A decision of the Fifth Circuit US Court of Appeals last week rejected an arbitrator’s award construing an arbitration clause as permitting class arbitration. (Reed v. Florida Metropolitan University, Inc., 2012 WL 1759298 (5th Cir. May 18, 2012). The Court held that the arbitrator exceeded his powers by finding class arbitration permissible under the clause. The decision expressly parts company with recent decisions of federal appellate panels in the Second and Third Circuit that sustained arbitrators’ clause construction awards in favor of class arbitration. Thus in the wake of the Supreme Court’s decisions in the Stolt-Nielsen, Concepcion, and Rent-a-Center cases, there is considerable uncertainty about what is the permissible scope of arbitral authority to interpret an arbitration clause when the claimant seeks to proceed on a class basis.
The Reed case involved a Texas-resident student’s enrollment contract for the distance learning program of a Florida university, and a claim on behalf of a proposed class that the university misrepresented that its degree would be recognized by graduate schools and employers. The arbitration clause provided for arbitration of “any dispute arising from” the student’s enrollment, “no matter how described, pleaded, or styled…” The clause provided further that “any suit filed in violation of the Agreement shall be dismissed by the court in favor of arbitration,” and that “any remedy available from a court under the law shall be available in the arbitration.“
The arbitrator’s Clause Construction Award made pursuant to the AAA Supplementary Rules for Class Arbitration found “an implicit agreement for class arbitration” (in the Fifth Circuit’s words). The district court confirmed the award, finding that the arbitrator made a “reasonable interpretation” of the clause.
But the Fifth Circuit reversed.
The Court found that the arbitrator’s power to find an “implicit” agreement to class arbitration from the contract’s broad language was substantially constrained by the Supreme Court’s Stolt-Nielsen decision — whose essence per this Fifth Circuit panel is that broad arbitration clause language that does not foreclose class arbitration cannot for that reason alone be construed as consent to class arbitration. Therefore the Fifth Circuit considered that the arbitrator could not rely on either the “any dispute” phrase, or the “any remedy available in court” language as a basis to find an agreement to class arbitration. As to the latter, the Court found that it was impermissible for an arbitrator to purport to interpret the word “remedy” in the clause to include class arbitration, as a class action must be regarded as a matter of procedure not remedy.
Whereas the Supreme Court in Stolt-Nielsen relied heavily on the parties’ express stipulation that they had made no agreement about class arbitration, and further stated that “[w]e have no occasion to decide what contractual basis may support a finding that the parties agreed to authorize class arbitration,” courts appear to be in relatively uncharted waters — i.e. they are not so much applying Stolt-Nielsen as extending it — if they find arbitrators to have exceeded their powers by allowing class arbitration when there is no comparable “no agreement” stipulation and the arbitrators purport to be construing the language of the agreement and the law governing the agreement does not bar class arbitration.
The Second Circuit in Jock v. Sterling Jewelers, Inc., 646 F.3d 113 (2d Cir. 2011), whose approach was rejected by the Fifth Circuit in Reed, held that once the parties have clearly placed before the arbitrator the issue of whether they agreed to class arbitration (i.e. there is no Stolt-Nielsen-like stipulation that they did not agree), and the applicable law does not prohibit class arbitration, the arbitrator who purports to interpret the contract acts within her powers if she finds an explicit or implicit agreement for class arbitration. The Third Circuit in Sutter v Oxford Health Plans, 675 F.3d 215 (3d Cir. 2012) (the subject of a recent post on Arbitration Commentaries), cited Sterling Jewelers with approval and took a similar approach: that the arbitrator acts within her powers in ordering class arbitration where the issue of whether the parties agreed is properly before her, she endeavors to interpret the contract “within the bounds of the law,” and the interpretation is not “totally irrational.” The Third Circuit held that the arbitrator was not irrationally construing the contract when he found agreement to have class arbitration in a clause that said: “No civil action concerning any dispute under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration…..“
Perhaps inconsistent judicial decisions are inevitable on an issue that is rooted in a conflict of economic and social philosophy between corporate laissez-faire and consumer protection. The Fifth Circuit is surely on solid ground in making assumptions about the political division underlying the 5-4 vote in the Supreme Court in Stolt-Nielsen. Still, this assessment does not furnish a compelling basis to read Stolt-Nielsen as a mandate to make the degree of deference owed to arbitrators’ class arbitration clause construction awards materially lower than the deference due under federal arbitration law to arbitral contract interpretation in general. Stolt-Nielsen is fundamentally about the hazards of arbitral tribunals saying they are “construing” an arbitration clause, to imply mutual consent to class arbitration, when both parties have already stipulated that there has been no such consent. But when federal courts are motivated by the broader dicta in the Supreme Court’s decisions (especially Concepcion) about the perceived shortcomings of class proceedings in an arbitral setting, to say that certain typical phrases in arbitration clauses cannot rationally be construed as evidence of an implicit agreement to class arbitration, they must recognize that they are in fact saying that less deference is due to an arbitrator’s interpretation of the contract when it pertains to class arbitration than when another issue is at stake.
The Fifth Circuit in Reed, while insisting that a single uniformly high level of deference to arbitral contract interpretation in required by federal arbitration law, appears to be taking the law in the opposite direction.