U.S. Supreme Court Issues Stolt-Nielsen Decision on Class Arbitration

In an April 27, 2010 decision with important implications for reinsurance arbitrations, Stolt-Nielsen S.A., et al. v. AnimalFeeds Int'l Corp., the United States Supreme Court held that it is inconsistent with the Federal Arbitration Act ("FAA") to impose class arbitration on parties where the applicable arbitration clause is silent on the issue.

The litigation in Stolt-Nielsen arose from a shipping contract known as a "charter party." The charter party contract (between shipping companies and their customer AnimalFeeds) was a highly standardized contract containing an arbitration clause that did not address class arbitration. After AnimalFeeds learned of a Department of Justice investigation of the shipping companies, it brought a class action suit against the shipping companies in federal court asserting antitrust claims of alleged price fixing. The suit was consolidated with similar actions, including one in which the Second Circuit Court of Appeals eventually determined that the claims were arbitrable.

The shipping companies and AnimalFeeds thereupon agreed that their dispute was arbitrable, and AnimalFeeds served the shipping companies with a demand for class arbitration, i.e., a demand for arbitration in which AnimalFeeds sought to represent similarly situated parties. AnimalFeeds and the shipping companies agreed that the applicable contract was silent on the issue of class arbitration, and agreed to submit to the arbitrators the question of whether class arbitration was available. The arbitration panel concluded that the parties' arbitration clause permitted class arbitration, but then stayed the proceeding to allow for judicial review of its ruling. The Southern District of New York vacated the ruling, the Second Circuit reversed, and the Supreme Court granted certiorari.

The Supreme Court held (in a 5-3 decision) that the arbitrators "exceeded their powers" under § 10(a)(4) of the FAA by not "identifying and applying a rule of decision derived from the FAA or either maritime or New York law" and, instead, simply imposing their own policy choices and preferences in favor of class arbitration. Slip Op., p. 12 (see link below). Central to the Court's ruling was the parties' stipulation that the applicable arbitration clause was silent on class arbitration. The Court emphasized that arbitration is "a matter of consent, not coercion," and that courts and arbitrators must "give effect to the contractual rights and expectations of the parties" when enforcing or construing an arbitration clause. Slip Op., pp. 17-18. Indeed, the Court noted that parties to an arbitration agreement are given great leeway to vary the terms of an agreement, such as limiting the issues they choose to arbitrate and choosing the rules under which the arbitration will proceed. Accordingly, the Court felt it was "clear from [its] precedents and the contractual nature of arbitration that parties may specify with whom they choose to arbitrate their disputes." Slip Op., p. 19.

The Court also distinguished (and further explained) its earlier decision in Bazzle v. Green Tree Financial Corp., 539 U.S. 444 (2003). According to the Court, Bazzle simply addressed which decision maker should determine whether the contract at issue was silent on the issue of class arbitration. (Bazzle held that the arbitrator, and not a court, should decide that issue, because it was not a "gateway" issue such as whether a valid arbitration agreement exists or whether a particular claim is in fact arbitrable.) However, the Court made clear that Bazzle did not identify the standard that should be applied in determining whether class arbitration is permitted or precluded under a particular agreement, or that that class arbitration was appropriate in that case.

Thus, the Court held 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." Slip Op., p. 20. Because AnimalFeeds and the shipping companies both acknowledged that the contract was silent on the issue, class arbitration was inappropriate. Moreover, while the Court acknowledged that it may be appropriate to presume that the parties, by entering into an arbitration agreement, implicitly authorized the arbitrator to adopt procedural rules, no such inference can be made about class arbitration. "This is so because 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." Slip Op., p. 21.

A copy of the Court's opinion in Stolt-Nielson can be found here.