Class action arbitration continues to be a hot topic among the federal appellate courts this summer.

The 8th Circuit followed the lead of other circuit courts, finding that courts, not arbitrators, presumptively decide whether the parties’ arbitration agreement allows for class arbitration. Catamaran Corporation v. Towncrest Pharmacy, 2017 WL 3197622 (July 28, 2017).   In support of its decision, the court raised concerns about class arbitration, including loss of confidentiality, due process concerns for absent parties, and a concern about the lack of appellate review.  [Interesting that it didn’t cite any of CFPB’s report on this, but just cited other case law… ] Therefore, unless the parties have “clearly and unmistakably delegated” the class arbitration issue to the arbitrator, a court will decide the issue.  Furthermore, the court said that incorporating the AAA rules is not a clear and unmistakable delegation of the class arbitration decision, even though citing the AAA rules is sufficiently clear in analogous issues in regular “bilateral arbitration.”  The court remanded to the district court to determine whether there was a contractual basis for class arbitration.

Halfway across the country, the 9th Circuit held that employees could bring their claims related to a data breach as a class action in arbitration.  Varela v. Lamps Plus, Inc., 2017 WL 3309944 (Aug. 3, 2017).  The employees had first brought their class claims to federal court, and the employer moved to compel individual arbitration.  The district court found the arbitration agreement was valid, but ambiguous about whether class actions were waived.  Construing that ambiguity against the employer who drafted the agreement, the district court ordered class arbitration.  On appeal, the 9th Circuit affirmed the finding of ambiguity, sending the class to arbitration as a group.  One judge issued a two sentence dissent, noting “we should not allow Varela to enlist us in this palpable evasion of Stolt-Nielsen

Just four months ago, SCOTUS suggested (but did not hold) that the decision to allow class arbitrations might be a “gateway” issue of arbitrability that defaults to courts.  This week, the Sixth Circuit was the first to take the bait and declare the availability of class actions a gateway question that a court decides unless the parties clearly assign the question to the arbitrator.

In Reed Elsevier, Inc. v. Crockett, __ F.3d __, 2013 5911219 (6th Cir. Nov. 5, 2013), a lawyer filed an arbitration demand with the AAA against LexisNexis on behalf of himself, a putative class of law firms, and a putative class of law firm clients.  The lawyer alleged that LexisNexis misrepresented its subscription services and sought damages of over $500 million.  In response, LexisNexis brought a declaratory judgment action in federal court, asking the court to find that the arbitration clause did not authorize class arbitration.  The clause itself said nothing explicit about the availability of class arbitration — it did not preclude or allow class actions.  It provided that “any controversy, claim or counterclaim…arising out of or in connection with this Order…will be resolved by binding arbitration…”

The district court granted summary judgment in favor of LexisNexis and the Sixth Circuit affirmed.  The critical analysis related to whether the courts even had the power to decide whether the arbitration clause authorized class actions.  The court started by dividing questions of arbitrability into “gateway disputes” and “subsidiary questions.”  (I have never heard the latter group called subsidiary questions, have you?  I have heard of substantive v. procedural, and gateway v. other, but not this new paradigm.)  It recited the two universally recognized gateway issues — whether a valid arbitration agreement exists and whether it applies to the controversy at hand.  Those two questions are reserved for judges, unless the parties have “clearly and unmistakably” given the arbitrator the power to decide them.  On the other hand, it defined the “subsidiary” questions as those that bear on the dispute’s final disposition, including waiver, delay, and any failure to satisfy a condition precedent.  It characterized the subsidiary questions (unfairly) as “mere details.”

The Sixth Circuit then had to decide whether class arbitration falls into the “gateway” or “subsidiary” camp.  It acknowledged that the Supreme Court has not held that the availability of class arbitration is a gateway issue to be reserved for the courts, but instead has hinted strongly in recent years that this issue belongs in the courts.  Those hints began with Stolt-Nielsen, continued in Concepcion, and grew louder in Sutter this summer.  Therefore, even though a plurality of the Supreme Court concluded in Bazzle that classwide arbitration is a question for arbitrators, the Sixth Circuit held this week that it is a gateway question that is presumptively for judges.  Furthermore, in this case the parties had not clearly and explicitly authorized arbitrators to determine the availability of class action, so the default rule governed.

Once the court gave itself permission to decide the issue, it quickly found the parties’ arbitration agreement did not allow a class action.  “The principal reason to conclude that this arbitration clause does not authorize classwide arbitration is that the clause nowhere mentions it.”  The court also noted that the agreement provided for arbitration of claims arising out of “this Order,” suggesting the arbitration was limited to the two parties to that agreement.  Finally, applying AmEx, the court found the arbitration was not unconscionable, even if it “favors LexisNexis at every turn.”

This is a significant decision.  It allows parties who want a court to decide whether class arbitration is available to cite to a published opinion from a federal appellate court, instead of just hints and whispers from the Supreme Court.  It also suggests that at least the Sixth Circuit will require fairly specific language in an arbitration agreement to support the parties’ intent to allow class arbitration.

The U.S. Supreme Court issued its decision in Sutter today, unanimously holding that as long as the arbitrator bases a decision to allow or disallow class arbitration on the text of the parties’ agreement, her “construction holds, however good, bad, or ugly.”  Oxford Health Plans LLC v. Sutter, 569 U.S. ___ (June 10, 2013).  The case resolved a circuit split on how to interpret SCOTUS’ Stolt-Nielsen decision.  It also proved me right (yahoo!).  (I predicted the Court would affirm the Third Circuit both when it granted review, and when it heard the argument.)

As you may recall, this case involves a putative class of doctors who sued a health insurer over allegedly inadequate payments for services.  The case was brought in state court, the insurer successfully compelled arbitration, and the parties then agreed that the arbitrator should decide whether the contract authorized class arbitration.  The contract did not explicitly allow or disallow class actions in arbitration.  The arbitrator construed the text of the arbitration agreement and found that the parties’ intent was to allow class arbitration.

In the District of New Jersey, the Third Circuit and again the Supreme Court, the insurer argued that the arbitrator had “exceeded [his] powers” within the meaning of Section 10(a)(4) of the FAA by allowing class arbitration.  In its decision, the Supreme Court firmly refused to look behind the curtain of an arbitration.  Because it was clear that the arbitrator was given authority to determine whether the contract authorized class arbitration, and he based his decision on the text of the arbitration clause, the Supreme Court would not consider whether “he performed that task poorly.”

This is a big defeat for opponents of class arbitration.  Not only does the Sutter decision do away with the Fifth Circuit’s interpretation of Stolt-Nielsen, which was essentially that class arbitration was precluded unless the parties agreement explicitly allowed it, it also refuses to create any kind of exception for really bad contract interpretations.  The insurer argued strongly that the arbitration agreement at issue in this case was “garden-variety” and contained no indicia that the parties intended to use class procedures in arbitration, so the arbitrator’s decision was wrong.  But, Justice Kagan, writing for the Court, declined the insurer’s invitation to consider the merits of the arbitrator’s decision.  Once the court is satisfied that the arbitrator was “arguably construing the contract,” his or her decision will be affirmed even in the case of “grave error.”  Indeed “[t]he potential for those mistakes is the price of agreeing to arbitration.”  In that regard, this decision is not limited to class arbitration at all, but is a strong decision for affirming arbitration awards in general.  It further calls into question whether “manifest disregard of the law” is a legitimate basis for vacating an arbitration award.

This decision opens the door to more arbitrators authorizing class actions.  Arbitrators now have the confidence that as long as the class arbitration decision is grounded in the text of the parties’ agreement, it will not be overturned.  (Of course, if the parties’ arbitration agreement explicitly precludes class actions, an arbitrator would exceed his or her power by authorizing a class.)  Even an arbitrator who believes as a matter of public policy that plaintiffs with small-dollar claims should be able to assert those claims as a class in arbitration will be affirmed, as long as the official decision is based in the language of the contract.

There are two issues that the Court left for another day, and those could eventually be the death knell of class arbitrations.  First, a long footnote suggests that the availability of class arbitration could be one of the gateway questions of arbitrability that are presumptively for courts (not arbitrators) to decide.  Second, Justices Alito and Thomas wrote a concurrence suggesting that there may be no satisfactory procedure for conducting class arbitrations — because the absent members cannot consent to the arbitrator’s authority and opt-out notices are not effective.  However, because the insurer agreed to have the arbitrator decide the issues of class arbitration, neither of these issues was before the Court in Sutter.

All the cool kids are talking about class arbitration lately. . .  There are the two cases pending before SCOTUS, and now the Second Circuit confirms its place in the “in crowd” with a decision forcing a class of employees into arbitration in Parisi v. Goldman, Sachs & Co., __ F.3d __, 2013 WL 1149751 (2d Cir. Mar. 21, 2013).

In Parisi, three female former employees alleged gender discrimination by Goldman, Sachs and sought to proceed as a class action in court.  The plaintiffs acknowledged having an arbitration agreement covering matters relating to their employment.  However, they opposed Goldman’s motion to compel arbitration by arguing their arbitration agreement was invalid because it waived their statutory right under Title VII to pursue a “pattern-or-practice” claim of discrimination.  (Interestingly, this whole case turns on the availability of class arbitration, but the quoted arbitration agreement does not explicitly preclude class arbitration.  The plaintiffs apparently never argued that their arbitration agreement can be interpreted as authorizing class arbitrations, so the assumption underlying this opinion is that class arbitration is unavailable to these plaintiffs.)

The plaintiffs won at the district court, with that court concluding that because plaintiffs could not proceed as a class in arbitration, they could not pursue a Title VII pattern-or-practice claim, and therefore the arbitration agreement impermissibly waived the plaintiffs’ statutory rights.  The Second Circuit disagreed and reversed.  In short, the appellate court found there is “no substantive statutory right to pursue a pattern-or-practice claim.”  Citing earlier decisions of both the Second and Fifth Circuits, the court summarized that “‘pattern-or-practice’ simply refers to a method of proof and does not constitute a ‘freestanding cause of action.'”  Therefore, plaintiffs could be compelled to arbitrate — even on an individual basis — without waiving any of their substantive statutory rights.

In the course of its decision, the court identified only two circumstances “in which motions to compel arbitration must be denied because arbitration would prevent plaintiffs from vindicating their statutory rights.” First, as in AmEx, that can happen when the costs of arbitration effectively preclude the plaintiffs from prosecuting their statutory rights.  And second, that can happen when the arbitration agreement “interfere[s] with the recovery of statutorily authorized damages.”  In other words, if a statute authorizes treble or punitive damages, the arbitration clause cannot bar those types of damages.

This is another case that appears to have been caught in Stolt-Nielsen‘s cross-hairs.  The plaintiffs here devised their strategy, and filed their complaint, before Stolt-Nielsen was issued and significantly altered the framework for arguing class arbitration issues.  In any case, this decision clarifies that alleging a pattern-or-practice of discrimination will not allow a plaintiff to keep its claims in court instead of arbitration, and also clarifies the current state of the law on when arbitration can be avoided because it does not adequately protect statutory rights.  Of course, the state of the law may shift again in the coming months when the Supreme Court decides AmEx.

 

While the oral argument before the United States Supreme Court in Sutter today was ostensibly about whether to affirm an arbitrator’s decision that the parties’ contract authorized class arbitration, the decision really turns on how the Court will review all arbitration decisions.  (Transcript here.)  Multiple Justices expressed an unwillingness to create a special standard for reviewing arbitrator decisions involving class arbitration.  (Info on the underlying case here.)

Appellant’s counsel tried valiantly to express some standard of review that fit within the Court’s past jurisprudence, but also allowed for vacatur of this particular result.  In response to questions like “how wrong does an arbitrator’s decision have to be to become an issue of law?” (from Justice Sotomayor), counsel advocated that Stolt-Nielsen and Concepcion established a “presumption” that there is no consent to class arbitration without a “very clear statement of a meeting of the parties’ minds.”  However, Justice Kagan quickly noted that the Court had never suggested such a presumption in either of those cases.  Appellant’s counsel later advocated for a slightly different formulation: a reviewing court may vacate the arbitrator’s decision to allow class  arbitration if the contractual language “leaves no room for a conclusion that the parties agreed to” arbitrate on a classwide basis.  Justice Kennedy, who often casts a deciding vote in close cases,  expressed skepticism about whether the Court’s repeated and highly deferential standard of review for decisions by arbitrators allowed any kind of inquiry into the merits of the arbitrator’s contractual analysis.

Respondent’s counsel, of course, emphasized the very limited grounds for vacating an arbitration award.  He noted that Appellant argues the arbitrator “exceeded his power,” but because Appellant consented to giving the arbitrator authority to determine whether the arbitration could proceed as a class, the only way the arbitrator could have exceeded his power was by basing his award on something other than an interpretation of the contract.  This led to a series of amusing hypotheticals in which Justice Breyer asked Respondent’s counsel to assume that an arbitrator made her decision based on consulting a “magic 8-ball” (Justice Scalia pretended not to know the reference) and then asked whether that would constitute “manifest disregard” of the law or otherwise serve as grounds for vacating the award.  Justice Breyer’s questions hint that the Court may give “manifest disregard of the law” new life as a separate basis for vacating arbitration awards, and that the Court is looking for a backstop beyond just the four bases in the FAA for parties to rely on if arbitrators get the law or facts really, really wrong.

Curiously, from a Court that has vigorously enforced arbitration agreements for all types of cases, the Justices appeared skeptical of arbitrators’ capability to handle class actions, and questioned whether arbitrators were wrongly incentivized.  Justices asked how the arbitrator was compensated in this case, whether he was experienced, how many class actions were handled in arbitration (neither side could answer, since that information is not public), and whether an arbitrator would be incentivized by his own fees to create a class action after seeing a case like Sutter drag on for eleven years.  To that, Respondent’s counsel gave a good soundbite: “if we trust arbitrators to handle such important issues as civil rights issues and other very important matters [], we have to expect that they will follow the precepts of this Court and the FAA as to what constitutes grounds for class arbitration.”

 

The big issue in arbitration law in 2012 was class arbitration.  Many state court opinions that had found class arbitration waivers unconscionable were preempted under federal law based on application of Concepcion.  And the federal circuit courts developed a split on how to interpret Stolt-Nielsen in cases where the parties’ arbitration agreement lacks language either allowing or disallowing class arbitrations.  It is no surprise, then, that the Supreme Court (including Santa Scalia, pictured here) accepted two cases relating to class arbitration for review in early 2013.

Fallout from Concepcion

At least five states had their pro-class-arbitration decisions reversed based on application of SCOTUS’ 2011 decision in Concepcion, which held that states could not impermissibly interfere with arbitration when they define what contract clauses are unconscionable. In the past few years, the state courts in California, Washington, Pennsylvania, Missouri and New Jersey had all declared an affinity for allowing class arbitrations, even if the parties’ agreement called exclusively for individual arbitration (California had also said claims for public injunctive relief were not appropriate for arbitration).  In 2012, all that precedent was voided, with Westlaw assigning big red flags to opinions around the country.    The Eleventh Circuit even stopped the Florida Supreme Court before it could impermissibly side with class arbitration.  The rule, articulated nicely by the Third Circuit this summer in Homa, is: “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.”

Stolt-Nielsen Split

Even if you disagree with Concepcion, you can agree that the decisions applying it are uniform.  That is not true with the decisions applying a 2010 SCOTUS arbitration opinion: Stolt-Nielsen.  In that case, SCOTUS held that arbitrators had exceeded their authority when they concluded that arbitration should proceed on a class-wide basis.  The facts were maddeningly unique, however — the parties had stipulated that their agreement was “silent” as to the availability of class actions and the panel of arbitrators had based their conclusion on public policy rationale, instead of standard gap-filling bases. Those unique facts have led courts to apply Stolt-Nielsen in at least two ways.

The popular way to interpret Stolt-Nielsen is more friendly to class arbitration.  It interprets the case’s message as a reminder to arbitrators everywhere that their job is to enforce the contract, not to be legislators.  Therefore arbitrators may authorize class arbitration as long as either the text of the arbitration agreement or other evidence shows the parties intended to allow class arbitration.   That is the approach the First, Second, and Third Circuits have taken (with opinions from the First and Third Circuits issued in 2012).  This approach is also consistent with the default rule that arbitrators interpret contracts calling for arbitration, and their interpretations are entitled to the highest level of deference.

The second way to interpret Stolt-Nielsen is as a federal presumption against class arbitration, much like the one against arbitrating arbitrability.  Courts will not assume that parties intend to arbitrate issues relating to the validity and scope of the arbitration provision itself without “clear and unmistakable” evidence of that intent (see Rent-a-Center).  Similarly, some courts (and litigants) read Stolt-Nielsen as essentially requiring clear and unmistakable evidence of the parties’ intent to allow class arbitration before an arbitrator may authorize that procedure.  In 2012 the Fifth Circuit, in particular, found that an arbitrator exceeded his authority by concluding that a common arbitration provision showed an intent to allow class arbitration.  (The provision said ““any dispute arising from [the agreement]…shall be resolved by binding arbitration.”)

SCOTUS will likely clarify its position on when class arbitrations are allowed in two cases it will hear in early 2013 (AmEx is set for argument on Feb. 27), so class arbitration is likely to be part of my year-end round up next year as well…

Even if we do not know for certain whether class arbitration will end up on Scalia’s naughty list or his nice list, we do know three courts that received big lumps of coal from SCOTUS in 2012: the West Virginia Supreme Court, Oklahoma Supreme Court, and Second Circuit.  The tone of its opinions vacating decisions of the high courts in West Virginia and Oklahoma was that of a parent washing out a child’s mouth with soap.  The Court seemed disgusted that those two lower courts would defy its authority by refusing to follow federal precedents on arbitration, to say nothing of the cheeky language those courts used to describe federal precedent.  And one has to believe that after remanding the AmEx case once already to the Second Circuit, someone at the Court is banging their head against the wall about hearing that case again.  (How could they not get the hint?!  We wanted them to reverse themselves!)

That’s the beauty of this area of the law, though.  It is changing rapidly, SCOTUS seems passionate about it, and the interplay between the FAA and state contract law is a constant tug of war about federalism and public policy.  I can’t wait to see what’s on Scalia’s naughty list in 2013!

Illustration by Jason Bryan (jason@fivepointsarthouse.com)

Just last Friday, the Supreme Court agreed to review a second circuit court case that allowed a class action to proceed, despite arguments that the arbitration clause precluded any collective actions.  The granting of these petitions is a fitting way to end a year in which there has been considerable discussion about how to apply Stolt-Nielsen, Concepcion, and other precedent in the context of claims by a group (or defined class) of plaintiffs.  Here is a preview of what is at issue, and at stake, in this arbitration double-feature.

CASE ONE: OXFORD HEALTH PLANS, LLC V. SUTTER

Summary: The Third Circuit affirmed an arbitrator’s decision to allow doctors’ claims against a health plan to proceed on a class basis.  The arbitrator had analyzed the text of the broad arbitration agreement at issue, which lacked any explicit language about whether class actions were authorized, and concluded the parties intended to allow class arbitration.  The Third Circuit said this did not amount to “exceed[ing] [his] powers” within the meaning of Section 10(a)(4) of the FAA.  The Third Circuit refused to vacate the award largely because the arbitrator made a rational attempt to interpret the parties’ arbitration agreement and that attempt is entitled to great deference by the courts.

Issue:  The Petitioner argued for review of this case based on the difference in how the circuit courts have interpreted Stolt-Nielsen (with some seeming to require explicit consent within the arbitration clause for any collective action to proceed in arbitration, but the majority noting that as long as the arbitration clause does not prohibit class arbitration, the arbitrator should use general contract interpretation principles to discern the parties’ intent regarding class actions).  It noted that “at least seven cases on this issue have reached the courts of appeals in just the last two years.”

The parties’ framing of the “question presented” reflect the different legal lenses through which the Court could view this case.  The Petitioner framed the question presented as: “Whether a contract provision requiring arbitration rather than litigation of any dispute, without more, can be a sufficient ‘contractual basis [to] support a finding that the parties agreed to authorize class-action arbitration,'” quoting from Stolt-Nielsen.  The Respondent framed the question very differently, following the Third Circuit’s lead: “Did the arbitrator exceed his powers under the [FAA] when he interpreted the atypical terms of the agreement in this case to authorize the arbitration of class claims?”

If this case were simply about the appropriate deference that courts should grant arbitrators, SCOTUS would not have granted review.  In my mind then, the relevant issue is how does SCOTUS plan to clarify its ruling in Stolt-Nielsen?  Possible options include indicating that:

  1. Stolt-Nielsen was unique, because the parties had stipulated that the arbitration provision was “silent” regarding class arbitration and the arbitrators applied their own policy judgments. The point is that arbitrators should try and determine the parties’ intent; this outcome would affirm the approach of the First, Second and Third Circuits ;
  2. Broad arbitration clauses, like the one at issue in Sutter, cannot reasonably be interpreted to authorize class arbitration; or
  3. As a matter of substantive federal law, class arbitration is precluded unless the arbitration clause explicitly allows it.

I don’t see a clear path that SCOTUS could take to reach conclusion 2 or 3, however, because contract interpretation is a matter of state law and the deference granted to an arbitrator’s decision on the merits is so great.  Of course, Justice Scalia could always surprise me. . .

Two groups already have permission to file amici — the Chamber of Commerce and DRI (“The Voice of the Defense Bar”).  They are firmly in favor of outcome 2 or 3 above.

CASE TWO: AMERICAN EXPRESS CO. V. ITALIAN COLORS RESTAURANT (a/k/a “Amex III”)

Summary: The case is called “Amex III” because the Second Circuit has issued three opinions in the dispute, two after remand from SCOTUS to consider the impact of first Stolt-Nielsen and then Concepcion.  The Second Circuit never changed its holding — it concluded that the parties’ clause prohibiting class arbitration was unenforceable.  The Second Circuit said that antitrust claims like those of these plaintiffs are so expensive to prosecute that it would never be rational for any individual claimant to bring them, therefore denying class actions would effectively preclude the plaintiffs from vindicating their rights under antitrust laws.  The Second Circuit grounded its decision in Green Tree Financial Corp-Ala. v. Randolph, 531 U.S. 79 (2000), and the strong expert testimony the plaintiffs presented with respect to the viability of individual suits.  (However, the language at issue in Green Tree is a pretty thin reed upon which to rest such a significant decision.)

Issue: The petitioner in this case framed the issue as: “Whether the [FAA] permits courts, invoking the “federal substantive law of arbitrability,” to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.”  The respondent has a different view of the issue: “[W]hether an arbitration clause should be enforced when there is no dispute that a litigant has shown it would be unable to effectively vindicate its federal statutory rights in the arbitral forum.”

In my view, the real issue here is will SCOTUS acknowledge any expense-based exception to its arbitration precedent.  It could conceivably say that: 1) economic realities of litigation are never a sufficient reason to invalidate an arbitration agreement (if Congress wants to preclude arbitration, it can do that in the statutes); or 2) more narrowly, it could say that there is no federal substantive rule that arbitration can only proceed if it is economically viable, and leave any review of state-based arguments for another time.  In either case, this decision is likely to be reversed.

Four outside groups have already weighed in on this issue — the New England Legal Foundation (“protecting the free enterprise system”), Chamber of Commerce, DRI, and a group of “senior legal officers for public companies” — all of whom advocate for reversing AmexIII.  The amici worry about an exception that could swallow the rule, and present the situation in the most dire of terms — DRI, for example, argues that AmexIII affects the enforceability of millions of arbitration agreements and “substantially undermines” the federal right to enforce arbitration agreements.

No matter how SCOTUS decides Sutter, corporations are likely to continue drafting arbitration agreements that explicitly exclude class arbitrations.  If those are strictly enforced (without any state law exceptions, see Concepcion), then we must acknowledge that our justice system is writing off a significant amount of smaller cases that cannot effectively be arbitrated on an individual basis, like those at issue in Amex III.  Some of those cases may even have significant public value.  Yet we are not likely to see amici briefs in favor of making sure claims with small dollar values have a cost-effective way of being arbitrated.

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.

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.