First Circuit Limits Ability to Avoid Class-Wide Arbitration

The First Circuit Court of Appeals recently issued a decision that has a significant impact on the ability of employers to avoid class-wide arbitration. In Fantastic Sams Franchise Corporation v. FSRO Association Ltd., the First Circuit joined the Second and Third Circuit Courts of Appeals in limiting the application of the U.S. Supreme Court’s decision in Stolt-Nielsen, S.A. v. AnimalFeeds International Corp. In Stolt-Nielsen, a consumer case, the Supreme Court held that parties could not be compelled to arbitrate class-wide claims unless they agreed to do so. In the wake of Stolt-Nielsen, many legal observers and defense counsel believed that Stolt-Nielsen would enable them to avoid class arbitration unless the arbitration agreement specifically provided for it, even if the agreement did not include an express provision prohibiting class arbitration. However, in decisions rendered after Stolt-Nielsen, the Second and Third Circuits, and now the First Circuit, have limited the application of Stolt-Nielsen to only those situations in which the parties’ intent not to arbitrate class claims was clear on the face of the agreement.

The First Circuit’s decision in Fantastic Sams arose in the commercial context—a licensing dispute between the regional owners association of Fantastic Sams hair salons and the franchisor. Significantly, the arbitration agreements at issue did not contain a class action prohibition or waiver and were silent on the issue of class arbitration. Like the Second and Third Circuits, the First Circuit rejected the notion that an arbitration agreement must contain express language evincing the parties’ intent to permit class arbitration. Rather, the First Circuit joined the Second and Third Circuits in holding that unless the parties’ intent not to allow class arbitration was clear, it is up to the arbitrator to decide the parties’ intent on the issue whether to allow class arbitration or not. The court noted that in making that decision, the arbitrator could consider “industry practice” as well as other factors commonly considered in contract construction cases.

While the Fantastic Sams decision arose in the commercial context, its holding may well be determined to be equally applicable to employment arbitration agreements. The lesson for employers operating within the First Circuit is clear: unless an employment agreement contains an express class and collective action waiver or prohibition, there is no guarantee that the employer can avoid arbitrating class and/or collective action claims. Therefore, employers are well advised to review their arbitration agreements to ensure that they contain class and/or collective action waivers and/or prohibitions. Unless the Supreme Court issues further guidance on this issue, employers in the First Circuit may not be able to rely solely on their agreements’ silence to avoid class and collective action arbitration.