On April 27, 2010, the United States Supreme Court in Stolt-Nielsen S.A. v. AnimalFeeds International Corp. held 5-3 that, under the Federal Arbitration Act (the “FAA”), if a commercial arbitration agreement is silent on whether it allows for class arbitration, an arbitration panel or court cannot allow class arbitration. (Justice Sotomayor took no part in the decision.)

Background

The case arose out of a series of antitrust disputes subject to international maritime agreements among seagoing shipping companies. Respondent AnimalFeeds filed a class action in federal district court alleging that the shipping companies engaged in a price-fixing conspiracy. The Second Circuit, thereafter, held that the claims arose under contracts with enforceable arbitration clauses, and that the antitrust claims were arbitrable.

The arbitration clause in the contract between the parties was silent on whether class arbitration was allowed. The parties stipulated before the arbitration panel that the agreement was “silent” on the issue, and asked the panel to determine whether class arbitration was permissible under the contract. The arbitration panel concluded that the arbitration clause allowed for class arbitration but the panel’s reasoning was unclear. The arbitrators stayed the proceeding to allow the parties to seek judicial review of this preliminary order. The issue was appealed to the District Court for the Southern District of New York, which reversed the arbitration panel. That decision, in turn, was appealed to the Second Circuit Court of Appeals, which reversed the District Court. The Supreme Court granted certiorari, and has now reversed the Second Circuit.

Supreme Court’s Decision

Writing for the majority, Justice Alito emphasized the contractual nature of arbitration, "an arbitrator derives his or her powers from the parties' agreement to forgo the legal process and submit their disputes to private dispute resolution." The Court noted that "The FAA imposes certain rules of fundamental importance, including the basic precept that arbitration 'is a matter of consent, not coercion,'" and therefore the arbitration panel’s conclusion “is fundamentally at war with [that] foundational FAA principle.”

This analysis led the Court to determine that a commercial arbitration clause that is silent regarding class arbitration cannot be read to allow class arbitration: "class-action arbitration changes the nature of 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."

The dissent, written by Justice Ginsburg, argued, based on other provisions of the FAA, that the Court did not need to reach the merits, and should have sent the matter back because the preliminary ruling was not subject to appeal under the FAA. The dissent furthermore noted that the Supreme Court has never before reviewed an arbitration award as preliminary as the one in this case. The dissenters also pointed out that, even if the case was ripe for review, the Court should still have rejected it on the merits because the parties, by jointly asking the arbitrators to decide whether the arbitration clause permitted class proceedings, empowered the panel to settle that issue.

Implications

Where commercial agreements are truly silent on class arbitration, Stolt-Nielsen offers comfort that an arbitration panel or court will not allow class arbitrations. It must be emphasized, however, that Stolt-Nielsen applies only where it is undisputed that the agreement is truly silent on the issue of class arbitration; i.e., where the parties had not reached any agreement on whether class arbitration is permitted. (Indeed, the parties in Stolt-Nielsen stipulated that there was no agreement on the issue.) In other commercial agreements, the issue of whether the arbitration clause is truly “silent” on class arbitration could itself be in dispute, which would lead to the usual fight over contract interpretation.

For those entering into commercial agreements who wish to avoid class arbitration, while it appears safe to say—after Stolt-Nielsen—that an arbitration panel or court would not allow class arbitration (when the agreement is truly silent), it is nevertheless prudent to draft agreements to exclude class arbitration explicitly from the arbitration provisions.

While Stolt-Nielsen clearly applies to arbitration agreements in the commercial context, the Court this week also heard Rent-A-Center West, Inc. v. Jackson, a case about the enforceability of arbitration provisions in consumer contracts such as short-term rental agreements. Such clauses have been challenged as unconscionable. It is unclear whether Stolt-Nielsen would have any applicability in the consumer or employment context.