Court Watch

In Oxford Health, a physician for' Oxford filed a class action in state court. Oxford moved to compel arbitration, and the motion was granted. Important to the Supreme Court's holding was the parties' stipulation that the arbitrator should determine whether the contract authorized class arbitration. The arbitrator construed and interpreted the contract, and found it did authorize class actions. Oxford then went to federal court and brought a motion to vacate the award on the ground that it exceeded the arbitrator's powers. The district court denied the motion, and this was affirmed on appeal. While the arbitration was proceeding, the Supreme Court handed down its decision in Stolt-Nielsen. The parties in Stolt-Nielsen stipulated that they had not agreed to class arbitration, and the Supreme Court vacated the arbitrators' decision approving class procedures as exceeding the arbitrators' authority because the arbitrators never interpreted the agreement but simply imposed their own brand of social policy.

In Oxford Health, Oxfordasked the arbitrator to reconsider his decision based on Stolt-Nielsen, and he did so, finding it had no impact because the parties in Oxford Health had agreed that class arbitration could be maintained. Since the parties had so agreed, the only issue before the Supreme Court was whether the arbitrator's interpretation could be vacated on the ground it exceeded his powers. In order to successfully do so, it had to be shown that the arbitrator failed to interpret the contract, but simply imposed his own notions of economic justice — a very difficult thing to show. It did not matter whether his interpretation was right or wrong, so Oxford lost.

The case is not remarkable when viewed in the context set out above: A stipulation to grant an arbitrator the power to interpret whether a provision allows for class arbitration. So long as the arbitrator actually takes steps to interpret the provision, his or her decision cannot be vacated, period. The arbitrator arrived at his decision in Oxford Health by interpreting the contract as requiring arbitration of all disputes that a court could decide, which included class actions. Had the parties not stipulated that the arbitrator could decide the issue, what would have happened on Oxford's motion to compel arbitration?

Oxford Health left open the question of 'who' decides whether an arbitration provision encompasses class claims — the arbitrator or court. The Court noted in a footnote that it is still an open question whether a determination of class claims is a gateway issue for a court to decide, stating, 'Stolt-Nielsen made clear that this Court has not yet decided whether the availability of class action arbitration is a question of arbitrability.' Oxford Health, supra, at FN 2. If it were, like the issue of whether there is a valid arbitration agreement, a court could decide the issue de novo unless it determined that it clearly appeared that the parties also wanted the arbitrator to decide that issue. That same footnote also gave as an example of a matter for a court to decide, 'Whether a concededly binding arbitration clause applies to a certain type of controversy,' citing Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 452 (2003). That phrase could cover decisions on whether a class action is covered, although it is arguable that the Court was referring to questions of substance, like whether patent disputes are covered. Green Tree cited AT & T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649 (1986), which involved whether a labor-management layoff controversy falls within the scope of an arbitration clause. That is certainly a controversy that involves substantive, as opposed to, procedural issues. Class action issues are procedural in nature, so it is quite possible a court will hold that such determinations are for an arbitrator.

On the other hand, there may be reluctance on the part of a court to defer all class issues to an arbitrator. In Keating v. Superior Court, 645 P.2d 1192 (1982), revd' on other grounds, Southland Corp. v. Keating, 465 U.S. 1 (1984), the California Supreme Court found that a class action could be arbitrated, but suggested that the court would still have to play a role in both the certification process and to insure that the rights of absent class members were adequately protected. Id. at 1211. Nevertheless, if class action issues are not determined to be gateway issues for the court alone to decide, the likely result is that the case will be ordered to arbitration as a class action, with the court reserving jurisdiction to supervise the matter to insure that the rights of absent class members are protected.

The 'who decides' issue usually comes up when a class action is filed in court and the defending party moves to compel arbitration. The arbitration provision may have a prohibition against class actions or may be worded similarly to that in Oxford Health (i.e., an 'all disputes' clause). Most defendants would prefer to have the court make the determination on arbitrability. One way to attempt to accomplish this objective is to move to compel arbitration on an individual basis and hope the Court takes up the issue.

Bearing in mind Stolt-Nielsen's requirement that an arbitrator can only arbitrate class claims if the parties specifically agreed, can a court decide that a case having' a class action prohibition/waiver or not specifically allowing class arbitration can only be sent to arbitration on an individual basis? If this is treated as a gateway issue, a court should be able to order the case to proceed only on an individual basis where there is a clear class action waiver/prohibition. However, where the agreement is silent, it is likely a court will order the matter into arbitration, allowing the arbitrator to decide if he or she has the power to maintain class arbitration. This would not be inconsistent with Stolt-Nielsen, because the arbitrator is simply determining whether the parties intended to preclude or allow a class action in arbitration. If the arbitrator decides that class actions were intended, he or she has not acted contrary to Stolt-Nielsen. If the arbitrator determines that the parties intended to preclude class actions, he or she would also be acting consistent with Stolt-Nielsen in that class arbitration would not occur since the parties did not agree to it. It is also still possible that the Supreme Court will determine that arbitrability of class claims is not a gateway issue and will allow courts to simply order the matter into arbitration, leaving for the arbitrator the determination of whether it proceeds as a class action.

Recent Attempt to Revive Laxmi v. Golf USA Fizzles

Even though Laxmi' Investments LLC v. Golf USA, 193 F.3d 1095 (9^th Cir. 1999) was decided almost 15 years ago, and the California Department of Corporations took steps to remedy the problem caused by the case, it is still relied upon by franchisees in attempts to avoid the impact of forum-selection clauses in arbitration agreements that pre-date it. Laxmi held that'the parties had not agreed to arbitrate disputes because of language required by the Department of Corporations to be contained in the Franchise Offering Circular at the time. If the franchise agreement required arbitration of disputes, the Franchise Offering Circular was required to state that it may not be enforceable (due in large part to various decisions striking down such provisions on the ground of unconscionability, inter alia).”

In Laxmi, the arbitration clause required that the arbitration be held in Oklahoma. The franchisee filed a demand for arbitration, requesting that the arbitration be held in California, based on the California Franchise Relations Act, which voided provisions requiring litigation to be filed in other states. The American Arbitration Association declined to interpret the statute and ruled that the arbitration should take place in Oklahoma as the parties agreed. The franchisee then filed a lawsuit in California, and the franchisor removed it and moved to transfer venue to Oklahoma. The franchisee relied on the California Franchise Relations Act (specifically section 20040.5 of the Business & Professions Code) in opposing the motion, and the franchisor argued that the statute was preempted by the Federal Arbitration Act because the parties had agreed that arbitration should be held in Oklahoma, and the FAA's preemptive effect was to enforce the agreement of the parties. The preemption argument failed because the court found that there was no agreement or meeting of the minds on where the arbitration was to take place, due to the language required by the Department of Corporations that indicated the provision may not be enforceable.

In the recent case of Maaco Franchising, Inc. v Tainter, 2013 U.S. Dist. Lexis 80790 (E.D.Pa. June 6, 2013), the situation was reversed. The franchisor filed suit against a California franchisee in Pennsylvania federal court, where the franchisor maintained part of its corporate headquarters. The franchisee moved to transfer the case to California, based upon the Franchise Relations Act and general principles of inconvenience. The franchisee also relied on Laxmi. The district court distinguished Laxmi on several grounds. It noted first that the language relied on by the franchisee in Laxmi ('may not be enforceable') to show no agreement was reached was contained, as in the Maaco case, in the Franchise Offering Circular, which was not a part of the franchise agreement, which had an integration clause. Accordingly, the court looked only to the franchise agreement, which was clear on arbitration and venue. The integration clause, assuming there was one in the Golf USA agreement, was never mentioned in the Laxmi opinion.

The court in Maaco gave short shrift to the franchisee's argument that the Franchise Relations Act evidenced the strong public policy of California that voided such clauses. Choice of law was not even at issue since Pennsylvania law was to apply. More important, the fact that California had a strong public policy that voided forum-selection clauses was irrelevant to a case brought in another jurisdiction. In that situation, the provision must offend the law of that jurisdiction for it not to be enforced. Pennsylvania law supported forum-selection clauses. The franchisee's convenience arguments fizzled largely because the franchisor had offices in Pennsylvania.

The lesson of this case is that in those rare situations where Laxmi could apply, the franchisor should try and get the jump on the franchisee by filing first in the selected forum.'

'

Charles G. Miller is a shareholder and a director at Bartko, Zankel, Tarrant & Miller in San Francisco. He can be reached at 415.956.1900 or [email protected].

U.S. Supreme Court Upholds Arbitrator's Determination of Authority to Determine Class Issues

'In Oxford Health Plans LLC v. Sutter ___ U.S. ___, 2013 WL 2459522 (June 10, 2013), the U.S. Supreme Court attempted 'to clarify its decision in Stolt-Nielsen S.A. v. Animal Feeds Int'l Corp., 559 U.S. 662 (2010), which held that arbitrators may employ class procedures only if the parties authorized them to do so. The arbitration provision in Oxford Health Plans did not specifically allow or disallow an arbitrator to consider class clams. It simply contained an 'all disputes' clause, found in many standard arbitration agreements, worded as follows: 'No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration in New Jersey, pursuant to the rules of the American Arbitration Association with one arbitrator.'

On its face, that provision does not appear to authorize class claims. A court's decision, following Stolt-Nielsen, to refuse to order the class action into arbitration might appear correct. Both Justices Alioto and Thomas, in a concurring opinion, agreed that if they were acting on a clean slate, they would have held that the arbitrator was not authorized to determine class issues. However, the parties complicated matters in Oxford Health by stipulating that the arbitrator could decide class issues. Had they not done so, the case may have come out differently.

In Oxford Health, a physician for' Oxford filed a class action in state court. Oxford moved to compel arbitration, and the motion was granted. Important to the Supreme Court's holding was the parties' stipulation that the arbitrator should determine whether the contract authorized class arbitration. The arbitrator construed and interpreted the contract, and found it did authorize class actions. Oxford then went to federal court and brought a motion to vacate the award on the ground that it exceeded the arbitrator's powers. The district court denied the motion, and this was affirmed on appeal. While the arbitration was proceeding, the Supreme Court handed down its decision in Stolt-Nielsen. The parties in Stolt-Nielsen stipulated that they had not agreed to class arbitration, and the Supreme Court vacated the arbitrators' decision approving class procedures as exceeding the arbitrators' authority because the arbitrators never interpreted the agreement but simply imposed their own brand of social policy.

In Oxford Health, Oxfordasked the arbitrator to reconsider his decision based on Stolt-Nielsen, and he did so, finding it had no impact because the parties in Oxford Health had agreed that class arbitration could be maintained. Since the parties had so agreed, the only issue before the Supreme Court was whether the arbitrator's interpretation could be vacated on the ground it exceeded his powers. In order to successfully do so, it had to be shown that the arbitrator failed to interpret the contract, but simply imposed his own notions of economic justice — a very difficult thing to show. It did not matter whether his interpretation was right or wrong, so Oxford lost.

The case is not remarkable when viewed in the context set out above: A stipulation to grant an arbitrator the power to interpret whether a provision allows for class arbitration. So long as the arbitrator actually takes steps to interpret the provision, his or her decision cannot be vacated, period. The arbitrator arrived at his decision in Oxford Health by interpreting the contract as requiring arbitration of all disputes that a court could decide, which included class actions. Had the parties not stipulated that the arbitrator could decide the issue, what would have happened on Oxford's motion to compel arbitration?

Oxford Health left open the question of 'who' decides whether an arbitration provision encompasses class claims — the arbitrator or court. The Court noted in a footnote that it is still an open question whether a determination of class claims is a gateway issue for a court to decide, stating, 'Stolt-Nielsen made clear that this Court has not yet decided whether the availability of class action arbitration is a question of arbitrability.' Oxford Health, supra, at FN 2. If it were, like the issue of whether there is a valid arbitration agreement, a court could decide the issue de novo unless it determined that it clearly appeared that the parties also wanted the arbitrator to decide that issue. That same footnote also gave as an example of a matter for a court to decide, 'Whether a concededly binding arbitration clause applies to a certain type of controversy,' citing Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 452 (2003). That phrase could cover decisions on whether a class action is covered, although it is arguable that the Court was referring to questions of substance, like whether patent disputes are covered. Green Tree cited AT & T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649 (1986) , which involved whether a labor-management layoff controversy falls within the scope of an arbitration clause. That is certainly a controversy that involves substantive, as opposed to, procedural issues. Class action issues are procedural in nature, so it is quite possible a court will hold that such determinations are for an arbitrator.

On the other hand, there may be reluctance on the part of a court to defer all class issues to an arbitrator. In Keating v. Superior Court , 645 P.2d 1192 (1982), revd' on other grounds, Southland Corp. v. Keating, 465 U.S. 1 (1984), the California Supreme Court found that a class action could be arbitrated, but suggested that the court would still have to play a role in both the certification process and to insure that the rights of absent class members were adequately protected. Id. at 1211. Nevertheless, if class action issues are not determined to be gateway issues for the court alone to decide, the likely result is that the case will be ordered to arbitration as a class action, with the court reserving jurisdiction to supervise the matter to insure that the rights of absent class members are protected.

The 'who decides' issue usually comes up when a class action is filed in court and the defending party moves to compel arbitration. The arbitration provision may have a prohibition against class actions or may be worded similarly to that in Oxford Health (i.e., an 'all disputes' clause). Most defendants would prefer to have the court make the determination on arbitrability. One way to attempt to accomplish this objective is to move to compel arbitration on an individual basis and hope the Court takes up the issue.

Bearing in mind Stolt-Nielsen's requirement that an arbitrator can only arbitrate class claims if the parties specifically agreed, can a court decide that a case having' a class action prohibition/waiver or not specifically allowing class arbitration can only be sent to arbitration on an individual basis? If this is treated as a gateway issue, a court should be able to order the case to proceed only on an individual basis where there is a clear class action waiver/prohibition. However, where the agreement is silent, it is likely a court will order the matter into arbitration, allowing the arbitrator to decide if he or she has the power to maintain class arbitration. This would not be inconsistent with Stolt-Nielsen, because the arbitrator is simply determining whether the parties intended to preclude or allow a class action in arbitration. If the arbitrator decides that class actions were intended, he or she has not acted contrary to Stolt-Nielsen. If the arbitrator determines that the parties intended to preclude class actions, he or she would also be acting consistent with Stolt-Nielsen in that class arbitration would not occur since the parties did not agree to it. It is also still possible that the Supreme Court will determine that arbitrability of class claims is not a gateway issue and will allow courts to simply order the matter into arbitration, leaving for the arbitrator the determination of whether it proceeds as a class action.

Recent Attempt to Revive Laxmi v. Golf USA Fizzles

Even though Laxmi' Investments LLC v. Golf USA , 193 F.3d 1095 (9 th Cir. 1999) was decided almost 15 years ago, and the California Department of Corporations took steps to remedy the problem caused by the case, it is still relied upon by franchisees in attempts to avoid the impact of forum-selection clauses in arbitration agreements that pre-date it. Laxmi held that'the parties had not agreed to arbitrate disputes because of language required by the Department of Corporations to be contained in the Franchise Offering Circular at the time. If the franchise agreement required arbitration of disputes, the Franchise Offering Circular was required to state that it may not be enforceable (due in large part to various decisions striking down such provisions on the ground of unconscionability, inter alia).”

In Laxmi, the arbitration clause required that the arbitration be held in Oklahoma. The franchisee filed a demand for arbitration, requesting that the arbitration be held in California, based on the California Franchise Relations Act, which voided provisions requiring litigation to be filed in other states. The American Arbitration Association declined to interpret the statute and ruled that the arbitration should take place in Oklahoma as the parties agreed. The franchisee then filed a lawsuit in California, and the franchisor removed it and moved to transfer venue to Oklahoma. The franchisee relied on the California Franchise Relations Act (specifically section 20040.5 of the Business & Professions Code) in opposing the motion, and the franchisor argued that the statute was preempted by the Federal Arbitration Act because the parties had agreed that arbitration should be held in Oklahoma, and the FAA's preemptive effect was to enforce the agreement of the parties. The preemption argument failed because the court found that there was no agreement or meeting of the minds on where the arbitration was to take place, due to the language required by the Department of Corporations that indicated the provision may not be enforceable.

In the recent case of Maaco Franchising, Inc. v Tainter, 2013 U.S. Dist. Lexis 80790 (E.D.Pa. June 6, 2013), the situation was reversed. The franchisor filed suit against a California franchisee in Pennsylvania federal court, where the franchisor maintained part of its corporate headquarters. The franchisee moved to transfer the case to California, based upon the Franchise Relations Act and general principles of inconvenience. The franchisee also relied on Laxmi. The district court distinguished Laxmi on several grounds. It noted first that the language relied on by the franchisee in Laxmi ('may not be enforceable') to show no agreement was reached was contained, as in the Maaco case, in the Franchise Offering Circular, which was not a part of the franchise agreement, which had an integration clause. Accordingly, the court looked only to the franchise agreement, which was clear on arbitration and venue. The integration clause, assuming there was one in the Golf USA agreement, was never mentioned in the Laxmi opinion.

The court in Maaco gave short shrift to the franchisee's argument that the Franchise Relations Act evidenced the strong public policy of California that voided such clauses. Choice of law was not even at issue since Pennsylvania law was to apply. More important, the fact that California had a strong public policy that voided forum-selection clauses was irrelevant to a case brought in another jurisdiction. In that situation, the provision must offend the law of that jurisdiction for it not to be enforced. Pennsylvania law supported forum-selection clauses. The franchisee's convenience arguments fizzled largely because the franchisor had offices in Pennsylvania.

The lesson of this case is that in those rare situations where Laxmi could apply, the franchisor should try and get the jump on the franchisee by filing first in the selected forum.'

'

Charles G. Miller is a shareholder and a director at Bartko, Zankel, Tarrant & Miller in San Francisco. He can be reached at 415.956.1900 or [email protected].