Court Watch

In addition to jurisdictional arguments that were quickly dismissed by the court, California Sun argued that: 1) there was no enforceable agreement; 2) any agreement was precluded because of unilateral or mutual mistake; and 3) any agreement should not be enforced based on material breach or unclean hands by the franchisees. To decide whether there was an enforceable agreement, the court considered whether the parties had manifested an intent to be bound and whether the terms were sufficiently definite to be enforced. The court noted that the fact that the agreement was never memorialized in the APA would not prevent enforcement if the terms were sufficiently clear from the e-mails. Importantly, the court held that the e-mails were sufficiently clear to constitute an enforceable agreement, and it found that there was no evidence that the parties believed that the enforceability of the agreement would be contingent on the execution of the APA. It held that because the purchase price had been reduced based on California Sun's complaints, there was no mistake by either party that could preclude the agreement. Finally, it rejected California Sun's allegations of material breach and unclean hands, and it held that the franchisees had not breached the agreement.

Cynthia M. Klaus is a shareholder at Larkin Hoffman in Minneapolis. She can be contacted at [email protected] or 952-896-3392. Meredith A. Bauer is an associate at the firm in Minneapolis. She can be contacted at [email protected] or 952-896-3263.

Supreme Court: Parties Must Explicitly Agree to Class Arbitration

On April 27, 2010, the U.S. Supreme Court issued its decision in the closely watched Stolt-Nielsen S.A. v. AnimalFeeds International Corp. case, in which the Court considered whether to impose class arbitration on parties when the agreed-to arbitration clause is silent on the issue.

The petitioner, Stolt-Nielsen, is a shipping company that charters compartments to customers that desire to ship liquids in smaller quantities. AnimalFeeds, the respondent and a former customer of Stolt-Nielsen, served Stolt-Nielsen with a demand for class arbitration of an antitrust claim, in 2005. AnimalFeeds sought arbitration on behalf of a class of purchasers of parcel tanker transportation services.

The contract between Stolt-Nielsen and AnimalFeeds was a “charter party,” which is one of several standard contracts in the maritime trade. The “charter party” provided for disputes to be arbitrated in New York in front of a three-arbitrator panel, in conformity with the Federal Arbitration Act (“FAA”). The parties agreed to submit the question of whether their arbitration agreement allowed for class arbitration to the panel and stipulated that the arbitration clause was “silent,” and that no agreement had been reached with respect the class arbitration issue. The panel found that the claim was subject to class arbitration, based primarily on the reasoning that the parties did not demonstrate an intent to preclude it.

The district court later vacated the arbitrators' decision as “manifest disregard for the law,” finding that the arbitrators should have conducted a choice-of-law analysis. The Court of Appeals reversed and held that no authority was cited under either applicable law ' federal maritime or New York ' against class arbitration.

The Supreme Court held that the panel exceeded its powers because, instead of identifying the appropriate law, the panel imposed its own policy choice on the parties in favor of class arbitration. In a 5-3 decision, the majority held that the dispute was not subject to class arbitration because the parties did not expressly agree to it.

In reaching its decision, the Court examined the FAA and relied on the fundamental rule that “arbitration is a matter of consent, not coercion.” In elaborating on this principle, the majority wrote that the primary purpose of the FAA is to ensure that the intent of the parties is enforced. As arbitration is consensual in nature, the parties should be free to structure the terms applicable to the arbitration process. Therefore, it follows that parties may specify with whom they choose to arbitrate disputes. As such, parties may not be required to submit to class arbitration unless there is a contractual basis for concluding the parties agreed to do so.

Accordingly, it may not be inferred that a party agrees to class arbitration simply because the party agrees to submit to general arbitration. The opinion describes the differences between arbitration and class arbitration, stating that class arbitration changes the nature of arbitration to such a degree that it cannot be presumed that the parties agreed to class arbitration just by agreeing to submit to arbitration. In the case at hand, the parties' express stipulation meant that they did not consent to submit to class arbitration. The court remanded the case to the Court of Appeals for further consideration.

The dissent argued, first, that the decision of the arbitrators was not ripe for judicial review, and, additionally, that the court did not have the authority to overturn the arbitrators' decision. In making this argument, the dissent reasoned that courts should vacate an arbitration panel's decision only in very unusual circumstances. It took issue with the majority's classification of the panel's decision as a “policy decision,” and instead found that the panel simply interpreted a broad arbitration clause. As argued in the dissent, such an interpretation could not be found to exceed the arbitrators' powers.

The Stolt-Nielsen decision raises a host of issues. For example, when, if ever, may arbitrators find class arbitration to be permissible, absent explicit written consent of the parties? In Stolt-Nielsen, the Court does not go so far as to require express written consent, but it does require contractual evidence that the parties agreed to class arbitration. The Court was able to avoid an analysis on the issue, as the parties had stipulated that no agreement existed. Additionally, the majority stated that the contract was between sophisticated business entities, and thus neglected to provide an analysis regarding contracts of adhesion. Finally, the decision does not reconcile the “manifest disregard” language set forth in previous decisions with the finding in this case that the arbitration panel exceeded its own powers.

Series of e-Mails Between Counsel Can Constitute an Enforceable Settlement Agreement

The question of when an enforceable agreement is reached in settlement negotiations has been the subject of many legal disputes. Although parties normally memorialize their discussions in one executed document, an enforceable settlement agreement can be created long before that time and can be made up of a series of communications. In California Sun Tanning USA, Inc. v. Electric Beach, Inc., Bus. Franchise Guide (CCH) ' 14, 332 (3rd Cir. March 11, 2010), the Third Circuit affirmed a decision enforcing a settlement agreement that consisted of a series of e-mails between lawyers that was never reduced to a document signed by the parties. The appellant, California Sun Tanning USA, is a franchisor of tanning salon businesses. It entered into a franchise agreement in 2003 with Electric Beach, Inc., and its principals, Lee and Staci Carter, who were husband and wife.

In early 2007, Staci Carter reported to California Sun that her husband had used a computer scheme to systematically underreport revenues, which resulted in an underpayment of royalties of approximately $50,000. California Sun commenced a federal district court action, requesting injunctive and declaratory relief under the Lanham Act. It also initiated arbitration against the franchisee parties for damages.

In December 2007 and January 2008, the parties engaged in settlement negotiations through their legal counsel. California Sun proposed that the parties enter into an asset purchase agreement (“APA”), under which it would purchase the franchise. In a January 4, 2008 e-mail following an oral discussion, counsel for the franchisees outlined agreed-upon points, including a purchase price payment of $85,000 to be made by California Sun to purchase the business, mutual general releases, and cooperation in the turnover of the franchise to the franchisor by Jan. 22, 2008. California Sun's attorney responded by e-mail on Jan. 7, 2008, by typing the word “AGREED” next to each point, and also agreed to circulate a draft APA promptly. The next day, counsel for California Sun informed the court by letter that “the parties had agreed in principle to resolve their differences.”

In the following weeks, California Sun assumed complete control of the franchised business and paid the $85,000 purchase price into an escrow account, to be held pending execution of the APA. California Sun was dissatisfied, however, with the condition of the business ' the franchisees had failed to meet certain financial obligations, the facility was in disrepair, and assets and merchandise that were intended to be included in the purchase had been removed. Although they continued to negotiate, the parties never executed the APA.

The franchisees subsequently filed a motion in the Eastern District of Pennsylvania to enforce the settlement agreement, which they alleged consisted of the e-mails between counsel. After an evidentiary hearing, the court found that the e-mails evidenced an enforceable settlement agreement, but it reduced the $85,000 purchase price to $63,983.60, based on California Sun's complaints. California Sun appealed.

In addition to jurisdictional arguments that were quickly dismissed by the court, California Sun argued that: 1) there was no enforceable agreement; 2) any agreement was precluded because of unilateral or mutual mistake; and 3) any agreement should not be enforced based on material breach or unclean hands by the franchisees. To decide whether there was an enforceable agreement, the court considered whether the parties had manifested an intent to be bound and whether the terms were sufficiently definite to be enforced. The court noted that the fact that the agreement was never memorialized in the APA would not prevent enforcement if the terms were sufficiently clear from the e-mails. Importantly, the court held that the e-mails were sufficiently clear to constitute an enforceable agreement, and it found that there was no evidence that the parties believed that the enforceability of the agreement would be contingent on the execution of the APA. It held that because the purchase price had been reduced based on California Sun's complaints, there was no mistake by either party that could preclude the agreement. Finally, it rejected California Sun's allegations of material breach and unclean hands, and it held that the franchisees had not breached the agreement.

Cynthia M. Klaus is a shareholder at Larkin Hoffman in Minneapolis. She can be contacted at [email protected] or 952-896-3392. Meredith A. Bauer is an associate at the firm in Minneapolis. She can be contacted at [email protected] or 952-896-3263.