Class-wide arbitration claim OK

The 1st U.S. Circuit Court of Appeals has held in an issue of first impression that an arbitrator, and not a judge, must decide if an arbitration agreement allows for a dispute to move forward individually or on a class-wide basis.

The plaintiff franchisor argued that the U.S. Supreme Court’s 2010 ruling in Stolt-Nielsen S.A. v. AnimalFeeds International Corp. required the express consent of the parties before arbitration could proceed as a class action.

But the 1st Circuit disagreed, holding not only that an agreement silent on the class-action question did not control, but also that the arbitrator was properly in a position to decide the intent of the parties.

“We … reject the … 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,” Chief Judge Sandra L. Lynch wrote for the court. “Stolt-Nielsen imposes no such constraint on arbitration agreements.”

The 18-page decision is Fantastic Sams Franchise Corporation v. FSRO Association Ltd., et al., Lawyers Weekly No. 01-156-12. The full text of the ruling can be found by clicking here.

End of debate

W. Michael Garner of Minnesota, who represented the franchisees, said the Supreme Court has long recognized a presumption in favor of enforcement when parties agree to arbitrate.

Stolt-Nielsen was a poorly drafted decision that has been improperly cited by many class-action defense attorneys, he said.

“When you have badly written opinions, lawyers can try to make them say a lot of different things, which is what the defense was trying to do here,” he said. “The 1st Circuit has gone a long way to ending the debate about what Stolt-Nielsen stands for.”

Garner said the franchisor’s argument failed to recognize Stolt-Nielsen was a case in which the parties had stipulated that no agreement had been reached on class arbitration. Such a stipulation had not been made in Fantastic Sams, he said.

“What the defense tried to argue was that Stolt-Nielsen prohibited class arbitration across the board unless there was some express authorization of it,” he said. “But that’s not what Stolt-Nielsen said, and that is not what the 1st Circuit said.”

Gregg A. Rubenstein of Nixon Peabody in Boston represented the franchisor. He declined to comment on the case.

But John J. Aromando, a civil defense litigator at Pierce Atwood, said Fantastic Sams shifts the balance in favor of plaintiffs. After Stolt-Nielsen, the impression among the defense bar was that if an agreement was silent on class-wide arbitration, it simply would not be allowed.

“What the 1st Circuit held was that they’re going to treat this the way they treat every contract construction case, which is that there is more than one way to skin a cat,” he said. “If the agreement doesn’t address it explicitly, you still get your opportunity to put in evidence as to why the contract should be read a certain way, based, for example, on industry custom or comments the parties may have made extrinsic to the contract.”

The court’s holding gives arbitrators far more authority than many in the defense bar had hoped, said Aromando, a Massachusetts-licensed lawyer who practices out of his firm’s Maine office.

“The reason a lot of lawyers, myself included, read Stolt-Nielsen the way we did is because agreements to arbitrate aren’t usually treated the same as other contractual provisions,” he said. “If you’re going to tell someone you are compelled to arbitrate, particularly on a class-wide basis, we want to be comfortable that that is what everyone intended. And unless it’s in the plain language, a lot of people thought after Stolt-Nielsen there was no way you could read it in.”

Moving forward, arbitrators will have to decide whether to address the class-action question first or deal with it in conjunction with the underlying facts of the case, he added.

“There is no obligation for the arbitrator to bifurcate, and that is the problem,” Aromando said. “If they don’t bifurcate, then you have to go through the whole proceeding before you get your answer, and that is a less than ideal way to proceed.”

Shannon Liss-Riordan of Lichten & Liss-Riordan in Boston, a plaintiffs’ lawyer who has litigated similar matters in the 1st, 3rd and 5th circuits, said the law allows judges to decide issues related to enforceability of arbitration agreements.

Notwithstanding arguments from the defense bar, however, she said most courts have held that class-action questions are matters of contract interpretation that cannot be decided by judges under the Federal Arbitration Act.

“Even after Stolt-Nielsen, the general consensus was that the arbitrator’s job was to interpret the contract,” she said. “The 2nd and 3rd circuits have already affirmed that principle; the 5th Circuit is the only court that has come out the other way.”

Who’s invited?

Defendant Fantastic Sams Regional Owners Association represents a group of franchisees that had entered into agreements with plaintiff Fantastic Sams Franchise Corp.

The franchise corporation is the franchisor of a chain of hair salons known as Fantastic Sams.

In 2011, the owners’ association filed a demand for arbitration against the franchise corporation, seeking declaratory and injunctive relief on behalf of its members for breach of contract and violations of Chapter 93A.

In response, the franchise corporation filed suit in U.S. District Court in Boston, seeking to stay the arbitration demand and compel the owners’ association to bring its claims on an individual basis.

U.S. District Court Judge Nathaniel M. Gorton barred collective arbitration on 25 of the 35 agreements at issue because they contained provisions stating that any arbitration between the franchise corporation and owners’ association must be done individually.

The agreements were all written and entered into after 1988.

The remaining 10 agreements, executed prior to 1988, contained no express prohibitions on class or collective arbitration. As a result, Gorton denied relief.

He concluded that whether the agreements precluded the owners’ association’s action “is a matter of contract interpretation which the parties have agreed to submit to arbitration.”

No stipulation

In affirming Gorton’s denial, Lynch wrote that the question of what the parties agreed to authorize was for the arbitrator to decide. She said she disagreed with the franchisor’s claim that the lack of an express agreement prohibited a class-wide claim.

“[Fantastic Sams Franchise Corporation] reads Stolt-Nielsen too broadly,” she said. “The Court granted certiorari in that case to decide ‘whether imposing class arbitration on parties whose arbitration clauses are ‘silent’ on that issue is consistent with the [FAA].’”

Unlike Fantastic Sams, the Stolt-Nielsen parties stipulated their agreement was unambiguously silent on class arbitration.

“Although the arbitration panel had considered the language, context, and usage of the agreement in that case, the Court held that these considerations were ‘beside the point’ in a case in which the ‘parties were in complete agreement regarding their [lack of] intent,’” she wrote. “Once the parties stipulated that they had reached ‘no agreement’ on class arbitration, … ‘the only task … left for the panel … was to identify the governing rule applicable’ in the case.”

The franchisor’s argument failed, Lynch said, because the agreements in Fantastic Sams were not ‘silent’ in the same way they were in Stolt-Nielsen.

“Furthermore, the Supreme Court has not extended Stolt-Nielsen to the type of associational action brought by [Fantastic Sams Regional Owners Association], which is different in many respects from the class-action arbitration at issue in Stolt-Nielsen,” she wrote. “We cannot conclude, under the auspices of Stolt-Nielsen, that as a matter of law the broad arbitration clause at issue here precludes arbitration of this issue.”