May 7, By: Christopher M. Mason, Steven M. Richards and Brian M. Childs

Transcription

1 May 7, 2010 The United States Supreme Court speaks loudly in Stolt- Nielsen: The Federal Arbitration Action Act does not permit class arbitrations when the parties have been silent on the subject By: Christopher M. Mason, Steven M. Richards and Brian M. Childs For a number of years, the question of whether parties may be required to engage in class arbitration when their written agreement to arbitrate is silent on the subject has been an important playing piece in the battle between anti-arbitration and pro-arbitration forces. Anti-arbitration forces have declared that, on this issue, they are not anti-arbitration at all, only in favor of allowing parties to arbitration to have the same procedural choices they would have in court. Proarbitration forces have countered that requiring parties to a preexisting arbitration clause to assume burdens and risks (in the form of class-wide proceedings) for which they did not bargain is a fine way to encourage them to drop arbitration from their contracts altogether. Until last week, the United States Supreme Court had managed twice not to decide this issue. See Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 447 (2003); Southland Corp. v. Keating, 465 U.S. 1, 3, 8-9 (1984). But in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., No , 2010 U.S. LEXIS 3672 (April 27, 2010), the Justices finally spoke, reversing the United States Court of Appeals for the Second Circuit and excusing the petitioner, Stolt-Nielsen, S.A. ( Stolt-Nielsen ), from having to honor a partial award from an arbitration panel that had ordered the company to arbitrate on a class-wide basis. With this 5 to 3 decision, the Supreme Court has now held that [i]mposing class arbitration on parties whose arbitration clauses are silent on that issue is not consistent with the Federal Arbitration Act (FAA), 9 U.S.C 1 et seq. Id. at *8. A party simply 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. Id. at *

2 The outcome in Stolt-Nielsen received immediate and widespread attention in the national press. As that coverage indicates, for cases involving business-to-business arbitration (and maritime law or New York law), it should be the final word on the subject. Some arbitration industry commentators, however, believe that, despite the assertive tone of the majority s opinion, the outcome is perhaps not so definitive in certain situations, such as consumer or employment contracts. See Thomas J. Stipanowich, Stipanowich on Stolt: Outcome Over Clarity, (April 28, 2010), available at Default.aspx ( There is therefore room for surmise about how the Court would handle the classaction issue in an adhesion contract setting. ) (last accessed May 3, 2010); Russ Bleemer, More on Stolt-Nielsen: A New Rule... With Limits? (April 27, 2010), available at ( the majority s concern with commercial practices... may at least be challengeable in the context of fine-print consumer or employment contracts. ) (last accessed May 3, 2010). No matter what the limits of the Stolt-Nielsen decision, however, the makeup of the 5 to 3 outcome indicates that the pro-arbitration bent of the Court could be expected to continue in the future. Justice Alito wrote the majority opinion, joined by Chief Justice Roberts and Justices Scalia, Kennedy, and Thomas. Justice Ginsburg dissented, joined by Justices Stevens and Breyer. Justice Sotomayor took no part in the case, but her vote either way would not have changed the outcome. (Justice Sotomayor did take part in argument in Rent-A-Center, West Inc. v. Jackson, No , argued on April 26, 2010, where the question is whether a court (rather than an arbitrator) must always determine claims of unconscionability.) Background to the Stolt-Nielsen decision Stolt-Nielsen is a shipping company that serves much of the world market for parcel tankers, ships with separate cargo tanks that can be separately chartered to customers (instead of a customer having to charter an entire ship). See 2010 U.S. LEXIS 3672 at *8-*9. Respondent AnimalFeeds International Corp. ( AnimalFeeds ), shipped goods on Stolt-Nielsen s tankers in small quantities pursuant to a standard form contract a contract that contained a broad arbitration clause. See id. at *9. In 2003, a Justice Department investigation revealed that Stolt-Nielsen and some of its competitors were engaged in illegal price fixing. Id. at *10. Customers of AnimalFeeds and its competitors promptly began a series of class actions against the companies. In the meantime, Stolt-Nielsen asserted the arbitration clause in its contracts as a defense to the class action against it. After litigation of that issue up to the Second Circuit, which held the clause applicable to the customers claims, see generally JLM Indus., Inc. v. Stolt-Nielsen S.A., 387 F.3d 163, 183 (2d Cir. 2004), the parties agreed that their dispute had to be arbitrated. The parties did not agree, however, as to how it should be arbitrated. AnimalFeeds served Stolt- Nielsen with a class arbitration demand U.S. LEXIS 3672 at *11-*12. Pursuant to the American Arbitration Association s Supplementary Rules for Class Arbitrations (the AAA Class Rules ), the arbitration panel selected by the parties rendered a decision on whether the proceedings could go forward on a class basis. Id. at *12. They decided that, although the parties - 2 -

3 arbitration clause was silent on the issue, and although the parties agreed that this meant that no agreement ha[d] been reached on that issue, the arbitration should continue on a class basis. Id. at *12-*13. The AAA Class Rules provided for an interim award of the panel on this issue, which could then be reviewed immediately by a court. Stolt-Nielsen sought that review in the United States District Court for the Southern District of New York, which vacated the award on the theory that the arbitrators had failed to interpret the parties contract in light of custom and usage as required by maritime law. Id. at *14-*15. On appeal, however, the Second Circuit reversed, holding that because Stolt-Nielsen had cited no authority applying a rule of custom and usage against class arbitration, the arbitrators decision was not in manifest disregard of maritime law. Id. at *15. The Second Circuit also held that the arbitrators had not manifestly disregarded New York law, because it supposedly has no established rule against class arbitration. Id. The Supreme Court finally speaks In reversing and deciding the substantive issue in Stolt-Nielsen, the Supreme Court did not as much fault the Second Circuit as it did the arbitration panel that had issued the award reviewed by the Second Circuit. The Supreme Court noted, for example, that the arbitration panel had improperly stray[ed] from interpretation and application of the [parties ] agreement and effectively dispense[d] [its] own brand of industrial justice. Id. at *18. In doing so, the panel had made the serious mistake of failing to inquire whether the FAA, maritime law, or New York law contain[ed] a default rule under which an arbitration clause is construed as allowing class arbitration in the absence of express consent. Id. at *13, *22. The Supreme Court could not discern any such default rule in any of those sources of law. As a result, given the FAA s basic precept that arbitration is a matter of consent, not coercion, class arbitration would violate the FAA. Id. at *36. As the majority reasoned, An implicit agreement to authorize class-action arbitration... is not a term that the arbitrator may infer solely from the fact of the parties agreement to arbitrate. This is so 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 *42. For example, in class arbitration, an arbitrator is no longer resolving a single dispute between the parties to a single agreement but, rather, resolving many disputes among hundreds or perhaps even thousands of parties ; at much greater financial stakes than in an individual case. Id. at *44. The dissent, written by Justice Ginsburg, argued first that the majority should never have reached the merits because of the interlocutory nature of the appeal and a supposed lack of ripeness. See id. at *46-*55. To some extent reflecting an issue heavily debated by the Court during oral argument of the Rent-A-Center case, i.e., where to draw the line between what a court must do and what an arbitrator may do, Justice Ginsburg also emphasized that [t]he parties supplemental agreement, referring the class-arbitration issue to the arbitration panel, undoubtedly empowered the - 3 -

4 arbitrators to render their clause-construction decision. Id. at *57. But none of the arguments in her opinion appear to provide any clear basis for believing that the majority could be persuaded in later cases to narrow materially their fundamental holdings in Stolt-Nielsen. What the Stolt-Nielsen ruling means for businesses Going forward, in order to conclude that parties authorized class-action arbitration, arbitrators must be able to locate the parties express assent to such arbitration. See id. at *45. In almost every case, this must be positive assent, because parties mere silence on the issue of class-action arbitration [does not] constitute] consent to resolve their disputes in class proceedings. Id. It would therefore be wise for drafters of arbitration agreements to address this issue explicitly in the future. For preexisting contracts in most states (or choosing, for example, New York law), the Supreme Court s decision should preclude class arbitration even in the absence of a specific waiver, unless there is strong affirmative evidence in the contract itself (or strong extrinsic evidence that is otherwise admissible) that each party agreed at the time of contract formation to such procedures. The same is true as to variations on class arbitration, such as mass consolidations. The majority s analysis in Stolt-Nielsen is at least equally applicable to such situations, and the majority cited with approval pre-existing law in the Circuit Courts of Appeals requiring affirmative consent to such procedures. See id. at *23 n.5 (citing Glencore, Ltd. v. Schnitzer Steel Prods. Co., 189 F.3d 264, 268 (2d Cir. 1999); Champ v. Siegel Trading Co., 55 F.3d 269, 275 (7th Cir. 1995), and Government of United Kingdom v. Boeing Co., 998 F.2d 68, 71 (2d Cir. 1993)). We can, however, expect that opponents of arbitration and the part of the plaintiffs class action bar that has begun to embrace class arbitration will try to avoid Stolt-Nielsen by asserting that state court decisions in some states forbid class arbitration waivers and thus implicitly require that parties agree to class arbitration. Cf., e.g., Discover Bank v. Boehr, 36 Cal. 4th 148, 30 Cal. Rptr. 3d 76 (2005) (California law prohibits such waivers). They will argue that such state court decisions establish a default rule under which an arbitration clause is construed as allowing class arbitration in the absence of express consent. Stolt-Nielsen, 2010 U.S. LEXIS 3672 at *23. But not only are such decisions generally limited in scope to certain kinds of consumer or employment contracts, but the United States Supreme Court s own decision in Stolt-Nielsen, properly read, indicates that the FAA contains, as a matter of preemptive federal law, an important underlying policy of freedom of contract: While the interpretation of an arbitration agreement is generally a matter of state law, the FAA imposes certain rules of fundamental importance, including the basic precept that arbitration is a matter of consent, not coercion. Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989) U.S. LEXIS 3672 at *

5 Contact Us: We welcome your questions and comments. If you need assistance on any matter, please call or e- mail: Christopher M. Mason, Co-Chair, National Class Action Team, at or Paul J. Hall, Co-Chair, National Class Action Team, at or Steven M. Richard at or Brian M. Childs at or - 5 -