On April 27, 2010, the Supreme Court of the United States recognized an important limit on the availability of class action mechanisms in arbitration. In Stolt-Nielsen S.A. v. AnimalFeeds International Corp., (08-1198), the Court ruled 5-3 that imposing class arbitration where the parties did not agree it would be available violates the Federal Arbitration Act. The case has significant implications for class arbitration across the board and likely will fuel the already intense debate surrounding the validity of class action waivers in arbitration agreements.
In Stolt-Nielsen, AnimalFeeds, an industrial feed manufacturer, brought a putative class action in federal court asserting antitrust claims against Stolt-Nielsen, a commercial shipper. The parties' shipping agreement contained a fairly standard arbitration clause providing that "any dispute arising from the making, performance or termination" of the agreement shall be submitted to arbitration conducted "in conformity with the provisions and procedures" of the Federal Arbitration Act ("FAA").
The arbitration clause did not mention class arbitration, and the parties disagreed as to whether the clause allowed AnimalFeeds to bring claims on behalf of a class. The parties ultimately stipulated that the contract was "silent" on the issue, and they asked a panel of arbitrators to rule on whether class arbitration was available. The panel held that it was, because Stolt-Nielsen had not established that the parties "intended to preclude class arbitration." Slip. op. at 20. A federal district court vacated the award, ruling that the arbitrators had "exceeded their powers" under § 10(a)(4) of the FAA. The Second Circuit reversed, holding that the arbitrators' determination was not contrary to law because Stolt-Nielsen had cited no applicable law against class arbitration.
The Supreme Court reversed and held that the arbitrators exceeded their powers by ordering class arbitration where the parties had not agreed to it. Writing for the Court, Justice Alito reaffirmed the fundamental principle that arbitral power is based on "the parties' agreement to forgo the legal process and submit their disputes to private dispute resolution." Slip op. at 18. Consistent with this basic rule, the Court held that imposing class arbitration where the parties stipulated they "had reached 'no agreement' on that issue" was "fundamentally at war with the foundational FAA principle that arbitration is a matter of consent." Id. at 20.
The Court stated that "class-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it simply by agreeing to submit their disputes to an arbitrator." Slip op. at 21. In particular, the Court focused on the fact that instead of deciding a single dispute between the parties, an arbitrator would be resolving a dispute between "hundreds or perhaps even thousands of parties," and that the "presumption of privacy and confidentiality" that may have motivated a party to enter an arbitration agreement does not apply in class arbitrations. Id. at 22. Moreover, although the commercial stakes of class arbitration would be similar to those of class action litigation, "the scope of judicial review is much more limited." Id. at 23. The Court concluded 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." Id.
The Court's ruling was clear on this central point, but it left several other questions unanswered. Most importantly, the Court stated that it was not deciding "what contractual basis may support a finding that the parties agreed to authorize class-action arbitration." Slip op. at 23 n.10. Although the Court left little room to infer "agreement" from an arbitration clause that is silent on the matter, its ultimate holding rested on the parties' stipulation that they had reached "no agreement." Id. at 23. Future cases will determine when an arbitration clause is "silent," as well as the extent to which extrinsic evidence could support a finding that the parties actually agreed to class arbitration even if they did not say so. In particular, because Stolt-Nielsen construed federal law, states purporting to recognize "a 'default rule' under which an arbitration clause is construed as allowing class arbitration in the absence of express consent," id. at 9, may not feel bound by the parties' silence. This distinction confirms the potential importance of choosing the governing law and arbitration venue at the time of contracting. Justice Ginsburg's dissent also read the majority's reference to "sophisticated business entities" to carve out contracts of adhesion. Slip op. at 13 (Ginsburg, J., dissenting). These will remain issues going forward.
In addition, the Court did not address who--the arbitrator or a court--should decide whether an arbitration clause contains an agreement that class arbitration is available. The four-Justice plurality in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), concluded that this issue is for arbitrators; the Court in Stolt-Nielsen noted that Bazzle "did not yield a majority decision" on this point, but it declined to "revisit th[e] question . . . because the parties' supplemental agreement expressly assigned this issue to the arbitration panel." Slip op. at 15, 16. The Court also declined to decide whether the "manifest disregard" standard of review of arbitral awards "remains viable" after Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), either "as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth" in Section 10 of the FAA. Slip op. at 7 n.5. That question has divided lower courts.
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The Stolt-Nielsen opinion is significant for several reasons. It is now plain that class action arbitration is permissible only where the parties have agreed to authorize it. And the opinion strongly suggests that it will be a rare (or non-existent) case where agreement can be inferred from an arbitration clause that says nothing about class arbitration. The Court's ruling surely will intensify the battle over express class arbitration waivers, which some federal courts of appeals have treated skeptically. Some courts have rejected class arbitration waivers on the ground that they are unconscionable as a matter of state contract law. See Homa v. Am. Express Co., 558 F.3d 225, 233 (3d Cir. 2009) (finding waiver unconscionable and ordering class arbitration); Shroyer v. New Cingular Wireless Servs., Inc., 498 F.3d 976, 978 (9th Cir. 2007) (finding waiver unconscionable, ruling that the entire arbitration clause was therefore void, and holding that arbitration could not be compelled). Other courts have struck down particular class arbitration waivers as invalid under federal law because they would preclude plaintiffs' ability to vindicate particular federal statutory rights. See In re Am. Express Merchants Litig., 554 F.3d 300, 304 (2d Cir. 2009).
By emphasizing the underlying principles of arbitration and the extent to which agreement on the availability of class arbitration is required, Stolt-Nielsen appears to suggest that there would be nothing wrong, at least as a matter of federal law, with parties agreeing to waive class arbitration. That is in tension with decisions (such as the Second Circuit's in the AmEx Merchants case) holding that class arbitration waivers for certain federal claims are not enforceable even if they are knowingly entered into by both parties. Less clear is the effect Stolt-Nielsen could have in cases where class arbitration waivers have been held unconscionable as a matter of state law. The Court's opinion reiterates that state contract law bears on the interpretation of arbitration agreements. But Stolt-Nielsen will give additional support to parties who argue that the FAA preempts any state-law unconscionability holding because the primary purpose of the FAA is to ensure that arbitration agreements are enforced according to their terms.
Stolt-Nielsen will have particular force in cases that do not involve class arbitration waivers. Where a court might have held that class arbitration was required--even where the parties were silent on the matter--because it believed any other interpretation of the clause was unconscionable under state law, that court must now consider whether Stolt-Nielsen precludes such a result as a matter of federal law because "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.