On April 27, 2010, the US Supreme Court ruled in Stolt-Nielsen SA, et al. v. AnimalFeeds Int'l Corp. that, under the Federal Arbitration Act (FAA), compelling arbitrating parties to submit to class arbitration pursuant to an arbitration agreement silent on the subject "is fundamentally at war with the foundational FAA principle that arbitration is a matter of consent." The case arises out of an arbitral award requiring client Stolt-Nielsen and other ship owners to arbitrate their customers' antitrust claims on a class basis under arbitration agreements silent on the class issue. Justice Alito authored the majority opinion, which Chief Justice Roberts and Justices Scalia, Kennedy, and Thomas joined. Justice Ginsburg authored a dissent, which Justices Stevens and Breyer joined. Justice Sotomayor took no part in the consideration or decision of the case.
In 2003, various customers brought class-action lawsuits against four parcel tanker shipping companies, including Stolt-Nielsen, alleging a price-fixing conspiracy and seeking treble damages under the Sherman Act. Among the putative class plaintiffs were JLM Industries, Inc. and AnimalFeeds International Corp ("AnimalFeeds"). The ship owners moved to compel arbitration of the various putative class-action lawsuits pursuant to the terms of their maritime contracts. In October 2004, the US Court of Appeals for the Second Circuit issued a landmark decision, JLM Indus., Inc. v. Stolt-Nielsen S.A., 387 F.3d 163 (2d Cir. 2004), requiring arbitration of the customers' antitrust claims under the parties' arbitration clauses.
As a consequence of the JLM Industries decision, all of the customers' putative antitrust class actions relating to the 2003 Department of Justice investigation then pending in a federal multidistrict litigation proceeding were required to proceed in arbitration—not litigation. Stolt-Nielsen and the other defendants then agreed to a consolidated arbitration with five of the putative class plaintiffs, including JLM Industries and AnimalFeeds. Stolt-Nielsen and the other defendants, however, vigorously disputed that class arbitration was available under the parties' arbitration agreements in the absence of the ship owners' consent. In resolving the dispute, the parties adopted Rules 3 through 7 of the AAA Supplementary Rules on Class Arbitration. These rules require, among other things, that the arbitrators initially construe the arbitration clause to determine the availability of class arbitration and issue a Partial Final Award on Clause Construction. Importantly, Rule 3 also provides an immediate right of appeal to a federal district court.
On December 20, 2005, relying on AAA arbitration decisions principally involving consumer actions governed by various state laws, the arbitrators ruled that the parties' silent maritime arbitration clauses could be construed to permit class arbitration. The arbitrators gave no weight to Stolt-Nielsen's undisputed evidence that established maritime custom and practice precluded class arbitration absent express consent.
The ship owners petitioned the United States District Court for the Southern District of New York to vacate the arbitrators' award. On June 26, 2006, the District Court vacated the arbitral award for manifest disregard of the law. The court held that the arbitrators' award disregarded governing maritime law prohibiting the imposition of class arbitration upon parties without their express consent.
AnimalFeeds then appealed to the US Court of Appeals for the Second Circuit. On November 4, 2008, a panel of the Second Circuit reversed the District Court's ruling. In reaching its decision, the Second Circuit panel held that the Supreme Court's decision in Green Tree Financial Corp. v. Bazzle, 539 US 444 (2003), effectively abrogated prior Second Circuit and other circuit courts of appeals' precedent interpreting the FAA to prohibit class-action or consolidated arbitration absent the express consent of the parties.
On March 26, 2009, Stolt-Nielsen and the other ship owners petitioned the Supreme Court for certiorari review. On June 15, 2009, the Supreme Court granted the petition for certiorari, and the Court issued its decision on the merits on April 27, 2010.
At the outset, the Court reviewed the high threshold for vacatur of an arbitral opinion under the FAA. In describing the circumstances that permit vacatur under Section 10 of the FAA for exceeding authority, the Court held: "It is only when [an] arbitrator strays from interpretation and application of the agreement and effectively 'dispense[s] his own brand of industrial justice' that his decision may be unenforceable."1 In prior cases, the Court had applied this standard primarily, if not exclusively, in the context of labor arbitrations.
The Court then examined the three arguments that AnimalFeeds made to the arbitrators to support inferring class arbitration where the clause was silent. The Court concluded that the arbitrators apparently rested their decision on only one—that "the clause should be construed to permit class arbitration as a matter of public policy."2
According to the Court, "what the arbitration panel did was simply to impose its own view of sound policy regarding class arbitration."3 Under such circumstances, the Court ruled that a decision "may be vacated under Section 10(a)(4) of the FAA on the ground that the arbitrator 'exceeded [his] powers,' for the task of an arbitrator is to interpret and enforce a contract, not to make public policy."4 The Court specified that parties may not be forced to arbitrate on a class basis "unless there is a contractual basis for concluding that the party agreed to do so."5
The Court explained further that absent a contractual basis for permitting class arbitration, "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."6
Under the auspices of the American Arbitration Association alone, there are currently more than 100 active arbitrations that have been filed as class arbitrations. All of these arbitrations were filed in the wake of Bazzle and are presently at different stages—in some a clause construction award has yet to be entered, while in others the parties may be at the class determination or damages phase. The AAA has announced it has formed a committee to revise its rules and policy statement to address the Stolt-Nielsen decision.
With the Court's repudiation of Bazzle and the AAA's announced rules and policy review, businesses clearly will need to examine their current arbitration contracts. One can also expect that a large number of companies currently embroiled in various stages of class arbitration proceedings will look to the Stolt-Nielsen decision either to defeat class arbitration claims at the outset or to determine whether a rehearing on the issue is available.
The Court's Stolt-Nielsen decision raises, but does not answer, a number of issues relevant to future arbitrations. For example, Stolt-Nielsen creates a strong negative inference as to whether the Bazzle decision—which Stolt-Nielsen underscores was merely a plurality opinion—even stands for the proposition that it is the arbitrator, not the court, that decides the clause construction issue in the first instance. In other words, after Stolt-Nielsen, it is not at all clear that it is for the arbitrator, not the courts, to decide if the clause permits class arbitration. Additionally, in dismissing AnimalFeeds' argument that the arbitrators' clause construction decision was not ripe for review, the Court held that Stolt-Nielsen had met the requisite test for the constitutional ripeness, creating a clearer standard for establishing a hardship in this arbitration context. But, the Court left open and expressly did not decide whether future courts may consider the question of prudential ripeness.7
The decision's impact on the availability of class arbitration in general may depend on how lower courts construe the Supreme Court's requirement that a "contractual basis" for class arbitration must exist—a term which the Court declined to define. Unlike this case, plaintiffs in general are unlikely to stipulate that the contract is "silent." In the absence of "silence" or an outright ban on class arbitration, proponents of class arbitration likely will seek textual clues to establish "consent."
Meanwhile, the issue of consumer contracts and unconscionability will likely continue to play a major role in lower court decisions. Just six days after issuing its opinion in Stolt-Nielsen, the Court issued a grant, vacate and remand order in American Express Co. v. Italian Colors Restaurant, No. 08-1473, 2010 WL 1740528 (2010), dealing with unconscionability of class arbitration waivers in consumer contracts, in light of the Stolt-Nielsen decision. Indeed, the issue of unconscionability was raised in Stolt-Nielsen. In her dissent, Justice Ginsburg argued the majority's decision in Stolt-Nielsen will not shut the door to all class arbitration, particularly arbitration related to standard form contracts used in business transactions. However, the Stolt-Nielsen decision could undoubtedly create a significant barrier to class arbitration.
In short, the Stolt-Nielsen decision added needed clarity to an unsettled and hotly disputed area of arbitration law. It is now clear that consent is the sine qua non of class—or any other species of—arbitration. Perhaps this will lead to arbitral analysis more closely tied to the contractual expectations of the parties. Fortunately, this clarity is not outweighed by the open questions that remain: What of unconscionability? And when are these questions ripe for review? Stay tuned.