Fantastic Sams Franchise v. FSRO Association, Ltd. ( 2012 )

United States Court of Appeals
For the First Circuit
No. 11-2300
FANTASTIC SAMS FRANCHISE CORPORATION,
Plaintiff, Appellant,
v.
FSRO ASSOCIATION LTD., ET AL.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge]
Before
Lynch, Chief Judge,
Selya and Thompson, Circuit Judges.
Gregg A. Rubenstein, with whom Arthur L. Pressman, Sara
E. Farber, and Nixon Peabody LLP were on brief, for appellant.
W. Michael Garner, with whom Elliot R. Ginsburg and W.
Michael Garner, P.A. were on brief, for appellee.
June 27, 2012
LYNCH, Chief Judge. In 2011, Fantastic Sams Regional
Owners Association ("FSRO") filed a Demand for Arbitration against
Fantastic Sams Franchise Corporation ("FSFC") with the American
Arbitration Association ("AAA"). FSRO's Demand, made on behalf of
its members, who are franchisees of Fantastic Sams and who have
individual license agreements with FSFC, alleged that FSFC had
breached those license agreements. FSFC then filed a petition in
federal district court pursuant to Section 4 of the Federal
Arbitration Act ("FAA"), 9 U.S.C. § 4, to stay FSRO's arbitration
and to compel FSRO's members to arbitrate their claims with FSFC on
an individual basis.
The district court allowed FSFC's petition as to some of
the license agreements at issue, based on the terms of those
agreements, and that decision is not at issue in this appeal.
Fantastic Sams Franchise Corp. v. FSRO Ass'n, 824 F. Supp. 2d 221,
225-26 (D. Mass. 2011). However, it denied relief as to ten other
agreements, which contained different language.1 FSFC appeals this
denial. We affirm the judgment of the district court allowing
these claims to proceed to arbitration. We leave to the
arbitrators the issue of whether FSRO may compel arbitration under
the terms of the agreements at issue, or whether its members must
proceed individually.
1
Several of these franchisees have settled their claims
with FSFC, reducing the remaining number of agreements at issue on
appeal from ten to six.
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I.
FSFC is the franchisor of the nationwide chain of hair
salons known as "Fantastic Sams." FSFC licenses the rights to its
brand to twenty-five regional owners, who are organized into
designated geographic regions and who license and manage over 1,200
individual salons. In return for the exclusive right to conduct
business under the "Fantastic Sams" brand, the regional owners,
among other things, pay FSFC a fee of fifteen percent of any amount
collected in royalties from their individual salons plus a weekly
advertising fee.
The regional owners have entered into thirty-five
regional license agreements with FSFC; all thirty-five agreements
provide for resolution of disputes via arbitration. The terms of
the arbitration clauses vary somewhat among the license agreements,
but for purposes of this case they may be grouped into two
categories. Twenty-five of the agreements expressly prohibit
"class arbitration" in the following (or similar) terms: "any
arbitration between FSFC and [the regional licensee] shall be of
[regional licensee's] individual claim only" and "[n]o arbitration
shall be conducted on a class-wide basis." These twenty-five
agreements were executed at various dates after 1988.
In contrast, the remaining ten agreements, which were
executed at various dates before 1988, do not contain any express
prohibitions on class or collective arbitration. Beyond this, they
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set out in broad terms the matters as to which arbitration is
required: "Any controversy or claim arising out of or relating in
any way to this Agreement or with regard to its formation,
interpretation or breach shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association."
The regional owners also formed the non-profit
corporation FSRO, the appellee here, for the purpose of promoting
their business interests. The owners comprise the exclusive
membership of FSRO, and each member is party to at least one
regional license agreement with FSFC.
Invoking the provisions for arbitration in the regional
license agreements, on July 25, 2011, FSRO filed a Demand for
Arbitration against FSFC seeking declaratory and injunctive relief
on behalf of its members both for breach of contract and related
violations of the Massachusetts Consumer Protection Act, Mass. Gen.
Laws ch. 93A. FSRO alleged that FSFC had "engaged in a pattern of
conduct designed to depress the price of Regional Owners'
businesses by making it impossible or impractical to offer or sell
such regions on the open market" and thus was in breach of the
regional license agreements.
On August 22, 2011, FSFC filed a petition pursuant to
Section 4 of the FAA, 9 U.S.C. § 4, in federal district court
seeking both to stay FSRO's Demand for Arbitration and to compel
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FSRO's members to arbitrate their claims individually. FSFC argued
that the express prohibitions on "class-wide" arbitration in
twenty-five of the regional license agreements at issue barred FSRO
from seeking to represent its members in arbitration under those
agreements.
Although the remaining ten agreements are devoid of
similar class-wide arbitration prohibitions, FSFC argued that
FSRO's arbitration as to these ten was foreclosed under the Supreme
Court's decision on class arbitration in Stolt-Nielsen S.A. v.
AnimalFeeds International Corp., 130 S. Ct. 1758 (2010). That
decision, FSFC contended, holds as a matter of law that no class or
collective arbitration may proceed unless the arbitration agreement
expressly authorizes those forms of proceedings. Because the ten
agreements here do not contain such express consent to arbitration
by an association, FSFC argued, FSRO's representative action must
be barred.
In its September 21, 2011, response in opposition, FSRO
argued that FSFC had misread Stolt-Nielsen, that the decision does
not require the express consent posited by FSFC, and that, in any
event, neither Stolt-Nielsen nor the prohibitions on "class-wide"
arbitration contained in some of the agreements applies to bar
associational arbitration, which, FSRO argued, is different in kind
from class arbitration. FSRO also urged the court to send the
dispute to be decided by the arbitrators.
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As said, the district court granted FSFC's petition as to
the twenty-five agreements expressly barring class arbitration,
finding that the requirements in those agreements "that arbitration
be of a licensee's individual claim only," foreclosed FSRO's
action. Fantastic Sams Franchise Corp., 824 F. Supp. 2d at 225.
FSRO does not appeal this decision.
The court denied FSFC's petition as to the remaining ten
agreements, on the grounds that "[t]he arbitration clause in those
contracts is very broad and applies, without qualification, to all
controversies or claims arising from or related to the contract,
including issues of interpretation and breach," and that the
contracts "incorporate[] by reference the rules of the AAA, which,
in turn, provide that the arbitrator shall have the power to rule
on his or her own jurisdiction, including any objections with
respect to the existence, scope or validity of the arbitration
agreement." Id. The court concluded that whether the agreements
preclude FSRO's action "is a matter of contract interpretation
which the parties have agreed to submit to arbitration." Id.
II.
We review the district court's order denying FSFC's
petition to stay arbitration and compel individual arbitrations de
novo as it presents a pure question of law. PowerShare, Inc. v.
Syntel, Inc., 597 F.3d 10, 15 (1st Cir. 2010). We may affirm the
district court's order on any ground manifest in the record.
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Houlton Citizens' Coal. v. Town of Houlton, 175 F.3d 178, 184 (1st
Cir. 1999).
As an initial matter, FSFC argues on appeal that because
the agreements at issue do not expressly permit FSRO's
associational action, under the Supreme Court's decision in
Stolt-Nielsen, the action is prohibited outright.
FSFC reads Stolt-Nielsen too broadly. The Court granted
certiorari in that case to decide "whether imposing class
arbitration on parties whose arbitration clauses are 'silent' on
that issue is consistent with the [FAA]." 130 S. Ct. at 1764. The
Court held that an arbitration panel had "exceeded its powers," id.
at 1770, under the FAA, state, and federal law, when it elected to
follow its own policy preferences and permit class arbitration to
go forward where the parties to an arbitration agreement had
reached "no agreement" on that subject, id. at 1776.
The parties in Stolt-Nielsen stipulated that their
agreement was unambiguously "silent" on class arbitration, not
merely in the sense that the agreement made no express reference to
class arbitration, but because "they had not reached any agreement
on the issue." Id. at 1768. Although it acknowledged this
"silence," the arbitration panel nonetheless concluded that class
arbitration should be permitted for a variety of policy-related
reasons. Id. at 1768-70 & n.7. The panel stayed the arbitration
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to allow the parties to seek judicial review of its decision. Id.
at 1766. On review, the Supreme Court reversed.
The Court 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. Id. at 1775 (first emphasis added). The
Court found no such contractual basis present on the facts before
it. Although the arbitration panel had considered the language,
context, and usage of the agreement in that case, the Court held
that these considerations were "beside the point" in a case in
which the "parties were in complete agreement regarding their [lack
of] intent." Id. at 1770. Once the parties stipulated that they
had reached "no agreement" on class arbitration, id. at 1766, "the
only task . . . left for the panel . . . was to identify the
governing rule applicable" in the case, id. at 1770. "[I]nstead of
identifying and applying a rule of decision derived from the FAA or
either maritime or New York law, the arbitration panel imposed its
own policy choice and thus exceeded its powers." Id.
The Court had no occasion in Stolt-Nielsen to consider
what may constitute a "contractual basis" for class arbitration.
Id. at 1776 n.10. It did, however, reiterate the general rule that
a court or arbitrator tasked with construing an arbitration
agreement "must give effect to the contractual rights and
expectations of the parties;" id. at 1773-74 (quoting Volt Info.
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Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489
U.S. 468, 479 (1989)) (internal quotation marks omitted), "as with
any other contract, the parties' intentions control," id. at 1774
(quoting Mitsubishi Motors Corp. v. Soler Chrysler–Plymouth, Inc.,
473 U.S. 614, 626 (1985)) (internal quotation marks omitted). The
Court acknowledged that "[i]n certain contexts, it is appropriate
to presume" that the parties "implicitly authorize[d]" class
arbitration. Id. at 1775. However, this implicit authorization
may not be inferred from the mere "fact of the parties' agreement
to arbitrate." Id. For example, a finding that an agreement does
not preclude class arbitration is not enough to conclude that the
agreement authorizes it when the parties have said that they
reached no agreement on the subject.
We thus reject the very different precept, on which
FSFC's argument depends, that there must be express contractual
language evincing the parties' intent to permit class or collective
arbitration. Stolt-Nielsen imposes no such constraint on
arbitration agreements. The two other circuits to have addressed
this issue agree. In Sutter v. Oxford Health Plans LLC, 675 F.3d
215 (3d Cir. 2012), the Third Circuit held that "Stolt–Nielsen did
not establish a bright line rule that class arbitration is allowed
only under an arbitration agreement that incants 'class
arbitration' or otherwise expressly provides for aggregate
procedures," id. at 222, and in Jock v. Sterling Jewelers Inc., 646
-9-
F.3d 113 (2d Cir. 2011), cert denied, 132 S. Ct. 1742 (2012), the
Second Circuit found that "Stolt–Nielsen does not foreclose the
possibility that parties may reach an implicit -- rather than
express -- agreement to authorize class-action arbitration," id. at
123 (citation and internal quotation marks omitted).
As a fallback, FSFC argues that the arbitration
agreements at issue here are "silent" on class arbitration, within
the meaning of the "silence" recognized in Stolt-Nielsen, and thus
preclude FSRO's action. FSFC's argument fails because the
agreements at issue here are not "silent" in the same sense that
the agreement was silent in Stolt-Nielsen. Furthermore, the
Supreme Court has not extended Stolt-Nielsen to the type of
associational action brought by FSRO, which is different in many
respects from the class-action arbitration at issue in Stolt-
Nielsen. We cannot conclude, under the auspices of Stolt-Nielsen,
that as a matter of law the broad arbitration clause at issue here
precludes arbitration of this issue.
First, because the parties to the arbitration agreement
at issue in Stolt-Nielsen stipulated that they had reached "no
agreement" on class-wide arbitration, there was no occasion for any
inquiry into the parties' intent on that subject. In contrast, in
this case, it is conceivable that an arbitrator could find more
than silence in the arbitration agreements on whether the "parties
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agreed to authorize" the type of associational action brought by
FSRO. Stolt-Nielsen, 130 S. Ct. at 1776 n.10.
In this case, the relevant language in the arbitration
agreements is quite broad and the parties vigorously dispute both
its meaning and the intentions underlying it. For example,
additional evidence could reveal that the later change in language
reflects a conscious choice by the parties to exclude some forms of
arbitration, available prior to 1988, after that date. That is,
there may have been no intent to exclude class arbitration, much
less associational arbitration, before 1988. In addition, there
may be other evidence of intent presented to the arbitrators, such
as industry practice. See id. at 1769 n.6 ("Under both New York
law and general maritime law, evidence of 'custom and usage' is
relevant to determining the parties' intent when an express
agreement is ambiguous."). Thus, this is unlike Stolt-Nielsen,
where the language of the arbitration agreement and circumstances
surrounding its formation "left no room for an inquiry regarding
the parties' intent." Id. at 1770.
In addition, we cannot say as a matter of law that FSRO's
associational action in this case is equivalent to a class action.
In Stolt-Nielsen, the Court was concerned with the particular
features of class-action arbitrations and with the fundamental
changes those features work in the arbitration process. The Court
held that an arbitrator may not infer an agreement to authorize
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class arbitration from the sole fact of the parties' agreement to
arbitrate because "class-action arbitration changes the nature of
arbitration to such a degree that it cannot be presumed the parties
consented to it by simply agreeing to submit their disputes to an
arbitrator." Id. at 1775.
The Court highlighted "just some of the fundamental
changes brought about by the shift from bilateral arbitration to
class-action arbitration." Id. at 1776. An arbitrator resolves
not a single dispute between the parties, but instead many disputes
between hundreds or thousands of parties, potentially including
non-domestic parties. Id. Further, the arbitrator's award no
longer binds just the parties to the arbitration agreement, but
adjudicates the rights of absent parties as well. Id. The
"commercial stakes of class-action arbitration are comparable to
those of class-action litigation," but judicial review is limited.
Id. Finally, "the presumption of privacy and confidentiality" that
typically applies in many bilateral arbitration agreements may not
apply. Id. (quoting Am. Arbitration Ass'n, Supplementary Rules for
Class Arbitrations, Class Rule 9(a) (2003)) (internal quotation
marks omitted).
In contrast, in this case, FSRO does not seek to
represent any absent parties, or any parties who are not
signatories of the agreements at issue. Nor does FSRO seek to
bring any claims or obtain any relief not arising directly out of
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the agreements. In this action, FSRO's members cannot, for
example, obtain individualized damage awards, as in some class
actions. In addition, the arbitrators do not have to certify a
class, or provide public notice of the arbitration, and the
proceedings accordingly may remain confidential.
It is conceivable that some associational actions in
arbitration would seek to do these things and so raise some of the
same concerns that animated the Court's decision in Stolt-Nielsen.
However, FSRO's action in this case does not appear to raise any of
those concerns.2
The question devolves into whether the court or the
arbitration panel should decide the merits of the parties' dispute
-- whether FSRO may bring its associational action -- in this case.
FSFC argues that the dispute is one for the courts to decide under
the Supreme Court's decision in Stolt-Nielsen and under a separate
2
In contrast, in this case, although it did not itself
sign the arbitration agreements with FSFC, FSRO is composed
exclusively of the twenty-five regional owners who make up the
Fantastic Sams franchise, each of whom have signed an arbitration
agreement with FSFC. FSRO's action, which it has brought under
these agreements, exclusively on behalf of the signatories of those
agreements, seeks declaratory and injunctive relief from what it
alleges is FSFC's breach of the agreements. FSRO is not a third
party beneficiary, which would raise different issues. See, e.g.,
Republic of Iraq v. BNP Paribas USA, No. 11-1356, 2012 WL 1021032,
at *1-2 (2d Cir. Mar. 28, 2012) (holding that whether the Republic
of Iraq may arbitrate breach of contract and fiduciary duty claims
as a purported third-party beneficiary of a contract between the
United Nations and BNP Paribas in connection with a 1995 United
Nations resolution creating an exception to economic sanctions on
Iraq for the "Oil-for-Food Program" presented a question of
arbitrability for the courts).
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line of cases which deal more directly with that question. See,
e.g., Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002);
First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 942 (1995);
John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 546-47 (1964).
We reject FSFC's arguments.
First, the question before the Supreme Court in Stolt-
Nielsen was whether the arbitrators had exceeded their powers in
permitting arbitration;3 it was not whether the court or the
arbitration panel should decide the issue of whether class
arbitration can go forward when the contract is silent on the
question.4 The parties in Stolt-Nielsen expressly assigned that
issue to the arbitration panel, and no party argued that the
assignment was impermissible. 130 S. Ct. at 1772 ("[W]e need not
revisit [the question of whether the court or arbitrator should
decide whether a contract permits class arbitration] here because
the parties' supplemental agreement expressly assigned this issue
to the arbitration panel, and no party argues that this assignment
was impermissible."). FSFC's argument that Stolt-Nielsen disposes
of this question thus fails.
3
The Court reserved the question of whether the "manifest
disregard" standard of review for arbitral awards survived Hall
Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008).
Stolt-Nielsen, 130 S. Ct. 1758, 1768 n.3 (2010).
4
The Stolt-Nielsen majority concluded that Green Tree
Financial Corp. v. Bazzle, 539 U.S. 444 (2003), had left that
question open. 130 S. Ct. at 1771-72.
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FSFC also argues that the parties' dispute presents a
"substantive question of arbitrability" which must be decided by
the courts under the Supreme Court's decisions on arbitrability in
First Options of Chicago, Inc. v. Kaplan, and other related cases.
See, e.g., Howsam, 537 U.S. 79; AT&T Techs., Inc. v. Commc'ns
Workers of Am., 475 U.S. 643 (1986); John Wiley & Sons, 376 U.S.
543.
The Supreme Court has held that in certain limited
circumstances, "[u]nless the parties clearly and unmistakably
provide otherwise," AT&T Techs., 475 U.S. at 649, courts should
assume that the parties to an arbitration agreement intended the
courts to decide "dispositive gateway . . . 'question[s] of
arbitrability,'" Howsam, 537 U.S. at 83. The Court has cautioned
that this interpretive rule must be construed narrowly, for any
number of non-merits questions could be characterized as
"dispositive" or "gateway" questions in the sense that their
"answer will determine whether the underlying controversy will
proceed to arbitration on the merits." Id.
The scope of "the phrase 'question of arbitrability'" is
"far more limited." Id. It includes questions about whether the
parties have a valid arbitration agreement at all, Green Tree Fin.
Corp. v. Bazzle, 539 U.S. 444, 452 (2003), and whether a concededly
valid arbitration clause encompasses a particular type of
controversy, Howsam, 537 U.S. at 84. Thus, the Court has held that
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a court should decide whether an arbitration agreement survived a
corporate merger, John Wiley & Sons, 376 U.S. at 546-47, whether a
party to an arbitration agreement could force a nonparty into
arbitration, First Options of Chi., 514 U.S. at 942-43, and whether
a particular labor-management dispute falls within the arbitration
clause of a collective bargaining agreement, AT&T Techs., 475 U.S.
at 649.
The Court has distinguished this narrow class of
"questions of arbitrability" from "'procedural' questions which
grow out of [a] dispute and bear on its final disposition," Howsam,
537 U.S. at 84 (quoting John Wiley & Sons, 376 U.S. at 557)
(internal quotation marks omitted), and which, presumptively are
for the arbitrator to decide, id.
Unlike a "question of arbitrability," the parties'
dispute in this case does not implicate the validity of the
arbitration agreement or present any question of whether FSRO's
particular claims come under the arbitration agreement. There is
no dispute here that the district court, quite appropriately, first
looked for whether there was a valid, contractual agreement to
arbitrate. See First Options of Chi., 514 U.S. at 943. Neither
party disputes the conclusion that there is such an agreement here.
FSFC also concedes that "the parties agree that FSRO's claims are
subject to the franchise agreements' arbitration requirement."
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The more limited question here is of the kind that an
arbitrator would typically decide, and does not raise an issue of
"arbitrability." Under the Arbitration Rules of the American
Arbitration Association, arbitrators typically decide questions
which concern the scope of their own jurisdiction. This may
include questions concerning allegations of waiver, defenses to
arbitrability, and whether conditions precedent to arbitrability
have been fulfilled. Howsam, 537 U.S. at 84. Arbitrators may also
decide such questions as whether to consolidate arbitrations into
a single proceeding. See, e.g., Blue Cross Blue Shield of Mass.,
Inc. v. BCS Ins. Co., 671 F.3d 635, 640 (7th Cir. 2011)
("Consolidation of suits that are going to proceed anyway poses
none of the[] potential problems [posed by class arbitration] . .
. . Just as consolidation under Rule 42(a) does not change the
fundamental nature of litigation, so consolidation of the
[parties'] claims would not change the fundamental nature of
arbitration."). Here, FSFC has conceded that FSRO's underlying
claims fall within the arbitration agreements.
Our conclusion that the parties' associational dispute
should be decided by the arbitrators is reinforced by the sweeping
language of the arbitration clauses at issue here and by the
conscious change in language subsequently. The arbitration
provision in the agreements reads, "Any controversy or claim
arising out of or relating in any way to this Agreement or with
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regard to its formation, interpretation or breach shall be settled
by arbitration in accordance with the Commercial Arbitration Rules
of the American Arbitration Association." The question of whether
the parties to this arbitration agreement "agreed to authorize" an
action like FSRO's, Stolt-Nielsen, 130 S. Ct. at 1776 n.10, is one
for the arbitrators to decide.
III.
The district court's denial of FSFC's petition is
affirmed.
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