June 24, 2013 Articles

Associational Arbitration: First Circuit Finds a New Way to Limit Stolt-Nielsen

By P. Jean Baker

On June 27, 2012, the U.S. Court of Appeals for the First Circuit joined the Second and the Third Circuits by finding a unique way to allow class arbitration by limiting Stolt-Nielsen to its facts. Fantastic Sams Franchise Corp. v. FSRO Association Ltd.,No. 11-2300. In the dispute, the regional owners association of Fantastic Sams hair salons (FSRO) sued the franchisor (FSFC) alleging breach of the franchise agreement. The FSRO and the franchisor had entered into 35 regional license agreements covering more than 1,200 individual salons across the country. All of the regional license agreements contained arbitration clauses providing for administration by the American Arbitration Association (AAA). Twenty-five of the agreements executed after 1988 expressly prohibited class arbitration, while the remaining 10 agreements executed before 1988 were silent concerning class arbitration.

FSRO filed a Demand for Arbitration with AAA on behalf of its 1,200 plus members. FSFC then filed a petition in federal district court to stay FSRO's group-wide arbitration and to compel FSRO's members to arbitrate their claims with FSFC on an individual basis. The district court allowed FSFC's petition as to the 25 regional license agreements executed after 1988 that expressly prohibited class arbitration. However, the district court denied relief as to the 10 other license agreements, which were executed before 1988 and contained different language. FSFC appealed the denial.

First Circuit Affirms Judgment of the District Court
The First Circuit affirmed that the claims arising out of the 10 license agreements executed before 1988 will proceed to arbitration––where the arbitrators will determine whether FSRO may compel group arbitration under the terms of the agreements, or whether its members must proceed individually. In reaching their decision the court stressed that the parties in Stolt-Nielsen S.A. v. Animalfeeds Int'l Corp.,130 S. Ct. 1758 (2010) had stipulated that they had reached "no agreement" on class-wide arbitration; thus, there was no occasion for any inquiry by the court into the parties' intent on that subject in that case. In contrast, in this case the court reasoned that it is conceivable that an arbitrator could find more than silence in the arbitration agreements on whether the parties agreed to authorize the type of associational action brought by FSRO. For example, evidence may be presented to the arbitrators clearly establishing a conscious intent after, but not before, 1988 to exclude some forms of arbitration.

FSRO's "Associational" Arbitration Process
The court went on to explain that, as a matter of law, the court could not say that FSRO's associational action in this case was equivalent to a class action. Unlike traditional class arbitration, which raised concerns with the Supreme Court in Stolt-Nielsen, FSRO was not seeking to represent any absent parties––or any parties who were not signatories of the agreements at issue. Nor did FSRO seek to bring any claims or obtain any relief not arising directly out of the agreements. In the current action, FSRO's members could not obtain individualized damage awards nor did the arbitrators have to certify a class or provide public notice. The court opined that had the associational arbitration sought by FSRO more closely resembled traditional class arbitration, the decision of the court might have been different.

Ascertaining the Parties' Intent
The next issue to be addressed by the court dealt with whether the decision in Stolt-Neilsen required that the court, rather than the arbitrator, decide whether class arbitration can go forward when the contract is silent on the question. The court determined that because the parties had expressly assigned the issue to the arbitration panel, and no party had argued that the assignment was impermissible, the question was never before the Supreme Court in Stolt-Neilsen.

Question of Arbitrability
The final issue dealt with whether the dispute presented a dispositive gateway question of arbitrability, which must be decided by the courts, or a procedural question, which must be resolved by the arbitrator. The court relied upon the AAA rules, which convey upon arbitrators the right to decide the scope of their own jurisdiction, the sweeping language of the arbitration clauses, and the conscious change in language subsequently. The court held that the arbitrators shall decide whether the parties "agreed to authorize" an association action.

Second Circuit's Approach
The Second Circuit was the first court to limit the reach of Stolt-Neilsen to the facts of the case. In Jock v. Sterling Jewelers Inc., 646 F. 3d 113 (2011), the court upheld an arbitrator's interlocutory decision allowing an employment case to proceed as a class arbitration. The court reasoned that the employer's ADR program clearly "intended" to make available all remedies and rights that would be available in court. Because neither the arbitration agreement nor the law categorically prohibited the arbitrator from ordering class arbitration, the court determined that an arbitrator could decide whether an arbitration clause allowed class arbitration. The Supreme Court denied certiorari in this case.

Third Circuit Also Limits Stolt-Nielsen
In Sutter v. Oxford Health Plans LLC, No. 11-1773 (Apr. 3, 2012), the court affirmed an arbitrator's decision to allow class arbitration based on an arbitration agreement executed in 1998 that was silent on the issue. The dispute involved medical reimbursements between a group of physicians and a healthcare plan. The arbitrator based his clause construction award on an analysis of both the breath of the arbitration agreement and the absence of any express carve-out for class arbitration. The court determined that the arbitration decision could not be vacated because the arbitrator had "performed his duty appropriately" by basing his decision on a thorough analysis of the text of the arbitration agreement. The court opined that had the arbitrator merely inferred the parties' intent to authorize class arbitration from their failure to preclude it, the court's decision would have been different.

In reaching its decision, the court stressed 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 Stolt-Nielsen "established a default rule" that parties may not be compelled to class arbitration unless the contract indicates the party consented to class arbitration.

Fifth Circuit Adopts a Totally Different Approach
In Reed v. Florida Metropolitan University, Inc., 2012 WL 1759298 (May 18, 2012), the Fifth Circuit vacated an arbitration award that permitted class arbitration. The court explained that it was abandoning the deference that it typically grants to decisions by arbitrators because of two recent Supreme Court decisions––Stolt-Nielsen and Concepcion. The court based its holding on the fact that neither of the arbitration clauses cited by the arbitrator could properly be interpreted as constituting a contractual basis upon which to conclude that the parties agreed to authorize class arbitration.

The First, Second, and Third Circuits have now concluded that broadly worded arbitration clauses may permissibly give rise to an inference by an arbitrator of an intent by the parties to engage in class arbitration. Courts in these three circuits may not use the presence or absence of magic words such as "class arbitration" or "class action" as the sole basis on which to rule on the availability of class arbitration. This may be especially true if the arbitration agreement was executed before the availability of class arbitration became a hot topic following the Supreme Court's decision in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003).

In sharp contrast, the Fifth Circuit has concluded that broad phrases such as "any dispute" or "any remedy" do not constitute a valid contractual basis upon which to conclude that the parties agreed to submit to class arbitration.

Keywords: ADR, litigation, class arbitration, group arbitration, associational arbitration