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Circuit Split: Does Stolt-Nielsen Allow Class Arbitrations Based On Implicit Contract Interpretation?

The Fifth Circuit just issued a decision openly disagreeing with how the Second Circuit has interpreted both the Stolt-Nielsen decision and case law regarding the level of deference that courts owe arbitrators.  In Reed v. Florida Metropolitan Univ., Inc., __ F.3d __, 2012 WL 1759298 (5th Cir. May 18, 2012), the Fifth Circuit vacated an arbitration award that permitted class arbitration, acknowledging that SCOTUS’s “lengthy discussion of the significant disadvantages of class arbitration” in Stolt-Nielsen and Concepcion led the court to ditch the extraordinary deference it usually grants decisions by arbitrators.

Reed involved a potential class of students who attended undergraduate online learning programs, only to find out that graduate programs and employers did not recognize their online degrees.  The students’ Enrollment Agreements contained these key provisions: “any dispute arising from my enrollment at Everest University…shall be resolved by binding arbitration under the [FAA] conducted by the” AAA; and “any remedy available from a court under the law shall be available in the arbitration.”  Based on these provisions, the federal district court had compelled arbitration, but concluded that the arbitrator should decide whether the case could proceed as a class action in arbitration.  After interpreting the enrollment agreement and the relevant case law, the arbitrator ruled that the students could proceed as a class.  The district court confirmed that award.

The Fifth Circuit reacted like a guard dog, growling protectively about Stolt-Nielsen.  After confirming that the arbitrator (and not the court) had the power to decide whether the claims should proceed as a class in arbitration (based on the parties’ incorporation of the AAA rules, which now include Supplementary Rules clearly authorizing arbitrators to decide whether the arbitration clause permits class arbitration), the court launched into an eight page analysis of the merits of the arbitrator’s decision.  Why is that significant?  Because SCOTUS has said (and the Fifth Circuit even quoted) that “as long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority,” the arbitrator’s decision should be confirmed.  In Reed, the Fifth Circuit implicitly acknowledges that the arbitrator thoughtfully construed the enrollment agreement and the appropriate case law under the FAA, and had the authority to do so.  Even so, the Fifth Circuit vacated the arbitrator’s decision.

The Fifth Circuit held that neither of the contract clauses cited by the arbitrator (and quoted above) could properly be interpreted as allowing class arbitration.  It found the “any dispute” clause only reflects an agreement to arbitrate and is “not a valid contractual basis upon which to conclude that the parties agreed to submit to class arbitration.”  Similarly, it found the “any remedy” clause insufficient because “while a class action may lead to certain types of remedies or relief, a class action is not itself a remedy.”  In sum, said the Fifth, “the arbitrator lacked a contractual basis upon which to conclude that the parties agreed to authorize class arbitration.  At most, the agreement in this case could support a finding that the parties did not preclude class arbitration, but under Stolt-Nielsen this is not enough.”

Toward the end of the opinion, the Fifth Circuit acknowledged that the Second Circuit came to a different conclusion in Jock v. Sterling Jewelers, Inc., 646 F.3d 113 (2d. Cir. 2011).  The Second Circuit’s decision in Jock, confirming an arbitrator’s decision to permit class claims, was fundamentally determined by its understanding of the appropriate standard of review.  The Second Circuit noted that it could not decide whether the arbitrator correctly interpreted the arbitration agreement, but only whether the arbitrator had authority to do so and “whether the agreement or the law categorically prohibited the arbitrator from reaching” its conclusion.  What the Fifth Circuit failed to acknowledge is that the Third Circuit issued a decision just last month, agreeing with the Second Circuit.  See Sutter v. Oxford Health Plans LLC, __ F.3d __, 2012 WL 1088887 (3d Cir. April 3, 2012) (affirming an arbitrator’s decision to allow class arbitration based on an arbitration agreement that never mentioned class actions at all).

My own prediction is that the Supreme Court will not grant an appeal of these decisions, but will leave the circuit courts to try and develop a majority approach to this issue in the coming years.  As long as the existing cases about the deference courts must grant to arbitrators under Section 10 of the FAA remain good law, the approach of the Second and Third Circuits should be persuasive.

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