In 2010, the Supreme Court issued Stolt-Nielsen, S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010). In that opinion, the Court held that parties could not be compelled to participate in class arbitration unless they had agreed to do so; courts and arbitrators could not infer such agreement by the mere fact that a party had agreed to arbitrate. Defense counsel thought (or hoped) that Stolt-Nielsen would preclude class arbitration whenever the arbitration clause did not expressly allow class or collective proceedings. As disputes worked their way to the various courts of appeals, however, we see those intermediate appellate courts finding unique ways to allow class arbitration and effectively limit Stolt-Nielsen to its facts.
The Second Circuit Pushes Back In Jock
Last year, the Second Circuit continued what seems to be a running battle with the Supreme Court regarding arbitration clauses in Jock v. Sterling Jewelers, Inc.
, 646 F.3d 113 (2d Cir. 2011), cert. denied
, 132 S. Ct. 1742 (2012). I discussed that opinion at the time
the Second Circuit released it. In essence, the Second Circuit concluded that an arbitrator could decide that an arbitration clause allowed class arbitration so long as neither the agreement nor the law categorically prohibited the arbitrator from concluding otherwise. Instead of requiring a specific intent to permit class arbitration, that decision allowed an arbitrator to use that procedure so long as the governing law did not prohibit it.
The Third Circuit Also Confines Stolt-Nielsen
Since Jock, two other courts of appeals have weighed in and likewise limited the reach of Stolt-Nielsen. In Sutter v. Oxford Health Plans LLC, No. 11-1773 (3d Cir. Apr. 3, 2012), a physician accused a managed care network of improperly denying, underpaying, and delaying reimbursements for medical services. The doctor originally brought the putative class action in New Jersey state court, and the managed care plan moved to compel arbitration. The doctor contended that individual arbitration would violate New Jersey public policy and asked the state court to refuse to enforce the arbitration clause or to certify the class before sending the matter to arbitration. The state court referred the matter to arbitration and ordered that the arbitrator decide all procedural issues, including whether class certification was warranted. The arbitrator concluded that the provision allowed class proceedings and issued a clause construction award to that effect. The managed care network then unsuccessfully moved to vacate the clause construction award in district court. The matter proceeded to class wide arbitration, and the managed care network again sought to vacate the resulting award. The district court denied the motion to vacate the award and granted the doctor’s cross-motion to confirm it.
The Third Circuit affirmed using class arbitration in this setting. As has become common in the lower courts, the Third Circuit seized on the parties’ stipulation in Stolt-Nielsen that their agreement was “silent” with respect to class arbitration (i.e., they had not reached any agreement on that issue). In this case, the doctor and the managed care network disputed whether they intended to authorize class arbitration. This was true even though the doctor had opposed enforcing the arbitration agreement in New Jersey state court on the ground that it would send the dispute to individual arbitration; the managed care plan contended this showed the doctor’s effective admission that the arbitration clause did not permit class wide proceedings. The Third Circuit concluded that the arbitration clause was very broad and encompassed class proceedings in the absence of an express carve-out making such proceedings unavailable. In relevant part, the clause stated: “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 in New Jersey . . . .” According to the Third Circuit, the lack of express class arbitration exclusion merely corroborated the arbitrator’s holding; it was not the basis of the holding. “Thus, the arbitrator did not impermissibly infer the parties’ intent to authorize class arbitration from their failure to preclude it.”
The First Circuit Is the Latest Appellate Court to Limit Stolt-Nielsen
More recently, the First Circuit likewise limited the scope of Stolt-Nielsen in Fantastic Sams Franchise Corp. v. FSRO Association, Ltd., No. 11-2300 (1st Cir. June 27, 2012). In that dispute, the regional owners association of Fantastic Sams hair salons sued the franchisor, alleging that the franchisor had breached the licensing agreements. The regional owners association and the franchisor entered into 35 agreements covering different areas of the country. All of the agreements called for arbitration, though 25 of them executed after 1988 expressly prohibited class arbitration. The remaining 10 agreements executed before 1988 did not expressly prohibit or permit class or collective arbitration. The district court ruled that the arbitrator had jurisdiction to determine if those 10 agreements allowed the regional owners association to pursue a collective action on behalf of hundreds of individual salons.
The First Circuit affirmed the district court’s decision. As other courts have done, the First Circuit found it important that the parties in Stolt-Nielsen stipulated that they had not reached agreement on the issue of class arbitration: “a finding that an agreement does not preclude class arbitration is not enough to conclude that the agreement authorizes it when the parties have said that they reached no agreement on the subject” (emphasis added). Thus, the First Circuit rejected the notion that a provision must contain express language evincing intent to permit class or collective arbitration. Rather, the parties can reach an implicit agreement to authorize class arbitration. The First Circuit also rejected the notion that arbitration clause was “silent” on class arbitration in the same manner as in Stolt-Nielsen (i.e., the parties did not stipulate to such silence). It was significant to the First Circuit that the agreement’s language changed in 1988 to exclude class arbitration. “[A]dditional evidence could reveal that the later change in language reflects a conscious choice by the parties to exclude some forms of arbitration, available prior to 1988, after that date. . . . In addition, there may be other evidence of intent presented to the arbitrators, such as industry practice.” The First Circuit also did not believe that the associational action brought by the owners’ group was the same as class action. The owners association did not seek to represent absent parties or parties that are not signatories to the agreement. Likewise, the arbitration panel would not need to certify a class or provide public notice of the arbitration; the owners association represented all of the individual salons.
The First Circuit could have relied only on this latter point—the nature of an “associational action” contrasted to a true class action—to reach this result. Instead, however, it discussed in considerable detail the limiting stipulation in Stolt-Nielsen and the ways of finding an implied agreement to class wide arbitration.
The Outlook for Defense Practitioners
In each of these three cases, the courts seemed to take great pains to limit Stolt-Nielsen based on those parties’ stipulation that the arbitration clause was “silent” on the issue of class/representative arbitration. Indeed, the First Circuit’s Fantastic Sams decision seemed to reach that point unnecessarily. That court likely could have pointed to the associational nature of the claims—a suit by the regional owners association rather than a class action—to conclude that the district court properly referred the issue to the arbitrator. The lower courts’ focus on the Stolt-Nielsen stipulation also oddly minimizes the importance of the Supreme Court opinion. In essence, that approach limits the applicability of Stolt-Nielsen to settings in which the parties stipulate that their arbitration clause is silent on the topic of class wide proceedings. Of course, no party hoping to pursue class treatment will stipulate as much anymore, effectively meaning Stolt-Nielsen is limited to its facts. It is difficult to conceive of the Supreme Court granting certiorari and issuing that opinion merely to announce a matter of statutory interpretation that will not apply to any other dispute. That contradicts the notion that a “petition for writ of certiorari will be granted only for compelling reasons.” Sup. Ct. R. 10.
The approach also stands on its head that notion that parties cannot be compelled to arbitrate on a class wide basis unless they agreed to do so. The lower courts’ decisions permit the inference of such intent when the arbitration clause refers to “any controversy or claim arising out of or relating to this contract” or similarly-broad language. Such language is common in arbitration clauses; interpreting it to evince assent to class arbitration renders much of Stolt-Nielsen moot absent a stipulation. Under that interpretation, the burden improperly shifts to the party opposing class arbitration to prove that the parties did not intend to permit such proceedings, which only seems possible with a “no class arbitration” clause. In effect, this approach does what Stolt-Nielsen prohibits by allowing a court or arbitrator to infer intent to agree to class arbitration solely because the parties agreed to arbitrate at all.