Supreme Court Rules Class Arbitration Not Permitted When Agreement Is Silent

Supreme Court Rules Class Arbitration Not Permitted When Agreement Is Silent

WASHINGTON, D.C. - (Mealey's) The U.S. Supreme Court in a 5-3 decision April 27 reversed a Second Circuit U.S. Court of Appeals ruling and held that an arbitration panel exceeded its authority under the Federal Arbitration Act (FAA) by construing an arbitration clause to permit class arbitration of antitrust claims when the clause was silent on that issue (Stolt-Nielsen S.A., et al. v. AnimalFeeds International Corp., No. 08-1198, U.S. Sup.).

The dispute arose out of AnimalFeeds International Corp.'s allegation that Stolt-Nielsen SA, Stolt-Nielsen Transportation Group Ltd., Odfjell ASA, Odfjell Seachem AS, Odfjell USA Inc., Jo Tankers BV, Jo Tankers Inc. and Tokyo Marine Co. Ltd. (collectively, Stolt-Nielsen) engaged in a global conspiracy to restrain competition in the world market for parcel tanker shipping services in violation of federal antitrust laws.  AnimalFeeds sought to proceed on behalf of a class of all direct purchasers of parcel tanker transportation services globally for bulk liquid chemicals, edible oils, acids and other specialty liquids from Stolt-Nielsen at any time from Aug. 1, 1998, through Nov. 30, 2002.

Stolt-Nielsen moved to compel arbitration, and the Second Circuit ruled that the antitrust claims were arbitrable.  The parties then entered into an agreement stating that the arbitrators would be bound by Rules 3 through 7 of the American Arbitration Association's Supplementary Rules for Class Arbitrations.  The parties stipulated that the arbitration clause was "silent" with respect to class arbitration.  An arbitration panel on Dec. 20, 2005, issued an award determining that the agreements permit class arbitration.

The U.S. District Court for the Southern District of New York vacated the award, concluding that the arbitration panel "manifestly disregarded" the law by failing to conduct a choice-of-law analysis and that if the panel had done so, it would have applied the rule of federal maritime law requiring that contracts be interpreted in light of custom and usage.  On Nov. 4, 2008, the Second Circuit reversed.

Justice Samuel Alito wrote for the majority that "[b]ecause 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.  Had they engaged in that undertaking, they presumably would have looked either to the FAA itself or to one of the two bodies of law that the parties claimed were governing, i.e., either federal maritime law or New York law.  But the panel did not consider whether the FAA provides the rule of decision in such a situation; nor did the panel attempt to determine what rule would govern under either maritime or New York law in the case of a 'silent' contract."  Rather, the panel "imposed its own conception of sound policy," thereby exceeding its powers.

The majority went on to find that imposing class arbitration in the instant case was inconsistent with the "foundational FAA principle that arbitration is a matter of consent."  "[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.  In this case, however, the arbitration panel imposed class arbitration even though the parties concurred that they had reached 'no agreement' on that issue," it said, concluding that "[a]n 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."

Chief Justice John G. Roberts Jr. and Justices Antonin Scalia, Anthony Kennedy and Clarence Thomas joined the majority opinion.

Justice Ruth Bader Ginsburg wrote the dissenting opinion, in which Justices John Paul Stevens and Stephen Breyer joined.  Justice Sonia Sotomayor did not take part in the consideration or decision of the case.

Editor's Note:  Full coverage will be in the May issue of LexisNexis Antitrust Litigation News.  In the meantime, the opinion is available at www.mealeysonline.com or by calling the Customer Support Department at 1-800-833-9844.  Document #81-100527-001Z.  For all of your legal news needs, please visit www.lexisnexis.com/mealeys.]

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