In Fantastic Sams Franchise Corp. v. FSRO Association Ltd., the U.S. Court of Appeals for the First Circuit held that an arbitrator, rather than a judge, must decide if an arbitration agreement that is silent on class arbitration allows for a dispute to be arbitrated on an individual or class-wide basis.
Fantastic Sams Franchise Corp. involved an association that represented a group of thirty-five Fantastic Sams franchisees, each with a separate franchise agreement, that filed a demand for arbitration against the franchise corporation alleging that the franchise corporation had breached their franchise agreements. All of the agreements called for arbitration. Twenty-five of the agreements expressly barred class arbitration, but the remaining ten did not. Instead, those ten agreements simply provided for arbitration of "[a]ny controversy or claim arising out of or relating in any way to this Agreement or with regard to its formation, interpretation or breach." In response, the franchise corporation filed suit in federal District Court, seeking to stay the arbitration and compel the association's members to arbitrate their claims individually. The District Court agreed with the franchise corporation as to the twenty-five franchisees whose arbitration agreements expressly prohibited class arbitration and compelled them to arbitrate their claims individually but not as to the other ten franchisees, reasoning that whether those agreements required individual arbitration "is a matter of contract interpretation which the parties have agreed to submit to arbitration."
The franchise corporation appealed the District Court's ruling as to the ten franchisees whose agreements were silent as to class arbitration, arguing that the Supreme Court's opinion in Stolt-Nielsen, S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010), required the express consent of the parties before arbitration can proceed on a class basis and, since none of these ten agreements contained such language, they must arbitrate their claims individually.
The First Circuit affirmed the District Court's decision. First, the Court found that while Stolt-Nielsen 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," Stolt-Nielsen did not consider what constituted a "contractual basis" for class arbitration. Second, the First Circuit found that the franchise agreements' "silence" on the issue of whether class arbitration was permissible to be different than the "silence" in Stolt-Nielsen, where the parties had expressly agreed that there was no agreement on the issue of class arbitration. Third, the Court ruled that an arbitrator "could find more than silence … on whether the parties agreed to authorize the type of association action brought by" the association. Finally, the First Circuit noted that Stolt-Nielsen was inapplicable because the association's action was not really a "class action" and, therefore, did not implicate the same concerns with respect to absent parties. Accordingly, the Court concluded, whether the association's claims must be arbitrated on an individual basis should be decided by an arbitrator rather than a court.
Although Fantastic Sams Franchise Corp. did not strictly involve a "class action" since the association did not seek to represent absent parties, employers in the First Circuit whose arbitration agreements do not explicitly address the permissibility of class arbitration should be aware that an arbitrator, rather than a court, may decide the permissibility of class arbitration under those agreements.