In the case of Fantastic Sams Franchise Corporation v. FSRO Association, Ltd., the First Circuit Court of Appeals addressed the issue of whether "class-wide" arbitration is permissible absent an explicit agreement between the parties to allow adjudication of claims on a collective as opposed to an individual basis. Their answer: it may be, and it is the arbitrators rather than the court who decide that question.
FSRO, an association representing Fantastic Sams franchisees, filed a demand for arbitration on behalf of its members against the franchisor Fantastic Sams Franchise Corporation ("FSFC") pursuant to 35 separate regional license agreements between individual franchisees and the franchisor. FSFC responded by filing a petition in federal court pursuant to Section 4 of the Federal Arbitration Act to stay FSRO's arbitration demand and to compel FSRO's members to arbitrate their claims with FSFC on an individual basis.
In 25 of the agreements, the arbitration provision expressly provided that "any arbitration between FSFC and [the franchisee] shall be of [the franchisee's] individual claim only" and "[n]o arbitration shall be conducted on a class-wide basis." The district court found that collective arbitration on behalf of the franchisees subject to those 25 agreements was therefore barred, and granted FSFC's petition with respect to those claims. FSRO did not appeal that portion of the district court's decision.
The other 10 agreements, however, did not contain that language, or any express language addressing the issue of collective or "class-wide" arbitration. FSFC argued that under the U.S. Supreme Court's decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010), no class or collective arbitration may proceed unless the arbitration agreement expressly authorizes such proceedings.
Following the lead of two other circuits that have addressed this question since the Stolt-Nielsen decision, the Third Circuit in Sutter v. Oxford Health Plans LLC, 675 F.3d 215 (3rd Cir. 2012), and the Second Circuit in Jock v. Sterling Jewelers, Inc., 646 F.3d 113 (2nd Cir. 2011), cert. denied, 132 S. Ct. 1742 (2012), the First Circuit saw it differently. The Court seized on the distinction that the parties in Stolt-Neilsen stipulated that they had reached "no agreement" on class-wide arbitration. Absent such a stipulation (which now presumably will never be seen again in connection with this issue), the Court noted, it is possible to prove a binding agreement to arbitrate claims collectively as well as individually based on record evidence other than the plain language of the contract itself, for example through the statements or other conduct of the parties before and after execution of the agreement, "industry practice" and "custom and usage."
Moreover, the Court found that this particular issue is beyond the scope of the "far more limited" question of "arbitrability" reserved to the courts under established Supreme Court authority. The Court went on at some length to explain why and how arbitrability determinations must be construed narrowly, otherwise "any number of non-merits questions could be characterized as 'dispositive' or 'gateway' questions in the sense that their 'answer will determine whether the underlying controversy will proceed to arbitration on the merits.'" The agreement to arbitrate and the scope of the matters to be arbitrated here were beyond dispute, the Court noted. The question of whether that arbitration could proceed collectively or must proceed individually, according to the intent of the parties, is for the arbitrators to determine.
Interestingly, the Court also distinguished this case from Stolt-Nielsen on the grounds that the collective arbitration proceeding urged by FSRO on behalf of a finite and known group of members did not implicate some of the policy concerns raised by true "class" arbitration. For instance, the arbitration did not involve the rights of "absent parties" as would be the case in a class action. And the arbitrators here would not be asked to decide issues relating to class certification, a legally intricate inquiry typically reserved to the courts. Also, the collective arbitration proposed in this case would not necessarily interfere with "the presumption of privacy and confidentiality" that typically applies in many bilateral arbitration agreements. Notwithstanding the primary thread of its decision, the Court seemed to be expressing some discomfort with the idea of true class arbitration absent an express agreement by all named parties involved, and perhaps provided a toehold to argue for a contrary result in a future case involving an actual "class" as opposed to merely a collective arbitration proceeding.
For now, however, the practical implication of this decision appears to be that, in the absence of express language barring collective arbitration, the case will at least initially proceed to arbitration on a collective or "class-wide" basis, and it will be up to the arbitrators to decide based on evidence of the parties' intent whether the claims will proceed collectively or individually. The decision acknowledges the apparent incompatibility of class litigation and certain traditional aspects of arbitration, but leaves open the possibility that parties can nevertheless be bound to arbitrate on a class basis on less than explicit contractual language to that effect, depending on how the arbitrators determine the parties' "intent" based on evidence extrinsic to the contract.
As a practical matter, arbitration panels faced with this issue presumably will bifurcate the proceedings to decide this question at the outset, given the significant impact it will have on the course of future proceedings on the merits. It seems an issue perfectly suited for court determination as part of the "gateway" function prior to the commencement of arbitration, but that is not how it will work now in the First Circuit. Of course, all of this can be avoided by plain language in the arbitration agreement (at least in commercial agreements -- consumer contracts may be governed by different principles beyond the scope of this decision) barring both "collective" and "class-wide" arbitrations if that is the parties' intent. It therefore behooves the parties to deal with this issue at the front end rather than after a dispute arises, when there is unlikely to be agreement on much of anything.
Originally published 06/28/2012
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