have thought that the Supreme Court effectively killed off class arbitrations with its decisions in Stolt-Nielsen and Concepcion, but at least two government agencies have recently made decisions that ensure financial consumers and employees can bring classwide claims in some arbitrations.

FINRA, the Financial Industry Regulatory Authority, regulates all securities firms doing business in the United States.  It also administers the largest dispute resolution forum for investors and investment firms.  FINRA has enacted rules that prohibit investment firms from including class action waivers in their agreements with customers.    Not only does it have those rules, but it is enforcing them.  Just last week, FINRA brought an enforcement action against Charles Schwab for “violating FINRA rules by requiring its customers to waive their rights to bring class actions against the firm.”

In January, the NLRB, National Labor Relations Board, “ruled that it is a violation of federal labor law to require employees to sign arbitration agreements that prevent them from joining together to pursue employment-related legal claims in any forum, whether in arbitration or in court.”   In its decision, the NLRB acknowledged that it was confronted for the first time with a conflict between federal precedent interpreting the Federal Arbitration Act and precedent interpreting the National Labor Relations Act.  The NLRB’s outcome, it found, was an “appropriate accomodation of the policies underlying the two statutes.” 

It appears the executive branch is ready to take on the judicial branch over the issue of class arbitration.

In April, the Supreme Court struck down a common law rule in California that declared most consumer arbitration agreements void if they prohibit classwide arbitration of claims, holding that it was preempted by the Federal Arbitration Act.  AT&T Mobility, LLC v. Concepcion, 131S. Ct. 1740 ( 2011).  In the last few weeks, two federal circuit courts have followed suit and declared similar common law rules in New Jersey and Florida are also preempted.

The Concepcion Holding

Concepcion is a 5-4 decision written by Justice Scalia, in which the Supreme Court continued its recent trend of fighting back state court attempts to use their common law to void arbitration clauses .  The putative class action in Concepcion alleged false advertising claims in cell phone promotions.  The lawsuit was in court because each class member’s contract with AT&T prohibited class-wide arbitration.  The district court denied AT&T’s motion to compel individual arbitrations.  It ruled that the AT&T arbitration provisions were unconscionable under a 2005 decision from the California Supreme Court called Discover Bank, which applied California law to conclude that most “collective-arbitration waivers” in consumer arbitration provisions are unconscionable.  The Ninth Circuit affirmed.

The Supreme Court concluded that Discover Bank applied California’s unconscionability doctrine in a way that impermissibly “interferes” with arbitration and was therefore preempted.  The Court went on to explain that allowing consumers to demand classwide arbitration, when the parties did not consent to arbitrating on a classwide basis, is inconsistent with the FAA because it would make arbitration more formal, more expensive, slower to reach a decision on the merits, and involves increased risk to defendants (because the potential judgments can be large and there is little opportunity to appeal).  The majority wrote “we find it hard to believe that defendants would bet the company with no effective means of review.” 

The Concepcion decision, with its strenuous dissent arguing that the Discover Bank rule was applicable to all contracts, shows increasing concern by the Court about 1) how state courts are interpreting their “general” contract doctrines in ways that may be unique to arbitration, and 2) whether the strict enforcement of arbitration agreements is in keeping with the purpose of the FAA and the nation’s overall system of justice.

Eleventh and Third Circuits Follow Suit

In early August, the Eleventh Circuit applied Concepcion to compel individual arbitration of actions against a wireless service provider.  In Cruz v. Cingular Wireless, LLC, 2011 WL 3505016 (11th Cir. Aug 11, 2011), the class of plaintiffs argued that the prohibition on class actions in their arbitration agreements violated Florida public policy and was therefore unenforceable.  Plaintiffs argued that the class action prohibition effectively defeated the remedial purpose of Florida’s unfair trade practices act (because many claims would be too small to merit litigating individually) .  The Eleventh Circuit held that even if that interpretation of Florida law were correct, it would be preempted by FAA under Concepcion.

 In late August, the Third Circuit issued a similar decision.  In Litman v. Cellco Partnership, 2011 WL 3689015 (3d Cir. Aug. 24, 2011), the Third Circuit held that New Jersey common law, which found a class arbitration waiver unconscionable, was preempted by the FAA.  (Of course, the court didn’t have much choice, given that the U.S. Supreme Court had vacated the Third Circuit’s earlier opinion to the contrary and remanded the case for reconsideration in light of Concepcion)

Look for this trend to continue over the next year, with more and more courts finding the FAA preempts particular state common law decisions that found class arbitration waivers unenforceable under state law principles.