Why have so many companies opted to include arbitration clauses in their standard form agreements? One reason is an “open secret.” Many of them had the understanding and expectation — which was reasonable at the time — that an arbitration clause would insulate them from class actions. That objective was especially important for franchisors and manufacturers seeking to avoid class action suits by independent franchisees, dealers, and distributors.

The Supreme Court's decision in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003) (Bazzle), however, raised a new prospect. This prospect was, for many companies, the worst of both worlds. Following Bazzle, class actions could be conducted under arbitration rules that were new and uncertain —with little or no meaningful judicial review. To make matters worse, the Supreme Court's 2003 decision in Bazzle raised as many questions as it answered about class action arbitrations. Only if the arbitration agreement expressly prohibited class action arbitrations was it clear after Bazzle that a class action dispute could not be arbitrated.

If the arbitration agreement was silent on the issue, however, the case law provided no clear guidance —until earlier this week. On April 27, 2010, the Supreme Court issued its long-awaited decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U. S. ____ (2010) (Stolt-Nielsen). Imposing class arbitration on parties who have not agreed to authorize class arbitration, the Supreme Court held, is inconsistent with the Federal Arbitration Act, 9 U. S. C. §1 et seq. (FAA).

Before the Supreme Court decided Bazzle in 2003, the case law was relatively clear that class arbitration is impermissible when the arbitration agreement is silent on the issue. The parties to the arbitration agreement at issue in Bazzle, however, disagreed as to whether the contract was truly silent about class arbitration. They also disagreed as to whether its terms actually prohibited class arbitration. This disagreement was never resolved by the Supreme Court's decision in Bazzle.Bazzle resulted in a four-member plurality opinion authored by Justice Breyer, a dissenting opinion authored by Justice Rehnquist (joined by Justices O'Connor and Kennedy), a separate dissent authored by Justice Thomas, and a fourth opinion by Justice Stevens dissenting in part and concurring in part. The Bazzleplurality, joined by Justice Stevens in the judgment only, remanded the case for an arbitrator to decide whether the contract was truly silent.

Following Bazzle, the two leading purveyors of ADR services — the American Arbitration Association (AAA)1 and JAMS — each adopted new rules governing class arbitrations. The AAA's Web site states that “[t]he AAA administers Class Arbitrations for cases where (1) the underlying agreement specifies that disputes arising out of the parties' agreement should be resolved by arbitration and (2) the agreement is silent with respect to class claims, consolidation, or joinder of claims.”2 More recently, on July 14, 2005, the AAA adopted a Policy on Arbitration that states:

The Association is not currently accepting for administration demands for arbitration where the underlying agreement prohibits class claims, consolidation or joinder, unless an order of a court directs the parties to the underlying dispute to submit any aspect of their dispute involving class claims, consolidation, joinder or the enforceability of such provisions, to an arbitrator or to the Association.3

The JAMS Class Action Procedures adopted in the wake of Bazzle have since been amended, effective May 1, 2009.4 Like the AAA, JAMS “will not administer a demand for class action arbitration when the underlying agreement contains a class preclusion clause, or its equivalent, unless a court orders the matter or claim to arbitration as a class action.” JAMS Class Action Rule 1(a).

In the wake of Bazzle, there was a split among the Circuits as to whether class action arbitration can proceed if arbitration agreement is silent on the issue. The Seventh Circuit, for example, left in place pre-Green Tree precedents holding that a class action arbitration cannot proceed when the arbitration agreement is silent on the issue. Employers Ins. Co. of Wausau v. Century Indem. Co., 443 F.3d 573, 580 (7th Cir. 2006). The Second Circuit, in contrast, held otherwise. Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 548 F.3d 85 (2d Cir. 2008).

In reversing the Second Circuit's decision in Stolt-Nielsen, the Supreme Court cited one of the few statutory grounds for vacating arbitration awards. Section 10(a)(4) of the FAA, the Supreme Court observed, permits vacatur “[w]here the arbitrators exceeded their powers.” 9 U.S.C. § 10(a)(4). Under prior Supreme Court precedents, Section 10(a)(4) is satisfied “only when [an] arbitrator strays from interpretation and application of the agreement and effectively ‘dispense[s] his own brand of industrial justice.'” Major League Baseball Players Ass'n v. Garvey, 532 U. S. 504, 509 (2001) (per curiam).

In Stolt-Nielsen, the Supreme Court found that requiring class action arbitration was inconsistent with “the basic precept that arbitration ‘is a matter of consent, not coercion.'” (quoting VoltInformation Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989)). Unlike Bazzle — where the parties disagreed as to whether the arbitration agreement was silent on the issue of class actions — in Stolt-Nielsen the parties stipulated that they had reached no agreement on the issue. The rationale of the Supreme Court's decision in Stolt-Nielsen, however, was not based solely on this stipulation. Rather, the Supreme Court announced a broader principle that “an implicit agreement to authorize class action arbitration is not a term that the arbitrator may infer solely from the fact of an agreement to arbitrate.”

While answering one question that the Supreme Court left unanswered in Bazzle, the Supreme Court's decision in Stolt-Nielsen may well lead to additional litigation over questions of arbitrability. For one thing, the Supreme Court did not address the grounds upon which the arbitration decision had been vacated at the district court level: “manifest disregard of the law”5 — a basis for setting aside arbitration awards that is not found anywhere in the FAA itself. Will the FAA always govern the question of whether the parties intended to arbitrate class action disputes? Or will the answer sometimes be found in substantive law at the federal and state level — potentially state laws invalidating class action waivers on public policy grounds? Regardless of how the courts answer these and other questions, the Supreme Court's decision in Stolt-Nielsen may provide further impetus for ongoing congressional efforts to limit the enforceability of arbitration clauses altogether, as reported in prior Legal News Alerts.6