Stolt-Nielsen v. AnimalFeeds: U.S. Supreme Court Holds that Class Arbitration Cannot be Imposed on Parties Whose Agreements Are Silent on the Issue

Stolt-Nielsen v. AnimalFeeds: U.S. Supreme Court Holds that Class Arbitration Cannot be Imposed on Parties Whose Agreements Are Silent on the Issue

by Lewis S. Wiener, Gail L. Westover, Brendan Ballard, and Wilson G. Barmeyer   

 

In a 5-3 majority decision issued on April 27, 2010, the U.S. Supreme Court held in Stolt-Nielsen, S.A. v. AnimalFeeds Int'l Corp., No. 08-1198 ( See Mealey's News item on this case), that imposing class arbitration on parties who have not agreed specifically to class arbitration is inconsistent with the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq. Because the parties in Stolt-Nielsen stipulated that the arbitration clause was silent on class arbitration, the Supreme Court held that the arbitration panel's inference that the parties' intended to authorize class-wide arbitration exceeded its powers. The holding answers the question left open by Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2002), on the proper standard to be applied in deciding whether class arbitration is permitted.

AnimalFeeds brought an antitrust class action in federal court against Stolt-Nielsen for price fixing. The parties had entered into an arbitration agreement, but it was silent on the issue of class arbitration. The action was ordered to arbitration, and the parties agreed to submit the question of whether their arbitration agreement allowed for class arbitration to a panel of arbitrators. The panel determined that the arbitration clause allowed for class-wide arbitration. The U.S. District Court for the Southern District of New York vacated that determination on the ground that it was made in manifest disregard of the law. 435 F. Supp. 2d 382 (S.D.N.Y. 2006). On appeal, the U.S. Court of Appeals for the Second Circuit reversed, upholding the arbitrators' ruling compelling class arbitration and rejecting Stolt-Nielsen's argument that the FAA precludes the imposition of class arbitration unless it is expressly provided for in the arbitration agreement. 548 F.3d 85, 100-01 (2d Cir. 2008). The U.S. Supreme Court granted Stolt-Nielsen's petition for a writ of certiorari on June 15, 2009.

In the majority opinion, authored by Justice Alito, the Court noted that the arbitration panel exceeded its powers by imposing its own policy preference instead of identifying and applying a rule of decision derived from the FAA or from maritime or New York law. "[T]he task of an arbitrator is to interpret and enforce a contract, not to make public policy." Slip. Op. at 7. "Because the parties agreed their agreement was 'silent' in the sense that they had not reached any agreement on the issue of class arbitration, the arbitrators' proper task was to identify the rule of law that governs in that situation." Id. at 8. Instead, the arbitration panel made a policy decision based on its view that there existed consensus in post-Bazzle arbitral decisions declaring class arbitration beneficial. The Court pointed out, however, that Bazzle does not control because it left open the question of the standard to be applied when determining whether and under what circumstances class-wide arbitration may be permitted.

The Court then turned to the mandate of the FAA, which is to "give effect to the contractual rights and expectations of the parties." Id. at 18 (citation omitted). From this principle, the Court stated, "it follows 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." Slip. Op. at 20 (emphasis in original). The Court noted that while there may be certain contexts in which it is appropriate to presume that parties entering into arbitration agreements implicitly authorize the arbitrator to adopt necessary procedures to give effect to the parties' agreement, class arbitration does not fall in this category. This is because "class arbitration changes the nature of the 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 21. The Court noted that the presumed benefits of arbitration, including lower costs, quickness, and efficiency, are less assured in class arbitration, which includes hundreds or thousands of parties, does not include the same presumption of privacy and confidentiality, and adjudicates the rights of absent parties. The Court concluded, therefore, that, in the absence of explicit language, there is good reason to doubt the parties' mutual consent to resolve disputes through class-wide arbitration.

Justice Ginsburg authored a dissenting opinion, which was joined by Justices Stevens and Breyer. The dissent argued that the case was not ripe for review because the arbitration panel made a threshold decision that did not justify judicial intervention. The dissent further noted that, even if the case were ripe, the parties gave the arbitration panel the discretion to decide whether class arbitration was permitted. The majority discounted this argument, stating that the dissent was minimizing the substantive implications of class arbitration.

This decision will limit a growing practice among arbitrators of permitting class-wide arbitration despite "silent" arbitration agreements based on the presumed intent of the parties. Moreover, the post-Bazzle concern with severability of class action waivers may now be superseded, since Stolt-Nielsen seems to hold that unless an agreement can be read to permit class arbitration, it is not permissible under the FAA. Stolt-Nielsen did not specifically address unconscionability arguments that are frequently raised in opposition to enforcement of class action waivers in arbitration agreements. Nonetheless, Stolt-Nielsen is likely to be argued to preempt state law decisions refusing to enforce arbitration agreements with class action waivers according to their terms pursuant to the FAA. Parties wishing to avoid class arbitration should continue to include provisions explicitly stating that class arbitration is not part of the agreement to arbitrate.

Coincidentally, the Court heard oral argument on Monday in Rent-A-Center, West Inc. v. Jackson, No. 09-497, which may decide whether an arbitrator may determine whether an arbitration agreement is unconscionable. Finally, Stolt-Nielsen may spur activity in Congress on proposed bills that would limit arbitration in consumer and other cases.

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If you have any questions about this Legal Alert, please feel free to contact the attorneys listed below or the Sutherland attorney with whom you regularly work.


LEGAL ALERT

Gail L. Westover                        202.383.0353 gail.westover@sutherland.com

Lewis S. Wiener                       202.383.0140 lewis.wiener@sutherland.com

Brendan Ballard                         202.383.0820 brendan.ballard@sutherland.com

Wilson G. Barmeyer                   202.383.0824 wilson.barmeyer@sutherland.com

Thomas M. Byrne                       404.853.8026 tom.byrne@sutherland.com

Nicholas T. Christakos              202.383.0184 nicholas.christakos@sutherland.com

Rachel Giesber Clingman       713.470.6189 rachel.clingman@sutherland.com

Lee C. Davis                                404.853.8139 lee.davis@sutherland.com

John H. Fleming                         404.853.8065 john.fleming@sutherland.com

Patricia A. Gorham                     404.853.8298 patricia.gorham@sutherland.com

Allegra J. Lawrence-Hardy        404.853.8497 allegra.lawrence-hardy@sutherland.com

S. Lawrence Polk                        404.853.8225 larry.polk@sutherland.com

Phillip E. Stano                            202.383.0261 phillip.stano@sutherland.com

Steuart H. Thomsen                   202.383.0166 steuart.thomsen@sutherland.com

Bryan M. Ward                              404.853.8249 bryan.ward@sutherland.com

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