The Seventh Circuit issued an opinion last week that sounded like it would be a big deal.  The case, Herrington v. Waterstone Mortgage Corp., 2018 WL 5116905 (7th Cir. Oct. 22, 2018), dealt with the fallout from SCOTUS’s Epic Systems, and addressed a class arbitrability issue of first impression, which meant it could have been epic indeed.  But instead, the decision is a fizzle that punts all the truly exciting issues back to the district court.

Herrington began in court as a collective action for minimum wages and overtime pay under the Fair Labor Standards Act.  The named plaintiff had an arbitration clause which included this statement “Such arbitration may not be joined with or join or include any claims by any persons not party to this Agreement.”  So, the defendant moved to compel individual arbitration.  But, based on the 7th Circuit’s precedent finding that class waivers in employment agreements violated federal labor laws (the NRLA), the court sent the parties to arbitration with an order instructing the arbitrator to allow the plaintiff “to join other employees to her case.”

In arbitration, the parties continued to fight over what type of suit could proceed.  The arbitrator concluded that the arbitration agreement evinced the parties’ intent to allow class arbitration, because it incorporated AAA employment rules, which the arbitrator interpreted to also include the supplementary rules for class arbitration.   In the end, however, the group proceeded as a collective arbitration with 175 members, and the arbitrator awarded them $10 million.

While the issue was on appeal, SCOTUS overruled the 7th Circuit’s precedent (in Epic Systems), which upended this entire proceeding.  On its face, it seemed as if the initial decision not to enforce the arbitration clause precluding joinder should be un-done, which would vacate the entire award.  However, the plaintiffs argued that despite the language precluding joinder, the arbitration clause still contained other language that authorized the collective arbitration.  At that, the 7th Circuit pivoted and framed the question as: who decides whether the arbitration clause allows collective arbitration?  The court or the arbitrator?

Noting it was “an open question in our circuit,” the 7th Circuit agreed with “every federal court of appeals to reach the question” that the “availability of class arbitration is a question of arbitrability” and therefore presumptively for courts to decide.  But, the 7th Circuit did not address the next logical question that must be answered to resolve the case: does or does not the parties’ choice of AAA rules delegate even the availability of class arbitration to an arbitrator?  Because that is not only an open question in the 7th Circuit, but one on which the other federal circuits are split.

That issue is important because if the parties validly delegated that question to the arbitrator, then the arbitrator’s decision finding the parties’ arbitration clause allowed collective action is entitled to deference.  At that point, isn’t it just like Sutter?  The arbitrator allowed the class action, and the courts have to live with that construction, “good, bad or ugly”?

Well, all those issues will have to be worked out by the district court.  The 7th Circuit found “the district court should conduct the threshold inquiry regarding class or collective arbitrability to determine whether [plaintiff’s] agreement with [defendant] authorized the kind of arbitration that took place.”

Happy Halloween!  (Or, by the time most of you read this, Day of the Dead.  Can you believe my husband carved this cool pumpkin?)

In a footnote in Sutter, SCOTUS hinted that the question of whether an arbitration agreement allowed for class arbitration may be one of the “gateway” questions of arbitrability that are presumptively for courts to decide. Last year, the Sixth Circuit went one step further, finding that the availability of class arbitration defaults to the courts. And this week, the Third Circuit agreed.

In Opalinksi v. Robert Half Int’l, Inc., __ F.3d __, 2014 WL 3733685 (3d Cir. July 30, 2014), a putative class of plaintiffs sued their employer. Their employment agreements called for arbitration, but said nothing about whether classwide arbitration was permitted. The employer moved to compel arbitration and the district court granted that motion, finding that the arbitrator should determine whether class arbitration was available.

The appellate court disagreed. It held that “whether an agreement provides for classwide arbitration is a ‘question of arbitrability’ to be decided by the District Court.” In support of its holding, the Third Circuit likened the decision about whether a class can go forward in arbitration to other arbitrability decisions that default to judges, like whether non-signatories are bound to arbitrate. The Third Circuit also noted that while procedural questions are generally for arbitrators, the availability of class arbitration has been construed by the Supreme Court as “not solely [] a question of procedure” but instead a “substantive gateway dispute.”

I predict there will be more circuit court cases finding that judges are the presumptive decisionmakers about class arbitration in the months to come.

p.s. There is only one week left to make sure ArbitrationNation stays in the ABA Blawg 100… Here is the link to use: http://www.abajournal.com/blawgs/blawg100_submit/ .

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 Federal Arbitration Act sets forth only four bases for vacating arbitration awards.  See 9 U.S.C. § 10 (a).    After SCOTUS’s 2008 decision in Hall Streetat least half of the circuit courts have concluded that those four bases are exclusive, de-legitimizing the creative bases that judges had developed over the years.  However, a recent Fourth Circuit opinion vacated an arbitration award for “manifest disregard of the law,” a judicially-created basis for vacating arbitration awards that is not contained in Section 10 of the FAA.

In Dewan v. Walia, 2013 WL 5781207 (4th Cir. Oct. 28, 2013), there was an arbitration between a company and its former employee.  Each side made claims against the other.  Critically, however, the employee had executed a Release Agreement in exchange for $7,000 just three months before the arbitration, which allegedly released all his employment claims.  After the hearing, the Arbitrator concluded that the Release Agreement was enforceable, but still awarded damages to the employee.  The district court confirmed the arbitrator’s award.

On appeal, the Fourth Circuit reversed.  It instructed the district court to vacate the arbitration award because it was “the product of a manifest disregard of the law by the Arbitrator.”  The court conducted its own analysis of the release language and concluded that the employee had released all claims against the company, including those he pursued in the arbitration, and therefore the arbitrator should not have awarded the employee any damages on his claims in the arbitration.

One judge dissented.  The dissent, while never citing Sutter, invokes the same standard used in Sutter, noting that the arbitrator did her job and interpreted the contract.  “Because the arbitrator unquestionably construed the release agreement at issue, we are not at liberty to substitute our preferred interpretation for the arbitrator’s.”

It does seem nearly impossible to square Justice Kagan’s language in Sutter, instructing courts to confirm arbitration awards whether “good, bad or ugly” and even if containing “grave error,” with this Dewan opinion from the Fourth Circuit.  While the insurer in Sutter moved to vacate under a legitimate FAA basis (that the arbitrator exceeded his power), and the company in this case moved to vacate claiming “manifest disregard,” the same standard should apply to all claims that arbitrators got the law wrong: as long as the arbitrator even arguably construed the contract, that construction holds.

**Finally, a short update on a previous post.  In April, the Ninth Circuit ducked the question of whether California’s Broughton-Cruz rule was preempted by the FAA.  (That rule exempted claims for public injunctive relief from arbitration under California law.)  Last week, however, the Ninth Circuit determined that Broughton-Cruz is preempted.  Ferguson v. Corinthian Colleges, Inc., __ F.3d __, 2013 WL 5779514.  The court relied on Concepcion as well as Marmet Health Care Center, and Mastrubuono to reach its result.

The Third Circuit ruled last week that Delaware’s Chancery Court could not offer its judges’ services as neutral arbitrators in its courtrooms, unless those arbitrations were open to the public.

In 2009, the Delaware courts decided to provide arbitration.  The state amended its laws to create an arbitration process that was only open to disputes worth more than a million dollars with at least one party being a business incorporated in Delaware (and no party being a consumer).  The parties did not need to have a pre-dispute arbitration agreement.  As long as they both consented, they could file their arbitration in the Delaware courts for a$12,000 initial fee and have the Chancellor select a Chancery Court judge to hear the arbitration in the Delaware courthouse (for another $6,000/day).  However, “the statute and rules governing Delaware’s proceedings bar public access.”  Only parties and their representatives could attend the proceedings.

In Delaware Coalition for Open Government, Inc. v. Strine, __ F.3d __, 2013 WL 5737309 (3d Cir. Oct. 23, 2013), the Third Circuit found that it violates the First Amendment to bar the public from Delaware business arbitrations.  Applying the “experience and logic” test (sounds like the kind of test courts should always apply!), the Court found “[w]hen we properly account for the type of proceeding that Delaware has instituted — a binding arbitration before a judge that takes place in a courtroom…the right of access to government-sponsored is deeply rooted in the way the judiciary functions in a democratic society.”  Further, the court noted that public access would be beneficial for stockholders, ensure transparency of the process, and discourage perjury.  For all those reasons, the Third Circuit found a right of public access to state-sponsored arbitrations in Delaware.

I haven’t heard of other states trying to compete with the AAA, so this decision does not have broader implications, but it is worth pondering whether the same benefits of public access the Third Circuit noted in this case also apply to private arbitrations.

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Now for some brief updates on recent topics:

  • The Minnesota Supreme Court granted review of this case, in which the Minnesota Court of Appeals confirmed an arbitration award involving a significant sanction against a party who was accused of manufacturing evidence.
  • The defense of illusoriness is still on the upswing.  Last week the Fifth Circuit affirmed a district court’s refusal to compel arbitration based on a finding that the agreement was illusory under Texas law.  Scudiero v. Radio One of Texas II, 2013 WL 5755484 (5th Cir. Oct. 24, 2013).
  • In case anyone thought Sutter was limited to deference for arbitrators who find arbitration agreements allow for class actions, the Eleventh Circuit clarified the same deference applies to arbitrator decisions to allow collective actions as well.  DirecTV v. Arndt, 2013 WL 5718384 (11th Cir. Oct. 22, 2013).
  • A thoughtful reader drew my attention to a case the U.S. Supreme Court will hear on November 13: Unite HERE Local 355 v. MulhallThe central question in the case is one of labor law, not arbitration, but the labor law questions were interpreted by arbitrators under the parties’ agreement, and the National Academy of Arbitrators has weighed in to support the use of “pre-recognitional governance systems” including arbitration.

 

Within weeks of its issuance, SCOTUS’s Sutter decision is already making an impact on other cases. Both the Eleventh Circuit and the D.C. Court of Appeals cite Sutter repeatedly in recent decisions that refuse to vacate arbitration awards.  Of course, new decisions are not the only ones that reverberate: Concepcion, a 2011 decision, was just applied by the Ninth Circuit to preempt Montana case law on contracts of adhesion.

Sutter

In Southern Commc’n Servs., Inc. v. Thomas, __ F.3d __, 2013 WL 3481467 (11th Cir. July 12, 2013), the court affirmed an arbitrator’s decision to allow a class action.  The plaintiffs are mobile phone consumers who allege they were charged unlawful penalties for canceling phone service.  Under the Wireless Industry Arbitration Rules of the AAA, an arbitrator found the arbitration clause allowed class actions and certified the class.  The wireless provider then moved to vacate that determination in federal court, claiming the arbitrator exceeded his authority and refused to apply the law.  The court, however, carefully applied the language of the recent Sutter decision and said that because the arbitrator engaged with the contract’s language and the parties’ intent, his construction of the contract must be upheld.

The D.C. Court of Appeals also cited Sutter recently in refusing to vacate an arbitration award.  In Wolf v. Sprenger + Lang, PLLC, __ A.3d. __, 2013 WL 3466348 (D.C. Ct. App. July 11, 2013), two attorneys sought to vacate an arbitration award against them in a fight over attorneys’ fees.  They argued the arbitrator exceeded his powers by addressing an issue outside the scope of the arbitration and by basing his award on notions of ethics instead of the co-counsel agreement.  In its analysis, the court summarized that the “‘sole question’ before the court in a challenge [that an arbitrator exceeded his power] is ‘whether the arbitrator (even arguably) interpreted the parties’ contract,'” citing Sutter.  Given that limited question, and the fact that the court said there was “no doubt” the arbitrator reached his decisions after interpreting the parties’ co-counsel agreement, the court affirmed the district court’s denial of the motion to vacate.

Concepcion

In a ruling that applies Concepcion in a new context, the Ninth Circuit just struck down Montana case law finding many arbitration agreements void as against public policy.  Mortensen v. Bresnan Commc’ns, LLC, __ F.3d. __, 2013 WL 3491415 (9th Cir. July 15, 2013), a putative class of Montana internet service subscribers asserted claims against the internet provider, based on the provider’s decision to allow an advertising company to create profiles of subscribers based on their internet usage and target them with “preference-sensitive advertising.”  The provider moved to compel arbitration, but the district court denied the motion under Montana law (even after considering application of Concepcion).

The Ninth Circuit reversed.  It found the Montana state law at issue was preempted by the FAA, even though it was ostensibly generally applicable contract law and not specific to arbitration.  The rule at issue said that provisions within contracts of adhesion are void as against public policy if they are not “in the reasonable expectations of both parties when contracting.”  Applying that rule, Montana has found that arbitration agreements in contracts of adhesion are void (because they waive parties’ right to trial by jury and access to court) unless they are explained to and initialed by consumers.  The court found that doctrine disproportinoally affects arbitration agreements and is therefore preempted by the FAA under the reasoning set forth in Concepcion.

The Ninth Circuit repeatedly distances itself from the result by noting that it is simply applying Supreme Court mandates.  For example: “Montana has an interest in protecting its consumers from unfair agreements, particularly those that force waiver of fundamental rights without notice.  But the Supreme Court in Concepcion told us to hold that the FAA preempts all laws that have a disproportional impact on arbitration agreements.”  It feels like making a promise while crossing your fingers behind your back.

The recent Sutter decision drives home repeatedly that a court may not vacate an arbitrator’s decision under the FAA just because a judge thinks the arbitrator reached the wrong result.  Justice Kagan said that under Section 10(a)(4) the court cannot second-guess the award, not even in the face of “grave error.”  Instead, the award must be confirmed, whether it is “good, bad, or ugly.”  If an ugly and gravely erroneous arbitration award does not establish that an arbitrator “exceeded his or her powers,” what does?

In general, the answer relates back to the fact that arbitration is a matter of contract.  If an arbitrator forgets that he or she is an all powerful genie only within the confines of his or her own lamp, which is defined by the arbitration agreement, there is a risk that the award can be vacated.  (Can you tell I watched “Aladdin” with the kids on my ArbitrationVacation?)  Here are a few examples of recent cases finding an arbitrator exceeded his or her powers, that would likely survive the test articulated in Sutter.

When an arbitrator issued an award that significantly rewrote the parties’ contract, the Third Circuit held that the award exceeded the arbitrator’s powers.  In particular, the court noted that the relief “was not sought by either party, and was completely irrational because [the arbitrator] wrote material terms of the contract out of existence.” PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd., 2010 WL 4409655 (3d Cir. 2010). See also Nat’l Hockey League Players’ Assoc. v. Nat’l Hockey League, 30 F. Supp. 2d 1025, 1029 (N.D. Ill. 1998) (vacating an award when the arbitrator considered evidence the parties had specifically agreed to exclude).

In another case, the Ninth Circuit upheld a district court’s finding that an arbitrator exceeded the scope of his authority when he issued two permanent injunctions to bind nonparties to a trademark agreement. Comedy Club, Inc. v. Improv West Assocs., 553 F.3d 1277, 1286-88 (9th Cir. 2009). The court held that the arbitrator had no authority to enjoin a nonparty since it was not a “third party beneficiary, an agent, or an assignee” of the agreement.  That portion of the award was vacated.

In a case where the court remanded an award to the arbitrator to clarify the calculation of damages, but the arbitrator did more than clarify the requested issue, the Fifth Circuit has held that the arbitrator exceeded his authority upon remand, and thereby reinstated the original arbitration award. Brown v. Witco Corp., 340 F.3d 209, 221 (5th Cir. 2003).

If “manifest disregard of the law” is no longer a separate, viable basis for vacating an arbitration award (which SCOTUS has not officially declared, but has hinted strongly twice), then parties seeking relief from an award must find ways to fit themselves into one of the four narrow bases for vacatur under Section 10(a) of the FAA.  The fourth of those, when an arbitrator exceeds his or her power, is just as narrow as the rest.   As the Court said in Stolt-Nielsen “[i]t is only when [an] arbitrator strays from interpretation and application of the agreement and effectively ‘dispense[s] his own brand of industrial
justice’ that his decision may be unenforceable.”

 

*ArbitrationNation thanks Zelda Elcin, a student at the University of Minnesota Law School, for her work on this post.

**If you find this blawg useful or interesting, please consider nominating it for the ABA Journal’s list of the top 100 Blawgs!  ArbitrationNation would be honored to be listed for a second year.  http://www.abajournal.com/blawgs/blawg100_submit/

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.

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)