http://arbitrationnation.com/wp-content/uploads/2012/12/santascalia2.jpgThe big issue in arbitration law in 2012 was class arbitration.  Many state court opinions that had found class arbitration waivers unconscionable were preempted under federal law based on application of Concepcion.  And the federal circuit courts developed a split on how to interpret Stolt-Nielsen in cases where the parties’ arbitration agreement lacks language either allowing or disallowing class arbitrations.  It is no surprise, then, that the Supreme Court (including Santa Scalia, pictured here) accepted two cases relating to class arbitration for review in early 2013.

Fallout from Concepcion

At least five states had their pro-class-arbitration decisions reversed based on application of SCOTUS’ 2011 decision in Concepcion, which held that states could not impermissibly interfere with arbitration when they define what contract clauses are unconscionable. In the past few years, the state courts in California, Washington, Pennsylvania, Missouri and New Jersey had all declared an affinity for allowing class arbitrations, even if the parties’ agreement called exclusively for individual arbitration (California had also said claims for public injunctive relief were not appropriate for arbitration).  In 2012, all that precedent was voided, with Westlaw assigning big red flags to opinions around the country.    The Eleventh Circuit even stopped the Florida Supreme Court before it could impermissibly side with class arbitration.  The rule, articulated nicely by the Third Circuit this summer in Homa, is: “a state law that seeks to impose class arbitration despite a contractual agreement for individualized arbitration is inconsistent with, and therefore preempted by, the FAA.”

Stolt-Nielsen Split

Even if you disagree with Concepcion, you can agree that the decisions applying it are uniform.  That is not true with the decisions applying a 2010 SCOTUS arbitration opinion: Stolt-Nielsen.  In that case, SCOTUS held that arbitrators had exceeded their authority when they concluded that arbitration should proceed on a class-wide basis.  The facts were maddeningly unique, however — the parties had stipulated that their agreement was “silent” as to the availability of class actions and the panel of arbitrators had based their conclusion on public policy rationale, instead of standard gap-filling bases. Those unique facts have led courts to apply Stolt-Nielsen in at least two ways.

The popular way to interpret Stolt-Nielsen is more friendly to class arbitration.  It interprets the case’s message as a reminder to arbitrators everywhere that their job is to enforce the contract, not to be legislators.  Therefore arbitrators may authorize class arbitration as long as either the text of the arbitration agreement or other evidence shows the parties intended to allow class arbitration.   That is the approach the First, Second, and Third Circuits have taken (with opinions from the First and Third Circuits issued in 2012).  This approach is also consistent with the default rule that arbitrators interpret contracts calling for arbitration, and their interpretations are entitled to the highest level of deference.

The second way to interpret Stolt-Nielsen is as a federal presumption against class arbitration, much like the one against arbitrating arbitrability.  Courts will not assume that parties intend to arbitrate issues relating to the validity and scope of the arbitration provision itself without “clear and unmistakable” evidence of that intent (see Rent-a-Center).  Similarly, some courts (and litigants) read Stolt-Nielsen as essentially requiring clear and unmistakable evidence of the parties’ intent to allow class arbitration before an arbitrator may authorize that procedure.  In 2012 the Fifth Circuit, in particular, found that an arbitrator exceeded his authority by concluding that a common arbitration provision showed an intent to allow class arbitration.  (The provision said ““any dispute arising from [the agreement]…shall be resolved by binding arbitration.”)

SCOTUS will likely clarify its position on when class arbitrations are allowed in two cases it will hear in early 2013 (AmEx is set for argument on Feb. 27), so class arbitration is likely to be part of my year-end round up next year as well…

Even if we do not know for certain whether class arbitration will end up on Scalia’s naughty list or his nice list, we do know three courts that received big lumps of coal from SCOTUS in 2012: the West Virginia Supreme Court, Oklahoma Supreme Court, and Second Circuit.  The tone of its opinions vacating decisions of the high courts in West Virginia and Oklahoma was that of a parent washing out a child’s mouth with soap.  The Court seemed disgusted that those two lower courts would defy its authority by refusing to follow federal precedents on arbitration, to say nothing of the cheeky language those courts used to describe federal precedent.  And one has to believe that after remanding the AmEx case once already to the Second Circuit, someone at the Court is banging their head against the wall about hearing that case again.  (How could they not get the hint?!  We wanted them to reverse themselves!)

That’s the beauty of this area of the law, though.  It is changing rapidly, SCOTUS seems passionate about it, and the interplay between the FAA and state contract law is a constant tug of war about federalism and public policy.  I can’t wait to see what’s on Scalia’s naughty list in 2013!

Illustration by Jason Bryan (jason@fivepointsarthouse.com)

Topics:  Arbitration, Arbitration Agreements, Class Action, Class Action Arbitration Waivers, Federal Arbitration Act, Preemption, SCOTUS, Split of Authority, Stolt-Nielsen

Published In: Alternative Dispute Resolution (ADR) Updates, Civil Procedure Updates, General Business Updates, Conflict of Laws Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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