On Tuesday, April 27, the United States Supreme Court rendered a broad and important decision on "class arbitrations," holding that an arbitration panel's decision imposing class-wide arbitration, in the face of the parties' silence on this issue, was contrary to the Federal Arbitration Act ("FAA") and "fundamentally at war" with the bedrock principle that arbitration is a matter of consent. Stolt-Nielsen S.A. et al v. Animalfeeds International Corp. (08-1198, April 27, 2010). The 5-3 decision, (Sotomayor did not take part) delivered by Justice Samuel Alito, not only makes it more difficult for courts or arbitrators to order class arbitration absent express consent, but may provide a basis for challenging pending class arbitrations, particularly in commercial cases. This decision impacts every company which uses, or is considering using, arbitration clauses in its commercial or consumer contracts. It also has interesting implications on the currently hot debates over the role of arbitrators vs. courts, the "manifest disregard" standard of review, and the increasing use of class action waivers in consumer contracts.

Context of the Supreme Court's Decision

The Supreme Court granted cert in this case to review a decision of the Second Circuit, which had upheld an arbitral panel's partial award certifying a class of claimants in an antitrust action. The case was initially brought by Animalfeeds against the four major parcel tanker transportation companies, and was subsequently consolidated with similar suits brought by other parties. After motion practice regarding the obligations to arbitrate, the parties ultimately selected an arbitration panel and agreed to submit the question of whether their agreement allowed for class arbitration to a panel of arbitrators, who would be bound by rules (Class Rules) developed by the American Arbitration Association following the Supreme Court's decision in Green Tree Financial Corp. v. Bazzle, 539 U. S. 444. The arbitration clause at issue, contained in a standard commercial charter party agreement, was silent as to whether class arbitration would be permissible. Importantly, the parties stipulated that their silence meant that "no agreement" had been reached on this issue.

The arbitrators decided to allow class arbitration and certified a class, prompting appeal to the federal courts. The district court (S.D.N.Y. Rakoff, J.) vacated the award, ruling that the award was made in "manifest disregard" of the law since the arbitrators should have both conducted a choice-of-law analysis, and then applied the rule of federal maritime law requiring contracts to be interpreted in light of custom and usage. The Second Circuit reversed, holding that because petitioners had cited no authority applying a maritime rule of custom and usage against class arbitration, the arbitrators' decision was not in manifest disregard of maritime law; and that the arbitrators had not manifestly disregarded New York law which had not established a rule against class arbitration. The Second Circuit found, essentially, that it was within the arbitrators' power to make the award, and thus it was not reviewable under Section 10 of the Federal Arbitration Act.

Silence Is Not Consent

The Supreme Court's core holding is 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." Mere silence on class arbitration, the Court ruled, does not itself constitute consent to class arbitration -- principally because agreeing to arbitration is not the same thing as agreeing to class arbitration. The Court observed that class action arbitration "changes the nature of arbitration in various ways: (1) the arbitrator is charged with not resolving just a single dispute, "but instead resolves many disputes between hundreds or thousands of parties," (2) the "presumption of privacy and confidentiality" is lost, (3) the arbitrator's award "adjudicates the rights of absent parties," and (4) the commercial stakes are particularly significant, as in class litigation. As a result, an arbitrator cannot allow a class arbitration to proceed solely on the basis of a contract that the parties agree is silent on class arbitration.

When Can Class Arbitration Be Ordered?

While Stolt-Nielsen clearly states that class arbitration is only allowed when the parties have agreed to it, the Court deliberately provided no guidance on "what contractual basis may support a finding that the parties agreed to authorize class-action arbitration," nor the circumstances in which parol evidence might play a role in this inquiry.

The Court could easily avoid this difficult question in Stolt-Nielsen because the parties had stipulated that there was no agreement on the question of whether the parties agreed to authorize class arbitration. Put differently, in Stolt-Nielsen, the parties agreed that "silence" did not simply mean that the clause made no express reference to a class arbitration. Rather, the parties agreed that, "when a contract is silent on an issue there's been no agreement that has been reached on that issue." Similarly, the parties stipulated that the arbitration agreement was "not ambiguous so as to call for parol evidence."

In light of these stipulations, Stolt-Nielsen leaves courts and arbitrators understanding that they need to find some basis in a contract to reflect that the parties agreed that arbitration of claims could include class arbitration. Subsequent decisions will need to define what this means, particularly in the context of consumer contracts where class litigation may be more common.

Companies would be well advised to review their arbitration clauses in light of this decision, and if they seek to avoid class arbitration, include an express provision clarifying that the parties do not consent by this clause to class arbitration.

What about Class Arbitration Waivers?

Although Stolt-Nielsen did not mention the hot issue of class action waivers in general consumer contracts, its holding impacts them. After Stolt-Nielsen, if an arbitration clause governed by the FAA includes a class waiver, neither a court nor an arbitrator should require class arbitration, since (assuming a well-drafted clause) the parties unequivocally did not agree to class arbitration. The decision clearly shows favor toward enforcing class arbitration waivers, reemphasizing the critical importance under the FAA of ensuring that "private agreements to arbitrate are enforced according to their terms," and that courts and arbitrators "must give effect to the [parties'] contractual rights and expectations." On the other hand, Stolt-Nielsen does not resolve the question whether a court could in some circumstances refuse to enforce an arbitration clause (either one with a class arbitration waiver or one that is silent) altogether on public policy or unconscionability grounds. NOTE: It is possible that another case currently before the Supreme Court, Jackson v. Rent-a-Center (09-497), could shed further light on the question of when enforcement of a contract may appropriately be challenged on such grounds.

Still, Stolt-Nielsen is no doubt a victory for class arbitration waivers -- where a court or arbitrator might previously have required class arbitration based on a silent arbitration clause or in spite of a class arbitration waiver, now the most a panel or a court can do, absent a contractual indication of intent, is to decline to enforce the arbitration clause.

Who Decides Whether A Contract Permits Class Arbitration?

In 2003, in Green Tree Financial Corp v. Bazzle, a plurality opinion of the Supreme Court determined that an arbitrator, rather than a court, should decide whether an arbitration clause is "silent" on the issue of class arbitration, or permits class arbitration. Following Bazzle, courts and arbitrators typically sent this issue to arbitrators, in effect treating the Bazzle plurality opinion like a majority opinion. Stolt-Nielsen has thrown this approach into question, as Justice Alito clarifies that Bazzle did not establish the rule to be applied in deciding whether class arbitration is permitted, going so far as to say that the parties in Stolt-Nielsen (and impliedly, the courts) have misconstrued the Court's decision.

Here too, the Supreme Court declined to comment on the question because the parties had agreed to submit the issue to the arbitration panel. As a result, district and circuit courts have mixed guidance on the issue of who decides. Stolt-Nielsen threw the issue to arbitrators, subject only to the review of courts post-decision. And, while the Court emphasized the importance of the FAA and the body of case law that have evolved surrounding it, pronouncing that "[w]hile 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," arbitrators will likely continue to get the question in the first instance. On a practical level, arbitrators who generally are paid by the hour could potentially be inclined to expand the scope of the case before them by ordering a class arbitration if they believe there is the authority to do so -- another reason for drafters of arbitration clause to specifically exclude such power.

Does "Manifest Disregard" Survive?

The finality of arbitration awards, and the purview of judicial scrutiny, is also an interesting subject for debate in light of Stolt-Nielsen. The Court took the unusual step of vacating an award in a commercial case. Yet the Court specifically declined to give clear direction on whether the doctrine of "manifest disregard of the law" is valid, or not. The Supreme Court states, in a footnote, "We do not decide whether 'manifest disregard' survives our decision in Hall Street Associates LLC v. Mattel, Inc., 552 U.S. 576, 585 (2008), as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 U.S.C. §10." Yet at the same time, the Court faulted the arbitration panel, finding it violative of the FAA to "simply to impose its own view of sound policy regarding class arbitration." In light of this decision, many are hopeful that the future may hold more rigorous court review of the grounds for arbitration awards.