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High Court Refuses to Compel Class Arbitration Where Agreement Is Silent

By Anthony R. McClure, Litigation News Associate Editor – June 24, 2010

In a decision sparking conjecture over the future of class arbitrations, the U.S. Supreme Court recently considered whether class arbitration could be imposed under the Federal Arbitration Act where an arbitration clause is “silent” on that issue. In Stolt-Nielsen S.A. v. AnimalFeeds International Corp. [PDF], the Court held that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”

Background of Stolt
AnimalFeeds ships goods under a standard maritime contract known as a “charter party.” AnimalFeeds chartered space on Stolt-Nielsen’s vessel and selected a charter party with an arbitration clause providing that “[a]ny dispute” relating to the agreement would be submitted to arbitration under the FAA. The parties stipulated that the agreement was “silent,” however, with respect to class action arbitration.

AnimalFeeds brought antitrust class action claims against Stolt-Nielsen, and the parties agreed to submit the issue of class arbitration to an arbitration panel.

Decisions Below
The arbitration panel concluded that the arbitration clause allowed class arbitration, after analyzing recent decisions of other arbitrators who allowed class action arbitration. Stolt-Nielsen filed an application to vacate the arbitrators’ award in the U.S. District Court for the Southern District of New York.

The District Court vacated the award, determining that the panel failed to conduct a choice-of-law analysis, which would have resulted in the application of federal maritime law. The Second Circuit Court of Appeals reversed, holding that because Stolt-Nielsen cited no authority applying a federal maritime rule of custom and usage against class arbitration, the panel’s decision was not in manifest disregard of federal maritime law.

Supreme Court Reverses
In reversing the Second Circuit’s decision, the Supreme Court first criticized the arbitration panel’s decision to follow a consensus among arbitrators instead of applying an existing rule of law, from the FAA, maritime law, or New York law. The Court concluded that the panel’s decision was not based on a determination regarding the parties’ intent and the panel thus exceeded its powers. “The conclusion is inescapable that the panel simply imposed its own conception of sound policy,” the Court stated. The Court then considered whether the FAA permits class arbitrations where the contract is silent on the issue.

“The central or ‘primary’ purpose of the FAA is to ensure that private agreements to arbitrate are enforced according to their terms,” the Court noted. Ultimately, the Court determined that absent an agreement to do so, “a party may not be compelled under the FAA to submit to class arbitration.”

The Court held that an arbitrator may not infer an agreement to authorize class-action arbitration 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.” The Court determined that “the differences between bilateral and class-action arbitration are too great for arbitrators to presume, consistent with their limited powers under the FAA, that the parties’ mere silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings.” Thus, “where the parties stipulated that there was ‘no agreement’ on this question, it follows that the parties cannot be compelled to submit their dispute to class arbitration.”

Justice Ginsburg authored a dissent, which was joined by Justices Stevens and Breyer. The dissent first questioned whether the case was ripe for Supreme Court review. Section 16 of the FAA allows appellate review of a district court decision “confirming or denying confirmation of an award or partial award.” Here, the dissent suggested, the panel’s determination was neither an award nor a partial award. “No decision of this Court, until today, has ever approved immediate judicial review of an arbitrator’s decision as preliminary as the ‘partial award’ made in this case.”

When it turned to the merits of the arbitration panel’s decision, the dissent noted that the parties had agreed to refer this specific question to the panel. “The parties’ supplemental agreement, referring the class-arbitration issue to an arbitration panel, undoubtedly empowered the arbitrators to render their clause-construction decision. That scarcely debatable point should resolve the case.”

Finally, the dissent noted that the majority decision is limited because the majority observed that the parties were “sophisticated business entities” and that AnimalFeeds chose the charter party. The dissent apparently suggests that the majority decision leaves open the issue of whether the result would be different under a consumer contract.

Scott L. Nelson, Washington, D.C., a member of the ABA Section of Litigation’s Special Committee on the Future of Civil Litigation, and counsel of record for an amicus brief [PDF] filed on behalf of Public Citizen, Inc. in the Stolt case, believes that the Supreme Court “got a couple of things wrong.” First, Nelson agrees with the dissent and points to the FAA requirement that appellate review be limited to “arbitration awards.” “But what was at issue in this case was not an award—just a preliminary procedural ruling,” he says. “So it is highly unusual to have judicial intervention at that stage.”

With respect to the merits of the arbitration panel’s decision, Nelson again agrees with the Stolt dissent, but he also believes that the majority decision still left the door open for class arbitration because it focused on the panel’s failure to apply rules of contract interpretation. “The Court did leave it open to arbitrators who use principles that conform more closely to what the majority considers to be principles of contract interpretation,” he says, to potentially construe even an arbitration clause that does not expressly say anything about class arbitration to permit class arbitration.

Nelson also raises a policy argument, pointing to consumer transactions, where one party is being forced into arbitration “against its will.” “If the Court were to say in that setting that class actions are outside the contemplation of arbitration agreements, it completely disarms one side of the bargain,” he says. “In other words, the party with the small claims that can only effectively be advanced in a class action will find itself completely without effective remedies if arbitration clauses are considered to be inherently incompatible with class actions unless they expressly authorize them.”

On the other hand, Andrew C. Glass, Boston, a member of the ABA Section of Litigation’s Class Actions and Derivative Suits Committee and a coauthor of the committee’s summary of the Stolt decision, agrees with the majority’s reasoning. “If you are looking at a contract to determine the intent of the parties, you have to look at the contract as a whole,” he says. “If the addition of a term would change the nature of the contract, that violates the principles of contract interpretation.” Specifically, where a contract is silent on class arbitration, Glass says, “it would defeat the advantages that parties may see in individual arbitration by introducing a class action mechanism into the contract.”

The Future of Class-Action Arbitration
Commentators tend to agree, however, on the effect that the Stolt decision will have on class arbitration. “I think it’s going to drastically limit the number of class-action arbitrations,” Nelson says. Edward M. Mullins, Miami, former cochair of the Section’s Alternative Dispute Resolution Committee and current cochair of the Section’s International Litigation Committee, envisions “more plain vanilla arbitration clauses” that remain silent on class arbitration. “Which is sort of the way the law went for a number of years before the courts started recognizing the class arbitration concept,” he says, “so now I think we are back to the way we were really 10 years ago.”

Pending Legislation
Another question is how the Stolt decision might affect the future passage of the Arbitration Fairness Act, which has been introduced in both the U.S. Senate and the House of Representatives. If passed, the law would bar arbitration clauses contained in consumer, employment, and franchisee agreements. Mullins wonders whether the decision will put “more impetus” to pass the act. If an arbitration clause in a consumer contract is unenforceable, he says, “you never get to the issue of class arbitration because you proceed to a class action.” Nelson, whose group supports the act, agrees that the decision “may incrementally add to whatever momentum there is behind that legislation.” “Decisions that make arbitration less useful for vindicating people’s rights ultimately strengthen the argument for the need for legislation to rein it in,” he says.

Keywords: Litigation, Supreme Court, class arbitration, silent arbitration clause


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