High Court to Consider Enforceability of Arbitration Clause’s Class Action Waiver in Antitrust Case

This posting was written by William Zale.

In a case involving merchants’ class antitrust claims against American Express, the U.S. Supreme Court has agreed to decide whether the Federal Arbitration Act 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 Court granted the petition for certiorari in American Express Co. v. Italian Colors Restaurant, Dkt. 12-133, on November 9, 2012.

At issue is a decision of the U.S. Court of Appeals in New York holding unenforceable a class action waiver contained in the mandatory arbitration clause of their commercial contracts with American Express, In re American Express Merchants’ Litigation, 667 F.3d 204 (2nd Cir. 2012).

 If the plaintiffs could not pursue their allegations of antitrust law violations as a class, it would be financially impossible for them to seek to vindicate their federal statutory rights, according to the appeals court. American Express thus would have immunized itself against all such antitrust liability by the expedient of including in its contracts of adhesion an arbitration clause that does not permit class arbitration, irrespective of whether or not the provision explicitly prohibits class arbitration, the court observed.

The petition for certiorari appears here.

Franchisor Is Subject to Collective Arbitration with Franchisees, Despite Contract Provision Requiring Individual Arbitrations

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

Despite the inclusion of a provision that arbitration must be conducted “on an individual, not a class-wide, basis” in its franchise agreements, a franchisor of pharmacies and 28 of its franchisees clearly and unmistakably agreed to submit questions of arbitrability to an arbitrator by incorporating the American Arbitration Association’s (AAA’s) Rules into their arbitration agreements, a federal district court in St. Louis has decided.

Thus, the court denied the franchisor’s motion to stay a collective arbitration claim filed by the franchisees and for an order compelling the franchisees to proceed with individual, bi-lateral arbitrations.

An arbitration clause in the parties’ agreements stated that all controversies, disputes, or claims "shall be heard by one arbitrator in accordance with the then current Commercial Arbitration Rules" of the American Arbitration Association (AAA). The clause thus incorporated the AAA’s Rules, the court held. The current version of AAA Rule 7(a) provides arbitrators with the authority to determine their own jurisdiction, and so the parties agreed to submit arbitrability questions to the arbitrator.

The franchisor argued that the arbitration clause also provided that the AAA Rules will apply “except as otherwise provided in this Agreement,” and pointed out that the clause expressly stated that arbitration must be conducted “on an individual, not a class-wide, basis.”

The franchisor contended that as a result of this language, the Rules did not vest in the arbitrator the power to interpret the requirement that the respondents arbitrate on an individual basis. However, there was no exception bearing on the applicability of Section 7(a) of the AAA Rules and, therefore, on the question of whether the parties agreed to submit questions of arbitrability to the arbitrator, the court ruled.

The franchisor’s argument that an arbitrator was without power to determine whether a collective arbitration may be allowed—because the arbitration clause stated that arbitration must be conducted “on an individual, not a class-wide, basis”—was unpersuasive. Whether this provision could be construed to prohibit or permit joinder or collective arbitration was a matter of contract interpretation. It was for the arbitrator to determine whether the clause was properly construed to prohibit or permit collective arbitration, in the court’s view.

The franchisor cited a recent Eighth Circuit case, Green v. Supershuttle Int’l, Inc. (Business Franchise Guide 2010-2011 New Developments Transfer Binder ¶14,673), in which the court enforced a franchisor’s class action waivers. However, Green was distinguishable from this case on several grounds, the court determined. Here, the franchisees sought to enforce the parties’ agreement to have questions of arbitrability resolved by an arbitrator, they did not challenge the class action waiver in the agreements based on state law or otherwise, and they have not filed a class-wide arbitration.

Unlike the plaintiffs’ argument in Green, the franchisees’ argument, that the issue of whether the agreement permitted joint or collective arbitration is for an arbitrator, has not been squarely rejected by the U.S. Supreme Court as a matter of law.

The decision is Medicine Shoppe Int’l, Inc. v. Edlucy, Inc., CCH Business Franchise Guide ¶14,822.

High Court Rules Class Arbitration in Price Fixing Case Was Improper

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

International shipping companies should not be forced to defend in class arbitration customers' price fixing claims where their arbitration clause was “silent” on the class arbitration issue, the U.S. Supreme Court ruled today in a five-to-three decision.

Finding that the arbitration panel erred in imposing class arbitration, the Court said: “instead of identifying and applying a rule of decision derived from the [Federal Arbitration Act] or either maritime or New York law, the arbitration panel imposed its own policy choice and thus exceeded its powers.”

Class Arbitration

A putative class action was brought against the shipping companies after a Department of Justice criminal investigation revealed an illegal price fixing conspiracy in 2003. After it was determined that the parties were required to arbitrate their antitrust dispute, the customers sought class arbitration of their claims. The arbitration panel granted the request but stayed the proceeding to allow the parties to seek judicial review.

The federal district court in New York City vacated the arbitration panel's clause-construction award (2006-2 Trade Cases ¶75,353); however, the federal appellate court subsequently reversed the district court and upheld the award. The federal appellate court held that class arbitration was permissible, even though the arbitration clauses in the underlying maritime agreements did not specifically provide for it (2008-2 Trade Cases ¶76,355).

“[P]arties may specify with whom they choose to arbitrate their disputes,” explained Justice Samuel Anthony Alito, writing for the majority, explained, in reversing the appellate court. The High Court cautioned courts and arbitrators “to give effect to the intent of the parties.”

Agreement Required

It followed that a party may not be compelled under the FAA to submit to class arbitration unless there was a contractual basis for concluding that the party had agreed to do so. In this matter, the parties had stipulated that there was “no agreement” on that issue, the Court noted.

Moreover, an agreement to authorize class arbitration could not be inferred based on the parties' “agreement to arbitrate" because class-action arbitration changed the nature of arbitration, according to the Court.

Dissent

The dissenting opinion, authored by Justice Ruth Bader Ginsburg, argued that the majority was improperly addressing an issue not ripe for judicial review. The dissent contended that,
even if the matter was ripe for judicial review, the Court should have rejected it on the merits. The Court should have affirmed the Second Circuit judgment confirming the arbitrators’ clause-construction decision.

Text of the April 27 decision in Stolt-Nielsen S.A. v. Animalfeeds International Corp., 2010-1 Trade Cases ¶76,982, is posted here on the U.S. Supreme Court website.

High Court Hears Arguments on Class Arbitration in Price Fixing Case

This posting was written by John W. Arden.

The U.S. Supreme Court today heard arguments on whether the Federal Arbitration Act (FAA) permits the imposition of class arbitration when the parties’ agreement is silent on the issue.

The Court is reviewing a decision of the U.S. Court of Appeals in New York City (2008-2 Trade Cases ¶76,355), holding that purchasers of shipping services could proceed with class arbitration of their price fixing claims against four major maritime shipping companies.

The federal appellate court held that class arbitration was permissible, even though arbitration clauses in the underlying maritime agreements did not specifically provide for it.

In their petition for certiorari, the maritime shipping companies argued that Supreme Court review was appropriate in light of a split among the circuits and because the case was free of threshold issues that previously thwarted review of the question.

The companies contended that “the Second Circuit’s decision that class arbitration may be imposed on parties whose arbitration contract does not provide for it cannot be reconciled with [the Supreme] Court’s FAA precedents.” Stolt-Nielsen SA v. Animalfeeds International Corp., Docket No. 08-1198, cert. granted June 15, 2009.

Authority of Arbitrators

Arguing for the shipping companies, Seth P. Waxman pointed out that—unlike courts—arbitrators derive their authority “solely from the consent of the parties to a particular agreement.”

When an agreement reveals no intent to add participants, arbitrators who nevertheless extend the process to hundreds of parties to other contracts “violate the basic principle reflected in the FAA that their authority is created and circumscribed by an agreement,” according to Mr. Waxman.

In a discussion with Justice Breyer, the petitioners' lawyer stated that there were two questions before the Court (1) whether there was a meeting of the minds between the parties on the issue of class arbitration and (2) if there was no meeting of the minds, and the contract was truly silent, whether ordering class arbitration would be permissible under the FAA.

Mr. Waxman answered his own questions—that no meeting of the minds was objectively revealed and therefore the arbitrator exceeded his authority under the FAA in requiring class arbitration. There was no express provision one way or the other, and maritime law governing the contract looks to the custom and practice in the industry, which is to not allow class arbitration.

Contract Interpretation

Speaking on behalf of the purchasers of shipping services, Cornelia T.L. Pillard maintained that the arbitrators only did what they were asked to do—interpret the contract. “They did not impose their own policy judgment,” she said. They relied on the broad language of the agreement and on the fact that “many other arbitrators had read similar language to permit class arbitration.”

By agreeing to arbitrate “any disputes,” the parties gave the arbitrators the authority to use class arbitration, among other procedures, that was appropriate to a particular case, she said.

There was an extensive discussion—between Justice Scalia and Ms. Pillard—about whether the arbitrators in the case agreed to permit class arbitration or simply did not agree to prohibit it. Ms. Pillard maintained that once the arbitrators had “affirmative general authorization” to choose any appropriate procedures, the shippers would have had to show the parties’ intent to preclude class arbitration.

Chief Justice Roberts pointed out that there is a difference “between allowing something and a background rule that requires it if you don’t say anything about it.” Later, he summed up, “So we have to decide, when . . . the contract says nothing about class actions, whether the background rule should be you can go ahead—or the background rule should be, you can’t go ahead.”

Justice Ginsburg opined that if the purchasers win this case and obtain class arbitration, that the shippers would insert “express no-class-action terms” in all their future contracts.

Ms. Pillard agreed, but said “at least it was incumbent on them to do that here if this was something they were so concerned about. . . . “

The 71-page transcript of the oral argument appears here on the U.S. Supreme Court website.

High Court to Consider Class Arbitration in Price Fixing Case, Constructive Nonrenewal under PMPA

This posting was written by Jeffrey May, Editor of CCH Trade Regultion Reporter.

The U.S. Supreme Court on June 15 agreed to take up two important issues facing antitrust and trade regulation practitioners.

In one case, the Court agreed to decide whether the Federal Arbitration Act (FAA) permits the imposition of class arbitration when the parties’ agreement is silent on the issue.

The Court granted a petition filed by international shipping companies seeking review of a decision of the U.S. Court of Appeals in New York City (2008-2 Trade Cases ¶76,355) holding that purchasers of the shipping services could proceed with class arbitration of their price fixing claims against the shipping companies.

The federal appellate court held that class arbitration was permissible, even though the arbitration clauses in the underlying maritime agreements did not specifically provide for it.

The petitioners argued that review was appropriate in light of a split among the circuits on the issue, and because the case was free of threshold issues that previously thwarted review of the question.

Moreover, the petitioners contended that “the Second Circuit’s decision that class arbitration may be imposed on parties whose arbitration contract does not provide for it cannot be reconciled with [the Supreme] Court’s FAA precedents.”

The petition is Stolt-Nielsen SA v. v. Animalfeeds International Corp. Dkt. 08-1198.

On the same day, the Court agreed to review of a decision of the U.S. Court of Appeals in Boston (Business Franchise Guide ¶13,890), rejecting the constructive nonrenewal claims brought by Shell gasoline station operators under the Petroleum Marketing Practices Act (PMPA).

The appellate court held that the PMPA did not support a claim for constructive nonrenewal where a franchisee had signed and continued to operate under the renewal agreement complained of. The Court granted the petition of the franchisees and Shell.

The franchisees asked the Court to consider “the scope of the protections afforded by the PMPA to franchisees who face termination or nonrenewal of their franchise agreements unless they accept onerous contract terms.’’

According to the petitioners—gasoline station operators—the circuits “are fundamentally split over whether a franchisor can lawfully present its franchisees with the Hobson’s choice of accepting unlawful contract terms or risking their livelihoods on a chance that a court will grant a preliminary injunction.”

There is a split between the First and Ninth Circuits on the issue. The franchisees contended that, under the First Circuit decision in Marcoux v. Shell Oil Products Co, LLC, a dealer presented with a questionable lease must either sign the lease and forgo the claim that the lease violates the Act or refuse to sign, receive a notice of termination, and risk the franchise on a chance that a district court will grant injunctive relief.

The franchisees contend that the Ninth Circuit, on the other hand, recognized the Catch -22 situation, and rejected such a requirement on the franchisee. In Pro Sales, Inc. v. Texaco, U.S.A. (Business Franchise Guide ¶8604), the U.S. Court of Appeals in San Francisco rejected a reading of the PMPA that would force a franchisee to choose between accepting an unlawful and coercive contract in order to stay in business or rejecting the contract and going out of business.

The petitions are Mac's Shell Service, Inc. v. Shell Oil Products Co., Dkt. 08-240, and Shell Oil Products Co. v. Mac's Shell Service, Inc., Dkt. 08-372.