After the Supreme Court’s 2010-2011 term, businesses generally were pleased with the development of class action law. During the previous term, the Court had held that an arbitration may not proceed as a class arbitration unless both parties agreed to do so. Stolt-Nielsen S.A. v. AnimalFeeds Int’l. Corp., ___ U.S. ___, 130 S.Ct. 1758 (2010). Such an agreement could not be inferred from silence and could not be based on public policy considerations. Rather, a class arbitration cannot be held without proof the parties “agreed to authorize class arbitration.” Id. at 1776.
This holding was reiterated in AT&T Mobility LLC v. Concepcion, ___ U.S. ___, 131 S.Ct. 1740 (2011), which barred enforcement of California’s rule holding contractual prohibitions on class arbitration to be unconscionable in certain contracts of adhesion. The Supreme Court noted that it is “hard to believe” that defendants ever would agree to class arbitration and thereby “bet the company with no effective means of review.” Id. at 1752.
After those two cases, it appeared businesses were immune from class arbitration if they had not expressly agreed to it. Of course, those holdings could be of scant value to insurers in states that prohibit the enforcement of arbitration clauses in insurance contracts. See Ga. Code Ann. § 9-9-2(c); Miss. Code Ann. § 83-11-109 (uninsured motorist coverage); Neb. Rev. St. § 25-2602.01; S.C. Code Ann. § 15-48-10; Ark. Code Ann. § 16-108-230; Nev. Rev. St. § 689B.067 (group health insurance). The majority of decisions uphold insurance-specific restrictions on arbitrability based upon the McCarran-Ferguson Act, which allows state law to control the insurance industry unless Congress expressly provides otherwise. See Am. Bankers Ins. Co. of Fla. v. Inman, 436 F.3d. 490 (5th Cir. 2006); McKnight v. Chicago Title Ins. Co., 358 F.3d 854 (11th Cir. 2004). But at least one recent decision questions whether such statutes reverse or preempt the Federal Arbitration Act (“FAA”). See Bixler v. Next Fin. Group, Inc., 858 F. Supp.2d 1136, (D. Mont. March 14, 2012) (state statute barring forced arbitration of insurance contracts does not preempt FAA).
Apparently, even non-insurers celebrated Stolt-Nielsen too early. Over the last year, several decisions have inferred a business’s agreement to class arbitration where the agreement facially was silent. In some cases, the inference was quite flimsy. In Jock v. Sterling Jewelers, Inc., 646 F.3d 113 (2nd Cir. 2011), an arbitrator’s decision to hold a class arbitration was upheld, because it “cannot be construed to prohibit class arbitration” and there was “no mention of class claims.” The Second Circuit held that only two judicial questions were presented. The first is whether the question of class arbitrability properly was referred to the arbitrator and “whether the agreement or the law categorically prohibited the arbitrator from reaching” the issue of class arbitrability. Jock, 646 F.3d at 123.
The Third Circuit agreed with the Jock decision. In Sutter v. Oxford Health Plans, LLC, 675 F.3d 215 (3rd Cir. Apr. 4, 2012), the Court affirmed an arbitrator’s class arbitration award, finding that an agreement to allow class arbitration need not be express. The arbitrator had inferred authorization for class arbitration from the following arbitration clause:
No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration in New Jersey, pursuant to the Rules of the American Arbitration Association with one arbitrator.
Id. at 223.
As is evident, nothing in that arbitration clause refers to class arbitration. Instead, the arbitrator inferred an intent to allow a class arbitration because, otherwise, a class proceeding could not be brought in any forum. Of course, avoiding a class adjudication in any forum was part of the business’ objectives in choosing arbitration.
More recently, in Fantastic Sam’s Franchise Corp. v. FSRO Ass’n. Ltd., 683 F.3d 18 (1st Cir. June 27, 2012), the court held that an agreement to class arbitration could be inferred from the broad scope of the arbitration clause and a change in the franchise agreement form to remove a prohibition on class arbitration. Several district courts have addressed the issue and have followed the Second and Third Circuits. See, e.g., Southern Commc’ns Servs., Inc. v. Thomas, 829 F. Supp.2d 1324, 1340 (N.D. Ga. 2011), appeal pending, No. 11-15587 (11th Cir.); Amerix Corp. v. Jones, No. 11-2844, 2012 WL 141150, at *6 (D. Md. Jan. 17, 2012); Louisiana Healthcare Serv. Indem. Co. v. Gambro A.B., 756 F. Supp.2d 760, 768 (W.D. La. 2010); Smith & Wollensky Restaurant Group Inc. v. Passow, 831 F. Supp.2d 390 (D. Mass. 2011).
Going the other way is the Fifth Circuit’s decision in Reed v. Florida Metropolitan Univ., Inc., 681 F.3d 630 (5th Cir. May 18, 2012). That court expressly rejected the Jock and Sutter decisions, holding that the arbitrator must have a contractual basis to hold a class arbitration, and a combination of a broad arbitration clause and the absence of an express prohibition cannot authorize a class arbitration.
The losers in Sutter have petitioned the Supreme Court to review the Third Circuit’s decision. Oxford Health Plans v. Sutter, U.S. Supreme Court, Case No. 12-135. The Supreme Court has not yet decided whether to hear the case.
Unless and until the Supreme Court rules otherwise, businesses should draw three lessons from these lines of cases. First, be careful in referring questions of arbitrability to the arbitrator. Second, be careful in drafting an arbitration clause to incorporate rules of various organizations or the arbitration laws of a particular state. A business should ensure that incorporated arbitration rules or state law do not authorize class arbitrations. Third, to avoid a flimsy inference from an anti-arbitration court, the prohibition on class arbitration must be express and coextensive with the arbitration clause itself.
