• Supreme Court Holds No Class Arbitration under FAA where Parties' Agreement is Silent on Issue
  • May 7, 2010 | Authors: Amy J. Gittler; David L. Gordon; David E. Nagle; Peter H. Nohle
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  • The Supreme Court has held that a party may not be compelled to submit to class-wide arbitration under the Federal Arbitration Act (FAA) where the parties’ arbitration agreement is silent on the issue. Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., No. 08-1198 (U.S. Apr. 27, 2010).  The Court, in a consolidated antitrust action between an association of charter-shipping companies and their customers, ruled that the FAA requires a contractual basis for concluding that a party affirmatively agreed to submit a dispute to class arbitration.  The Court ruled that an agreement to authorize class arbitration may not be inferred solely from the fact of an agreement to arbitrate. Justice Sotomayor took no part in the consideration or decision of the case.

    The Facts and Prior Proceedings

    An association of charter-shipping companies was sued by a number of customers in a series of separate actions alleging antitrust claims premised on an illegal price-fixing conspiracy.  Following consolidation of the claims and a determination that the claims were subject to a contractual provision calling for arbitration in New York under the FAA, the customers sought to pursue their claims on a class-wide basis in an arbitral forum.  The parties selected a panel of arbitrators and submitted to them the threshold question of whether the arbitration clause permitted the arbitration to proceed on behalf of or against a class.  The parties agreed that the arbitration clause was silent on the issue of class arbitration — it not only made no express reference to class arbitration, but the parties specifically agreed that no agreement had been reached on the issue.
     
    The panel of arbitrators concluded that, in the absence of any evidence of an intent to preclude arbitration, the clause permitted resolution of class claims in the arbitral forum.  The panel found persuasive the fact that many arbitrators “had construed a wide variety of clauses in a wide variety of settings as allowing for class arbitration.”  (Since July 2005, the American Arbitration Association has taken the position, as a matter of policy, that it will administer class arbitrations where an agreement is silent with respect to class claims, consolidation or joinder of claims.)

    The arbitrators stayed the proceeding while the association sought to vacate the panel’s determination in the District Court for the Southern District of New York pursuant to the § 10(a)(4) of the FAA, which authorizes a District Court to “make an order vacating the award upon the application of any party to the arbitration . . . where the arbitrators exceeded their powers.”  The court vacated the panel’s decision, concluding the decision was made in “manifest disregard” of the law.  The court said the panel failed to conduct a choice-of-law analysis, and that had it done so, it would have applied the rule of federal maritime law (applicable to charter shipping companies) requiring that contracts be interpreted in light of custom and usage.

    On appeal, the United States Court of Appeals for the Second Circuit reversed, holding that as nothing in federal maritime law established a rule against class arbitration, the decision was not in “manifest disregard” of the law as the lower court stated.
    The Supreme Court agreed to review the caseto determine whether the arbitration panel’s decision to impose class arbitration on parties to a dispute in circumstances where their agreement is silent on the issue is permissible under the FAA.

    Class Arbitration May Not Be Compelled Absent Affirmative Consent

    In its ruling, the Supreme Court first emphasized the high hurdle which must be cleared to vacate an arbitrator’s award.  Error, “even a serious error,” is not enough.  To vacate this arbitration panel’s award on the grounds that it exceeded its powers requires a showing that the panel has gone beyond interpretation and enforcement of the agreement, and has instead imposed its own view of policy.
     
    The Court held that under the FAA a party may not be compelled to submit to class arbitration “unless there is a contractual basis for concluding that the party agreed to do so.”

    The Court found that in the present case, the arbitration panel failed to engage in the required contractual analysis and instead accepted the argument of those seeking class arbitration that the clause should be construed to permit class arbitration as a matter of public policy.  In so doing, “the panel simply imposed its own conception of sound policy” rather than basing its determination on the agreement of the parties.  Where the parties concurred that they had reached no agreement on the issue of class arbitration, the panel exceeded its powers in ordering the parties to proceed in that manner.  Accordingly, the Supreme Court vacated the award authorizing class arbitration.  The Supreme Court declined to direct a rehearing before the arbitration panel as, in its view, “there can be only one possible outcome[.]”

    The Supreme Court held that although it may be appropriate to presume parties to an arbitration agreement implicitly authorize an arbitrator to adopt procedures necessary to give effect to the agreement, “[a]n implicit agreement to authorize class-action arbitration . . . is not a term that the arbitrator may infer solely from the fact of the parties’ agreement to arbitrate.”  The Court’s five-justice majority held that although the class action device is arguably a procedural mechanism, it changes the nature of arbitration to such a degree that there must be a showing that the parties affirmatively agreed to submit their dispute to class arbitration.  Where, as here,  the arbitration clause is silent on the issue, and it is undisputed  that there was no agreement with regard to class arbitration, the parties cannot be compelled to arbitrate their dispute on a class-wide basis.

    As the absence of consent to class arbitration was established here, the Court did not have to address the possibility that affirmative consent to class-wide arbitration could be evidenced by something other than express agreement, including such traditional aids to contract interpretation as custom and usage or a “default rule” under the particular law governing the dispute.
     
    Justice Ginsburg, joined by Justices Stevens and Breyer, in dissent, suggested that contracts of adhesion may be “spare[d]” from the “affirmative-authorization requirement” embraced in the majority opinion — an observation certain to lead to future challenges.

    Practical Implications for Employers

    The Stolt-Nielsen decision has the potential to significantly curtail class arbitrations in the employment context, particularly where the agreement is silent on the issue of class arbitration and is not a contract of adhesion.  Nonetheless, such reliance on arbitration agreements is not a certainty.  For example, certain arbitration service providers, in the past, have taken the position that their rules for class arbitration allow collective actions under the Fair Labor Standards Act (FLSA) to proceed on an opt-out basis (rather than an opt-in basis as provided under § 16(b) of the FLSA), thereby significantly increasing the size of the class.  How they will react to this ruling is uncertain. The decision, however, will undermine court rulings rejecting efforts to compel arbitration in reliance upon an agreement which prohibits class actions, where such a provision was cited as a factor in an unconscionability analysis.