1st Circuit Holds No Right to Remain Silent When it Comes to Arbitration Agreements

Cross-posted at WLF’s Forbes.com contributor site

In raising the bar for what’s required to avoid class action arbitration, the U.S. Court of Appeals for the First Circuit may not only have run afoul of the Supreme Court’s ruling in Stolt-Nielsen, but effectively limited the possibility that the case will apply in the future.  In Fantastic Sams Franchise Corp. v. FSRO Association Ltd., the court held that silence in an arbitration agreement as to whether class wide arbitration is permissible does not bar the imposition of class arbitration.  Following Stolt-Nielsen v. AnimalFeeds International Corp.in which the Supreme Court had ruled that class arbitration could not be imposed on parties “who have not agreed to authorize class arbitration”–it was believed by some that class arbitration could only result if the agreement explicitly authorized it.  The First Circuit, however, factually distinguished Stolt-Nielsen, and in doing so limited its holding to the circumstances in that case.

In Fantastic Sams, plaintiff FSRO–an association of Fantastic Sams franchisees–brought suit against Fantastic Sams for alleged license agreement violations.  Because the license agreements of 25 of those franchisees explicitly provided for individual arbitration, the district court held that those parties could not move forward on a class-wide basis.  With respect to the remaining ten franchisees, whose license agreements were silent on the subject, Fantastic Sams argued that–pursuant to Stolt-Nielsen–collective arbitration similarly could not proceed.

The court, however, distinguished Stolt-Nielsen based on the fact that, in that case, not only was the contract silent as to class, but further both parties stipulated that they had reached no agreement as to the matter.  The determinative fact was not the contract’s silence, but rather that both parties agreed that they had not agreed as to class arbitration.  Thus, while in Stolt-Nielsen there was “no room for an inquiry regarding the parties’ intent,” in Fantastic Sams the agreements were merely silent, and the parties’ intent as to class arbitration was unclear. (After Fantastic Sams, one will be hard pressed to find a plaintiff willing to make the same stipulation.)  Subsequently it was for the arbitrator to determine if class arbitration was contemplated–as a matter of contract interpretation. 

Certainly the Court’s language in Stolt-Nielsen should caution against arbitrators inferring too much when making such inquiries. The Court repeatedly emphasized that arbitration “is a matter of consent, not coercion.”  This notion underpinned the Court’s holding that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”  And due to the rather burdensome implications of class wide adjudication, an arbitrator should not infer an implicit intent to authorize class arbitration “solely from the fact of the parties’ agreement to arbitrate.”

Similarly, the First Circuit indicated that part of its decision was based on the fact that the concerns associated with class action that were present in Stolt-Nielsen were not present in Fantastic SamsFantastic Sams could be likened to “associational” arbitration because, for instance, all class members were present, and thus no absent parties’ rights were at risk.  This leaves open the possibility that in future cases, where those concerns are present, the court might be less likely to leave the door open to class arbitration.

The progeny of Stolt-Nielsen indicate that courts lack clarity as to the finer points of the case.  In similar decisions, the Second and Third Circuits allowed class arbitration where the agreements were silent on the issue.  However, they may have gone further in that they appeared to require the reverse of Stolt-Nielsen: they reasoned that the agreements’ failure to expressly prohibit class arbitration indicated the parties agreed on class arbitration.  On this point the Fifth Circuit explicitly disagreed.

Perhaps these conflicting cases will make their way to the Supreme Court.  In the meanwhile, it is advisable for businesses to take a look at their existing arbitration agreements.  While the agreements at issue were commercial in nature, surely this case has the same implications for employment agreements and the like: silence no longer speaks for itself.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s