Arbitration - USA
Federal appeals court allows class proceedings in arbitration
Authors
Contributed by K&L Gates
JP Duffy
September 05 2013
Background
Class arbitration in the United States
Oxford Health and class arbitration
Italian Colors and class arbitration
Comment
In Southern Communications Services, Inc v Thomas(1) the US Court of Appeals for the
Eleventh Circuit recently confirmed an arbitral award that permitted class arbitration
where the arbitration clause was silent as to the permissibility of class arbitration.
Southern Communications is significant for international arbitration practitioners
because it demonstrates not only the deference that US courts will accord to arbitral
awards, but the ongoing need to exclude expressly class arbitration within the
arbitration clause itself if parties wish to avoid it.
Molly E Nixon-Graf
Background
Southern Communications concerned a dispute over early termination fees paid by a
consumer to a wireless communications provider. In the underlying arbitration, which
was administered by the American Arbitration Association, the claimant sought an
award declaring that early termination fees that he had paid to the respondent were
unlawful under both Georgia state law and US federal law.(2)
The claimant filed the arbitration with the association "on behalf of himself and a
nationwide class of consumers" and therefore sought class arbitration.(3) Notably, the
arbitration clause pursuant to which the arbitration was commenced was silent on the
issue of class arbitration.
After the pleadings were exchanged, the claimant applied, pursuant to Rule 3 of the
American Arbitration Association's Supplementary Rules for Class Arbitrations, for an
award declaring that the arbitration clause permitted class arbitration.(4) After reviewing
the arbitration clause the arbitrator issued a partial final award, which concluded that
class arbitration was appropriate because:
l
the arbitration clause did not specifically bar class arbitration;
l
Georgia state law "permit[s]–and even favors–[class action] when individual class
member[s'] claims are meager" such that class treatment would be the only viable
way to permit class members to "vindicate their rights"; and
l
class treatment would provide "an efficient mechanism for dispute resolution".(5)
After issuing the clause construction award, the arbitrator issued a second award
certifying a class.
After receiving those awards, the respondent commenced an action in a federal district
court to vacate both, pursuant to Section 10(a)(4) of the Federal Arbitration Act.(6) The
federal district court rejected the respondent's application to vacate the awards on the
basis that an "incorrect legal conclusion is not grounds for vacating or modifying an
award".(7)
The respondent appealed the district court's ruling to the Eleventh Circuit, which also
refused to vacate the awards on grounds that the arbitrator "did not 'stray from his
delegated task of interpreting a contract'", when he determined that the arbitration
clause in question permitted class arbitration.(8) Consequently, both courts held that
the arbitrator was free to interpret the clause to permit class arbitration, even though it
was silent on the issue.
Class arbitration in the United States
In recent years class arbitration has garnered significant attention from the US
Supreme Court, starting with its 2010 decision in Stolt-Nielson v Animal Feeds.(9) In
Stolt-Nielsen the Supreme Court vacated an arbitral award that permitted class
arbitration in the face of a clause that was silent on the issue because "a party may not
be compelled under the act to submit to class arbitration unless there is a contractual
basis for concluding that the party agreed to do so".(10)
Shortly after it issued the Stolt-Nielson decision, the Supreme Court vacated a ruling
from the Second Circuit Court of Appeals in In re American Express Merchants
Litigation. In American Express the Second Circuit had refused to enforce class
arbitration waiver provisions found in American Express's card acceptance
agreements, and the Supreme Court directed the Second Circuit to reconsider its ruling
in light of Stolt-Nielsen.(11) By vacating the Second Circuit's decision in American
Express, the Supreme Court signalled that class arbitration waivers were enforceable
and that parties could avoid class arbitration simply by including one in an arbitration
clause.
Following those decisions the Supreme Court ruled in AT&T Mobility LLC v Concepcion
in 2011 that the Federal Arbitration Act preempted a California state law which
prohibited class arbitration waivers in certain consumer contracts.(12) The Concepcion
ruling further indicated that parties could avoid class arbitration simply by excluding it
within the arbitration clause.
In the wake of these three rulings, numerous practitioners believed that class
arbitration had become a dying issue. However, the Supreme Court recently
resurrected the matter with its June 2013 ruling in Oxford Health v Sutter.(13)
Oxford Health and class arbitration
In Oxford Health a claimant physician commenced arbitration before the American
Arbitration Association against an insurance company, alleging that the insurance
company had failed to provide prompt reimbursement to doctors who had treated
patients insured by Oxford Health. The doctor sought to have the arbitration proceed on
a class basis.
After reviewing the arbitration clause, which was ostensibly silent on the question of
class arbitration, the arbitrator ruled that "on its face, the arbitration clause… expresses
the parties' intent that class arbitration can be maintained".(14) The arbitrator therefore
permitted class arbitration to proceed.
Following the issuance of that award, the insurance company moved in a federal district
court to vacate the award under Section 10(a)(4) of the act, which was denied. A federal
appellate court subsequently affirmed the lower court's decision, which permitted the
arbitral award to stand. The insurance company then petitioned the Supreme Court to
take up the issue.
After reviewing the arbitral award and the lower court decisions, the Supreme Court
rejected the insurance company's challenge on grounds that the arbitrator was free to
interpret the contract as he saw fit, and the arbitrator had discharged that duty. The
Supreme Court therefore concluded that Section 10(a)(4) does not permit courts to
vacate an award simply because they do not agree with the arbitrator's contractual
interpretation. Consequently, Oxford Health reaffirmed the high degree of deference to
which arbitral awards are entitled in the United States and confirmed that the
"arbitrator's construction [of a contract] holds, however good, bad or ugly".(15)
Italian Colors and class arbitration
Ten days after it issued the Oxford Health decision, the Supreme Court again affirmed
the sanctity of class arbitration waivers in American Express Co v Italian Colors
Restaurant.(16) In Italian Colors, which was a continuation of the issue first addressed
by the Supreme Court in the 2010 American Express decision, the Supreme Court
again reversed the Second Circuit and required it to enforce the class arbitration waiver
included in American Express's card agreement. In reaching that conclusion, the
Supreme Court reiterated the act's mandate that arbitration agreements be enforced
according to their terms, including any class arbitration waivers.
Comment
The Eleventh Circuit's decision in Southern Communications, which expressly relied on
the Supreme Court's Oxford Health ruling, demonstrates the "extraordinary deference
with which arbitral decisions are treated" by US courts, as well as the continuing trend
towards minimising the grounds on which arbitral awards may be challenged. In short,
Southern Communications is further evidence of the pro-arbitration stance that US
courts have increasingly demonstrated in recent years (for further information please
see "Supreme Court reaffirms pro-arbitration stance").
Southern Communications further highlights the need to include express class
arbitration waivers in arbitration clauses if parties wish to exclude that possibility. As
Italian Colors and Oxford Health collectively instruct, class arbitration waivers are
enforceable, but clauses silent about class arbitration can be successfully interpreted
to permit the practice.
Class arbitration continues to be an evolving issue in US courts. International
arbitration practitioners should closely follow developments in this area to ensure that
clauses accurately reflect the most current developments.
For further information on this topic please contact JP Duffy or Molly E Nixon-Graf at K&L
Gates by telephone (+1 212 536 3900), fax (+1 212 536 3901) or email (
JP.Duffy@klgates.com or molly.nixon-graf@klgates.com).
Endnotes
(1)
No 11-15587, 2013 WL 3481467 (11th Cir July 12 2013).
(2) 47 USC § 201(b).
(3)
2013 WL 3481467, at *2.
(4)
In relevant part, Rule 3 provides that:
"[u]pon appointment, the arbitrator shall determine as a threshold matter, in a
reasoned, partial final award on the construction of the arbitration clause,
whether the applicable arbitration clause permits the arbitration to proceed on
behalf of or against a class (the clause construction award)."
(5)
2013 WL 3481467, at *2.
Section 10(a)(4) permits courts to vacate an award "where the arbitrators exceeded
their powers, or so imperfectly executed them that a mutual, final, and definite award
upon the subject matter submitted was not made".
(6)
(7)
2013 WL 3481467, at *3.
(8)
Id at *6 (quoting Oxford Health).
(9)
130 S Ct 1758 (2010).
(10)
Id at 1775.
(11)
130 S Ct 2401 (2010).
(12)
131 S Ct 1740 (2011).
(13)
133 S Ct 2064 (2013).
(14)
Id at 2067.
(15)
Id at 2072.
(16)
133 S Ct 2304 (2013).
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