August 16 2012
Recent Supreme Court decisions indicate that unless parties to an arbitration agreement agreed to allow a class arbitration, the parties could not be required to participate in a class arbitration. Although the Supreme Court was seemingly clear on this point, franchisors wondered whether it was still necessary to include a 'no class action' clause in their franchise agreements.
A recent court decision involving a franchisee association underscores the continuing importance of including such clauses in franchise agreements, and of careful drafting of these clauses to encompass various forms of group action.
In Fantastic Sams Franchise Corporation v FSPO Association Ltd, an association of regional owners (ie, area franchisees) of the Fantastic Sams system filed an arbitration with the American Arbitration Association alleging that Fantastic Sams had breached the licence agreement that each member had with it. Fantastic Sams filed a petition in federal court to stay the arbitration and to compel the association's members to arbitrate their claims on an individual basis. Twenty-five of the agreements expressly prohibited class arbitration, stating that "any arbitration between FSFC and [the regional licensee] shall be of [regional licensee's] individual claims only" and "[n]o arbitration shall be conducted on a class-wide basis". Ten of the agreements contained no express prohibition on class or collective arbitration.
Fantastic Sams sought to stay the arbitration, arguing that:
In response, the association argued that the Stolt-Nielsen decision does not require the express consent imposed by Fantastic Sams, and that, in any event, neither that case nor the prohibitions against class-wide arbitration apply to an action by an association which, the association claimed, is different in kind from class arbitration. The association asked the court to submit the dispute to the arbitrators for decision.
District court decision
The district court agreed with Fantastic Sams that the 25 agreements which expressly barred class arbitration and required that arbitration be "of a licensee's individual claim only" precluded the association from proceeding as to those agreements. The association did not appeal that ruling.
However, the district court denied Fantastic Sams' petition to stay the arbitration of the other 10 agreements, on the grounds that the arbitration clause was broad and covered "all controversies or claims arising from or related to the contract", and that the agreements "incorporated by reference the rules of the AAA, which, in turn, provide that the arbitrator shall have the power to rule on his or her own jurisdiction". The district court concluded that whether the 10 agreements preclude the association's action was a matter of contract interpretation, which the parties had agreed to submit to arbitration.
Court of appeals decision
The First Circuit Court of Appeals concluded that Fantastic Sams was reading the Stolt-Nielsen decision too broadly. According to the court of appeals, Stolt-Nielsen held merely that when no agreement at all is reached between the parties as to class arbitration when the agreement is entered into, the courts cannot require the parties involved to participate in a class arbitration.
In reaching this conclusion, the court interpreted the fact that the parties in Stolt-Nielsen had stipulated that this agreement was 'silent' as to class arbitrations, as meaning not merely that the agreement made no express reference to class arbitration, but that "they had not reached any agreement on the issue".(2) The court pointed out that the Supreme Court in its decision had held that class arbitration may not be imposed on a party to an arbitration agreement "unless there is a contractual basis for concluding that the party agreed to" submit to class arbitration.(3) However, the court noted that the Supreme Court in Stolt-Nielsen had no occasion to consider what may constitute a 'contractual basis' for class arbitration, though it acknowledged the general rule that a court or arbitrator tasked with construing an arbitration agreement "must give effect to the contractual rights and expectations of the parties".(4)
The court expressly rejected the concept that "there must be express contractual language evincing the parties' intent to permit class or collective arbitration". Quoting from a Second Circuit Court of Appeals decision, the First Circuit Court of Appeals pointed out that "Stolt-Nielsen does not foreclose the possibility that parties may reach an implicit – rather than express – agreement to authorize class-action arbitration".
The court of appeals also proceeded to suggest that Stolt-Nielsen may not govern this case because it dealt with class-action arbitration which, according to the court, is different in many respects from the associational action in this case.
Considering the American Arbitration Association Rules, which provide for arbitrators to decide questions concerning the scope of their own jurisdiction, the court concluded that it is for the arbitrators to decide whether the parties to the arbitration agreement 'agreed to authorise' the type of associational action involved. In this context, the court noted the "sweeping language" of the arbitration clause, which required arbitration of "any controversy or claim arising out of or in any way to this agreement".
The Fantastic Sams decision should serve as a signal to franchisors not to rely on the Supreme Court's Stolt-Nielsen decision as holding that silence in the agreement will necessarily result in the avoidance of a class or collective action.
Rather, franchisors wishing to select arbitration should include in their franchise agreements an express prohibition on class or collective actions and, to preclude any distinction being made with respect to other forms of actions, the agreement should explicitly preclude any group, consolidated, joint or associational actions or any actions brought in a representative capacity.
Franchisors should also consider whether their franchise agreements provide protection from such related events as:
These are complex and difficult issues and require additional considerations and analysis.
ILO provides online commentaries as specialist Legal Newsletters. Written in collaboration with over 500 of the world's leading experts and covering more than 100 jurisdictions, it delivers individually requested information via email to an influential global audience of law firm partners and international corporate counsel. Please click here to register for the service.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription. Register at www.iloinfo.com.