First Circuit's New Ruling on Class Arbitration for Franchisees

With less colorful language than its last arbitration opinion, the First Circuit sided with the Second and Third Circuits in limiting the application of the 2010 Stolt-Nielsen decision on the availability of class arbitration. Fantastic Sams Franchise Corp. v. FSRO Assoc. Ltd., __ F.3d __, 2012 WL 2402560 (1st Cir. June 27, 2012).

Decisions from these three circuits suggest that as long as the party seeking a class action can show it did not stipulate that the agreement was "silent" on the availability of class arbitration, the courts (or the arbitrator) will consider arguments based on contractual interpretation and the parties' actions to find the parties' intent.

In Fantastic Sams, a coalition of 35 franchisees demanded arbitration against the franchisor for common violations of their agreements and statutes. Twenty five of the agreements had arbitration clauses that prohibited class arbitration. Ten agreements did not expressly prohibit class arbitration, and broadly provided for arbitration of "any controversy or claim arising out of or relating in any way to this Agreement." The franchisor brought a petition in federal court to compel the coalition members to arbitrate individually, relying on Stolt-Nielsen.

The 25 franchisees whose contracts prohibited class arbitration were compelled to arbitrate individually. But the remaining ten were not. The First Circuit concluded that Stolt-Nielsen was not as broad as the franchisor argued: "We thus reject the very different precept, on which [the franchisor's] argument depends, that there must be express contractual language evincing the parties' intent to permit class or collective arbitration.

Stolt-Nielsen imposes no such constraint on arbitration agreements." The court focused on the fact that the Stolt-Nielsen parties had stipulated that their agreement was "silent" on class arbitration, whereas in this case it was possible the arbitrator could find evidence that the parties did intend to allow class or collective arbitrations. The First Circuit noted its agreement with the Second and Third Circuit decisions on this point, but did not address the recent Fifth Circuit decision coming out in favor of the franchisor's argument.

Furthermore, the First Circuit noted that Stolt-Nielsen did not clearly apply because this coalition of franchisees was not a "class action" and did not have the same issues that SCOTUS noted with class arbitrations. (No absent parties, no certifying a class or providing public notice, etc.)

Finally, the court found that the question of whether the remaining ten franchisees could proceed in a collective arbitration was a decision for the arbitrator, because it characterized that question as a "procedural" one and because the agreements incorporated the AAA Rules, which delegate jurisdictional questions to the arbitrator.

At least one lesson from these cases is: never stipulate your arbitration agreement is silent regarding the availability of class actions! Give the courts some reason to distinguish your facts from the unusual facts in Stolt-Nielsen, if you want any chance of arbitrating as a class.