Preview Of SCOTUS’s 2013 Double-Feature On Class Arbitration

by Stinson Leonard Street - Arbitration Nation

[author: Liz Kramer]

Just last Friday, the Supreme Court agreed to review a second circuit court case that allowed a class action to proceed, despite arguments that the arbitration clause precluded any collective actions.  The granting of these petitions is a fitting way to end a year in which there has been considerable discussion about how to apply Stolt-Nielsen, Concepcion, and other precedent in the context of claims by a group (or defined class) of plaintiffs.  Here is a preview of what is at issue, and at stake, in this arbitration double-feature.


Summary: The Third Circuit affirmed an arbitrator’s decision to allow doctors’ claims against a health plan to proceed on a class basis.  The arbitrator had analyzed the text of the broad arbitration agreement at issue, which lacked any explicit language about whether class actions were authorized, and concluded the parties intended to allow class arbitration.  The Third Circuit said this did not amount to “exceed[ing] [his] powers” within the meaning of Section 10(a)(4) of the FAA.  The Third Circuit refused to vacate the award largely because the arbitrator made a rational attempt to interpret the parties’ arbitration agreement and that attempt is entitled to great deference by the courts.

Issue:  The Petitioner argued for review of this case based on the difference in how the circuit courts have interpreted Stolt-Nielsen (with some seeming to require explicit consent within the arbitration clause for any collective action to proceed in arbitration, but the majority noting that as long as the arbitration clause does not prohibit class arbitration, the arbitrator should use general contract interpretation principles to discern the parties’ intent regarding class actions).  It noted that “at least seven cases on this issue have reached the courts of appeals in just the last two years.”

The parties’ framing of the “question presented” reflect the different legal lenses through which the Court could view this case.  The Petitioner framed the question presented as: “Whether a contract provision requiring arbitration rather than litigation of any dispute, without more, can be a sufficient ‘contractual basis [to] support a finding that the parties agreed to authorize class-action arbitration,’” quoting from Stolt-Nielsen.  The Respondent framed the question very differently, following the Third Circuit’s lead: “Did the arbitrator exceed his powers under the [FAA] when he interpreted the atypical terms of the agreement in this case to authorize the arbitration of class claims?”

If this case were simply about the appropriate deference that courts should grant arbitrators, SCOTUS would not have granted review.  In my mind then, the relevant issue is how does SCOTUS plan to clarify its ruling in Stolt-Nielsen?  Possible options include indicating that:

  1. Stolt-Nielsen was unique, because the parties had stipulated that the arbitration provision was “silent” regarding class arbitration and the arbitrators applied their own policy judgments. The point is that arbitrators should try and determine the parties’ intent; this outcome would affirm the approach of the First, Second and Third Circuits ;
  2. Broad arbitration clauses, like the one at issue in Sutter, cannot reasonably be interpreted to authorize class arbitration; or
  3. As a matter of substantive federal law, class arbitration is precluded unless the arbitration clause explicitly allows it.

I don’t see a clear path that SCOTUS could take to reach conclusion 2 or 3, however, because contract interpretation is a matter of state law and the deference granted to an arbitrator’s decision on the merits is so great.  Of course, Justice Scalia could always surprise me. . .

Two groups already have permission to file amici — the Chamber of Commerce and DRI (“The Voice of the Defense Bar”).  They are firmly in favor of outcome 2 or 3 above.


Summary: The case is called “Amex III” because the Second Circuit has issued three opinions in the dispute, two after remand from SCOTUS to consider the impact of first Stolt-Nielsen and then Concepcion.  The Second Circuit never changed its holding — it concluded that the parties’ clause prohibiting class arbitration was unenforceable.  The Second Circuit said that antitrust claims like those of these plaintiffs are so expensive to prosecute that it would never be rational for any individual claimant to bring them, therefore denying class actions would effectively preclude the plaintiffs from vindicating their rights under antitrust laws.  The Second Circuit grounded its decision in Green Tree Financial Corp-Ala. v. Randolph, 531 U.S. 79 (2000), and the strong expert testimony the plaintiffs presented with respect to the viability of individual suits.  (However, the language at issue in Green Tree is a pretty thin reed upon which to rest such a significant decision.)

Issue: The petitioner in this case framed the issue as: “Whether the [FAA] permits courts, invoking the “federal substantive law of arbitrability,” to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.”  The respondent has a different view of the issue: “[W]hether an arbitration clause should be enforced when there is no dispute that a litigant has shown it would be unable to effectively vindicate its federal statutory rights in the arbitral forum.”

In my view, the real issue here is will SCOTUS acknowledge any expense-based exception to its arbitration precedent.  It could conceivably say that: 1) economic realities of litigation are never a sufficient reason to invalidate an arbitration agreement (if Congress wants to preclude arbitration, it can do that in the statutes); or 2) more narrowly, it could say that there is no federal substantive rule that arbitration can only proceed if it is economically viable, and leave any review of state-based arguments for another time.  In either case, this decision is likely to be reversed.

Four outside groups have already weighed in on this issue — the New England Legal Foundation (“protecting the free enterprise system”), Chamber of Commerce, DRI, and a group of “senior legal officers for public companies” — all of whom advocate for reversing AmexIII.  The amici worry about an exception that could swallow the rule, and present the situation in the most dire of terms — DRI, for example, argues that AmexIII affects the enforceability of millions of arbitration agreements and “substantially undermines” the federal right to enforce arbitration agreements.

No matter how SCOTUS decides Sutter, corporations are likely to continue drafting arbitration agreements that explicitly exclude class arbitrations.  If those are strictly enforced (without any state law exceptions, see Concepcion), then we must acknowledge that our justice system is writing off a significant amount of smaller cases that cannot effectively be arbitrated on an individual basis, like those at issue in Amex III.  Some of those cases may even have significant public value.  Yet we are not likely to see amici briefs in favor of making sure claims with small dollar values have a cost-effective way of being arbitrated.

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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