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Absent An Agreement Between The Parties To The Contrary, Imposing Class Arbitration On The Parties Is Inconsistent With The Federal Arbitration Act

In Stolt-Nielsen S.A. v. AnimalFeeds International Corp. (No. 08-1198), 559 U.S. ____ (2010), the Supreme Court refused to force class arbitration where the parties had not previously consented to it.

Stolt is a shipping company. AnimalFeeds shipped products with Stolt pursuant to a standard contract. The contract had an arbitration clause, which, the parties stipulated, did not address whether class arbitration was proper.

A criminal investigation revealed that Stolt was engaged in an illegal price fixing conspiracy. Upon learning of the conspiracy, AnimalFeeds brought class action against Stolt in the District Court for the Eastern District of Pennsylvania asserting antitrust claims. Other companies brought similar suits, including one in the District Court for the District of Connecticut. In the Connecticut case the District Court held the claims were not subject to arbitration under the contract’s arbitration clause. The Second Circuit, however, reversed.

While the Connecticut case was at the Second Circuit, the Judicial Panel on Multidistrict Litigation consolidated all of the cases, including AnimalFeeds’ case, in the District of Connecticut. As such, AnimalFeed and Stolt were required to arbitrate their dispute pursuant to the Second Circuit’s decision.

Then AnimalFeed submitted to Stolt a claim for class arbitration in New York City. The parties agreed that a panel of arbitrators would determine if class arbitration was proper under the governing arbitration clause. As part of this process the parties stipulated that the arbitration clause was silent on the issue of class arbitration.

AnimalFeeds gave three reasons for allowing class arbitration. First, since the arbitration clause was silent on the issue, class arbitration was permitted under Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003). Second, the clause should allow class arbitration as a matter of public policy. And third, the arbitration clause is unconscionable and unenforceable if it forbade class actions.

The panel of arbitrators rejected AnimalFeeds’ first argument, and the Supreme Court agreed. Also, the panel did not address AnimalFeeds’ third argument. Instead, the arbitrators determined that class arbitration was proper as a matter of public policy. Specifically, “the panel based its decision on post-Bazzle arbitral decisions that ‘construed a wide variety of clauses in a wide variety of settings as allowing for class arbitration.’” The arbitration was then stayed to allow for judicial review. The District Court for the Southern District of New York vacated the arbitrators’ decision, but again the Second Circuit reversed.

The Supreme Court explained that the job of an arbitrator is to interpret and enforce a contract. An arbitrator’s decision is unenforceable if he exceeds that mandate. By relying on post-Bazzle arbitral decisions and acting as if they had the powers of a common law court, the arbitrators exceeded their authority. Instead, the panel was required to determining what the absence of an agreement to class arbitration meant under the FAA, federal maritime law, or New York law. Since the arbitrators exceeded their authority, the Supreme Court vacated the arbitrators’ decision and decided the issue themselves under §10(b) of the FAA.

According to the Court, the Federal Arbitration Act imposes specific “rules of fundamental importance.” One of these rules is “that arbitration ‘is a matter of consent, not coercion.’” Arbitration agreements are contracts, which should be enforced according to the parties’ intentions. As such, parties can structure their agreements to arbitrate as they see fit, and can choose with whom they want to arbitrate. Thus, ‘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.”

Because of the fundamental differences between class arbitration and bilateral arbitration, an agreement to arbitrate, alone, cannot be construed as an agreement to accept class arbitration. The Court, therefore, held that absent an agreement to accept class arbitration, imposing class arbitration on the parties is inconsistent with the FAA.

Jason B. Desiderio, Esq.

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This page contains a single entry from the blog posted on May 7, 2010 6:05 PM.

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