Scope of Arbitration Agreement

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.

**ARBITRATION NATION IS ALMOST ONE YEAR OLD!  Help me celebrate by following my arbitration news on Twitter (@KramerLiz) and/ or subscribing to this blog (via the button on the right).  It’s the Summer Lovin’ campaign!  **

While a court may vacate an arbitration award if the arbitrator exceeds the scope of his authority, the City of Lebanon was unable to convince the Supreme Court of New Hampshire that an arbitrator exceeded his authority when siding against the City in a tax dispute.

The plaintiff in Lebanon Hanger Assoc. v. City of Lebanon, ___ A.3d ___, 2012 WL 2094387 (N.H. June 12, 2012), had been leasing property from the City for 15 years.  During the first 14 years, the City only taxed the value of the buildings.  In the 15th year, the City taxed the value of the buildings plus the value of the land, quintupling the taxable amount.  The plaintiff objected and the parties then arbitrated under a clause in the lease saying “any controversy arising out of or relating to this lease… shall be settled by arbitration.”

The arbitrator ruled for the plaintiff.  The arbitrator found the lease allowed the City to tax the value of the land, but that mutual mistake warranted reformation of the lease such that the plaintiff was not obligated to pay taxes on the value of the land.  The trial court vacated that decision, finding that the arbitrator’s authority was limited to deciding the meaning of the “four corners of the lease agreement.”

The Supreme Court of New Hampshire wisely saw that the City was playing too cute with its arbitration clause and its static definition of “lease,” and held that the arbitrator did not exceed the scope of his authority.    The Court relied on the broad scope of the arbitration clause, the parties’ statements to the district court in initially staying the case, and the parties’ submissions to the arbitrator in concluding that the parties’ agreed to have the arbitrator consider extrinsic evidence and to fully decide the dispute about whether the land was taxable.

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 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.

The highest court in the District of Columbia has held that piercing the corporate veil is outside the scope of the arbitration clause in Giron v. Dodds, 2012 WL 18574 (D.C. Ct. App. 2012).  But the case’s reasoning may extend to all cases in which a party must bring a court case in order to collect on an arbitration award.

In Giron, property owners sued a construction company after the company abandoned a renovation project.  In response to the construction company’s motion to compel, the trial court ordered arbitration.  After the arbitrator awarded the owners almost $121,000 from the construction company, however, the company refused to pay.

 The owners then brought a new complaint in the trial court, seeking to pierce the company’s corporate veil and hold the two shareholders individually responsible for the arbitration award.  The shareholders moved to compel arbitration of the veil-piercing claim, but the trial court denied the motion.  (Why would the shareholders of the construction company, who had just been roundly defeated in arbitration, would want the veil-piercing claims sent back to arbitration anyway?!  Must be gluttons for punishment.)  The D.C. Court of Appeals affirmed that decision.

 The court found that the veil-piercing claim did not fall within the scope of the parties’ arbitration agreement.  The court held the claim did not “ari[se] out of or relat[e] to [the] contract, or the breach thereof,” but arose “out of the [owners’] efforts to collect the arbitration award.”  The court analyzed the issue under D.C.’s Uniform Arbitration Act, but cited supportive cases decided under the FAA.  

This is a useful case for any party who must institute follow-up litigation to collect on an arbitration award.  An important practice pointer here is that the lawyer for the owners wisely asked the arbitrator to clarify that she did not consider the veil-piercing claim.

As we pile up the cardboard boxes that held holiday gifts for the recycling truck and select our new year’s resolutions for 2012, here are a few reflections on the last twelve months in arbitration law.  I would summarize it as another year where the U.S. Supreme Court was playing whack-a-mole, trying to tamp down all the different ways that courts around the nation are creatively using state common law or statutes to nullify arbitration agreements that they find inequitable.    And the U.S. Supreme Court simply can never keep up (I should specify that the current majority of the Court that reflexively rules in favor of arbitration cannot keep up, because there have been vigorous dissents).

This year’s biggest arbitration “whack” from the Supreme Court was the Concepcion case in April.  That case held that the Federal Arbitration Act preempts a line of California case law that found most “collective-arbitration waivers” in consumer arbitration provisions were unconscionable.   After Concepcion, circuit courts found similar lines of case law in New Jersey and Florida were preempted by the FAA.  (Just last week the Third Circuit remanded another unconscionability case for consideration in light of Concepcion.  Antkowiak v. Taxmasters, 2011 WL 6425567 (3d Cir. Dec. 22, 2011).)  I expect that this trend will continue in 2012, with parties who seek to enforce arbitration agreements arguing that any positions their opponents take based on state contract law are preempted by the FAA.

Of course, federal and state courts spent much of 2012 still trying to figure out how to deal with 2010’s big whack from the Supreme Court: Rent-A-Center.  In that case, the Supreme Court held that because the employee did not challenge the validity of the particular delegation provision within his stand-alone arbitration agreement with his employer, the Court could not address his arguments about the validity of that arbitration agreement as a whole.  The four dissenters, however, worried that the majority’s reasoning could result in a situation where a party who seeks to avoid arbitration is required to prove that the specific sentence calling for arbitration is invalid.  (For example, imagine trying to argue that this phrase is invalid: “any and all disputes arising under this agreement shall be resolved by binding arbitration.”)  In the great majority of 2011 cases that addressed this issue, however, courts interpreted Rent-A-Center as applying only when the arbitration agreement contained a delegation provision (that authorized the arbitrator to decide questions of the agreement’s validity).   I predict that courts will continue to limit Rent-A-Center‘s impact in 2012, although it may lead to some circuit splits about the proper interpretation of the case as well as more litigation to define what is and is not a delegation provision.

Keeping with the theme here, if those were the whacks, what kinds of moles popped up in 2011?  The most interesting fell into these three categories:

  • Protecting Nursing Home Residents.   This year,  West Virginia declared that arbitration agreements executed as part of standard admission packets for nursing home residents are unenforceable, and Florida refused to enforce any arbitration agreement against nursing home residents that curtails their statutory rights .  (A petition for cert has been filed in the West Virginia case, but the Supreme Court has not taken any action on it.)  If the Supreme Court does not intervene, watch for this trend to continue in other state courts, with exceptions made for particularly vulnerable categories of litigants.
  • Finding Legislative Overrides.  Another trend this year was for courts to find that that Congress intended particular federal statutes (enacted or amended after the FAA) to trump the FAA and require disputes be venued in court.  That happened at least twice this year, with the Magnuson-Moss Warranty Act and the Carmack Amendment.  The Supreme Court will either breathe additional life into that type of argument (and encourage Members of Congress who dislike the Supreme Court’s interpretations of the FAA to add similar language in new legislation) with its forthcoming decision in CompuCredit v. Greenwood or suck the life right out of those legislative preclusion arguments by setting an impossibly high standard for how clearly the statute must indicate that it is intended to nullify arbitration agreements.
  • Scope is the New Validity.  There are two broad arguments to make about an arbitration agreement — whether it is a valid agreement and whether the dispute at issue is within the scope of that agreement.  Many of the decisions from the U.S. Supreme Court in recent years have related to the validity of arbitration agreements, and since those have made it increasingly difficult to have a court address the enforceability of arbitration, litigators have begun to focus their arguments on the scope of arbitration agreements.  And some of those arguments have been successful.  For example, the Second Circuit found that the term “customer” — a person or company who can be compelled to arbitrate under FINRA rules — is not broad enough to include an entity with whom the FINRA member lacked any written or oral contract, when there were not enough other facts suggesting a business relationship.  Wachovia Bank, Nat’l Assoc. v. VCG Special Opportunities Master Fund, Ltd., 661 F.3d 164, 172-74 (2d Cir. 2011).   Furthermore, the Eleventh Circuit found that an employee’s civil sexual assault claims were outside the scope of the arbitration agreement in her employment contract.   Parties who want to evade arbitration are likely to continue making creative arguments about why their dispute is outside the scope of their arbitration agreement in the coming year.

The Arbitration Nation award for the best “mole” of 2011, though, goes to the California courts, who have found creative ways around the Concepcion decision, including finding that it does not apply to suits under California’s Private Attorney General Act, see Brown v. Ralph’s Grocery Co., 197 Cal. App. 4th 489, (Cal. Ct. App. 2011) , and have suggested that Rent-A-Center may not apply in state courts at all, see Chin v. Advanced Fresh Concepts Franchise Corp.,  194 Cal. App. 4th 704, 708-09 (Cal. Ct. App. 2011).

Honorable mention in this category goes to Herron v. Century BMW, 2011 WL 6347845 (S.C. Dec. 19, 2011).   In 2010, the Supreme Court of South Carolina held that as a matter of state public policy, any arbitration agreements prohibiting motor vehicle consumers from bringing class action suits was unenforceable (the decision found the arbitration agreement at issue, which was fairly consumer-friendly, was not unconscionable).  The U.S. Supreme Court then vacated the decision and instructed the South Carolina court to reconsider its decision in light of Concepcion.   Just this month, the Supreme Court of South Carolina refused to reconsider its decision, finding that the question of whether the FAA preempted state public policy was not raised in the trial court or appellate courts of South Carolina:

Because the matter of preemption was not raised to and ruled upon in any of the South Carolina proceedings, we find the issue of preemption is procedurally barred as [a] matter of state law and further consideration in light of AT&T Mobility, LLC v. Concepcion is unwarranted.  We reinstate our original opinion and decline to revisit it.

Id.  I am pretty confident the U.S. Supreme Court was aware that Concepcion had not been decided when Herron was briefed, and therefore no parties had raised the preemption arguments implicated by Concepcion.  I am also pretty confident that the U.S. Supreme Court, in vacating Herron, did not mean to say “reconsider this case in light of Concepcion, if and only if you like the legal result of that reconsideration and/or you can find no legal basis not to do so.”

Happy New Year!

**If you can’t get enough of arbitration case law, please “subscribe” to ArbitrationNation via that button on our blog ( and follow @KramerLiz on Twitter (where I share more arbitration-related information than I cover in the blog).

Two recent decisions illustrate how individuals that did not sign a contract can be bound by that contract’s arbitration provisions. 

In the first, Blaustein v. Huete, 2011 WL 5103759 (5th Cir. Oct. 26, 2011), an individual member of an LLC, Huete, argued he should not be bound by the arbitration clause between the LLC and its attorneys.  Huete was suing the attorneys for legal malpractice and negligence, stemming from an allegedly botched patent application.  However, the law firm’s agreement with the LLC, which Huete had signed on behalf of the LLC, called for arbitration.  The law firm moved to compel arbitration.  The Fifth Circuit held that while Huete was not directly bound by the agreement (he only signed in his representative capacity), he was bound under the doctrine of “direct benefits estoppel.”  (Couldn’t anyone come up with a better name for that theory?  It doesn’t exactly roll off the tongue.) 

The concept of direct benefits estoppel is this: if the non-signatory used the contract to its benefit, it can’t later turn its back on the contract’s arbitration clause.  In particular, at least the Third and Fifth Circuits say that if a non-signatory has either 1) knowingly obtained direct benefits from the contract or 2) sought to enforce the contract, the non-signatory is bound by an arbitration clause in the contract.  In this case, the Court found Huete had obtained benefits from the agreement with the attorneys as a member of the LLC (research, drafting, filing, advice), and noted that Huete’s claims were related to the attorney-client relationship which was formed by the agreement between the firm and the LLC.  The law firm was successful in compelling Huete to arbitration.

In the second case, Lemon Drop Properties, LLC v. Pass Marianne, LLC, ___ So.3d ___, 2011 WL 5027140 (Oct. 20, 2011), the Supreme Court of Mississippi allowed a non-signatory to compel arbitration.  In that case, a condo buyer sued the developer and contractor alleging defective construction.    Although there was an arbitration agreement in the agreement between the buyer and developer, the developer waived its right to arbitrate by participating in the court case for “two-hundred-and-fifty-two (252) days,” without  invoking the arbitration provision.  The non-signatory issue arose after the buyer amended its complaint to name the real estate agent as a defendant.  The real estate agent argued that it was entitled to enforce the arbitration agreement in the developer’s agreement, as an agent of the developer.  The court easily agreed, but then had to address whether the developer’s waiver of its right to arbitrate was imputed to the real estate agent.  Citing recent decisions from a Texas state court and a California federal court, the Mississippi Supreme Court held that a “principal’s waiver of its right to arbitrate [does] not operate as a waiver of the agent’s right to arbitrate under the same agreement.”  Two Justices dissented from the portion of the opinion.

These cases serve as a good reminder that employees and agents are frequently bound by the same arbitration agreements that bind their employers and principals (but not necessarily by any waivers by those employers or principals).

Last week the Eleventh Circuit interpreted the scope of the arbitration agreement within a plaintiff’s employment contract to exclude civil claims stemming from her sexual assault by fellow employees.  In doing so, the court may have signaled a discomfort with sending civil claims based on criminal conduct to arbitration. 

In Doe v. Princess Cruise Lines, Ltd., 2011 WL 4425288 (11th Cir. Sep. 23, 2011), the court held that the agreement to arbitrate “any and all disputes, claims or controversies whatsoever . . . relating to or in any way arising out of or connected with the Crew Agreement, these terms, or services performed for the [cruise ship]” was not broad enough to encompass an employee’s claims of false imprisonment, intentional infliction of emotional distress, spoliation of evidence, and invasion of privacy relating to her sexual assault. 

The plaintiff employee, a server on a cruise ship, had been drugged and sexually assaulted by other employees, and she alleged the cruise ship had repeatedly refused to let her off the ship for medical care, had humiliated her publicly, and had destroyed evidence of the crimes against her.  She brought ten claims against her employer, and the employer moved to compel arbitration.  The Florida district court found all ten claims fell outside the scope of the parties’ arbitration agreement and denied the employer’s motion to compel arbitration. 

The Eleventh Circuit disagreed, in part.  It held that five of the plaintiff’s claims fell within the scope of the arbitration agreement, because they “ar[o]se directly from her undisputed status as a ‘seaman,'” and therefore were sufficiently “related to” her employment as a “seaman.”  Those five claims were based on federal statutes that apply only to “seamen” or on common law rules that apply only to seamen. 

However, the Eleventh Circuit found the remaining five claims in the plaintiff’s complaint were outside the scope of the arbitration agreement.  In analyzing whether the claims of false imprisonment, intentional infliction of emotional distress, spoliation, etc., were related to or connected with her employment, the court repeatedly looked at whether those same claims could be brought be a non-employee.  It reasoned that the “cruise line could have engaged in that tortious conduct even in the absence of any contractual or employment relationship with” the plaintiff.”  Similarly “a passenger could have brought these same five claims against the cruise line based on virtually the same alleged facts.” 

There are at least two interesting points about this decision.  The first is a drafting point: if parties intend to arbitrate disputes like this one, the arbitration agreement needs to be broader.  Similarly, if a plaintiff wants to avoid arbitration under an employment contract, it may not want to assert claims that depend on its status as an employee.

A second point relates to this court’s apparent discomfort with sending these claims to arbitration.  The court acknowledged it could find only one case on point (Jones v. Halliburton, 583 F.3d 228 (5th Cir. 2009), which found similar claims fell outside the scope of the arbitration agreement in an employment contract).  Despite the paucity of authority, and despite language in the arbitration agreement that could have been interpreted to cover all the plaintiff’s claims, the Eleventh Circuit decided, without dissent, that the plaintiff did not have to arbitate all her claims. 

Reading between the lines, the court may have been concerned about whether proper justice could be done in arbitration.  The court was obviously disturbed by the facts in the case–the opinion describes the allegations at length, and goes out of its way to point out the disconnect between the employer’s public statements regarding how it values its employees and the employer’s alleged behavior toward the plaintiff.  The court may have been motivated, in part, by its desire to ensure that the defendant’s actions remained public and that the plaintiff’s claims be heard by a decision-maker who is arguably more accustomed than an arbitrator to dealing with claims of violence and criminal conduct.  

This case may be part of a growing trend to keep entire categories of claims (negligence in nursing homes, sexual assault, Magnuson-Moss warranty claims) out of arbitration altogether, based on public policy concerns.

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.

The AAA just reported that 143,349 cases were filed with it in 2010.  JAMS reports that approximately 10,000 cases are filed with it each year.

There were 190,543 new civil cases filed with all the U.S. District Courts in 2010.

In short, two of the largest ADR providers are currently handling almost as many civil cases as the nation’s federal courts.

Another point of comparison: the National Arbitration Forum had over 62,000 cases filed with it in two areas (domain name disputes and New Jersey personal injury cases), and Arbitration Forums, Inc. says it handles 500,000 insurance cases a year.  In contrast, there were less than 200,000 civil cases filed in the State of Minnesota in 2010 (and only 42,136 if you exclude things like conciliation court matters and unlawful detainers).

If you needed any more convincing about why the statutes and case law governing arbitration are important to our nation’s overall system of justice, that should do it.