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Class Action Arbitration Defense Cases–Stolt-Nielsen v. AnimalFeeds: Supreme Court Holds Federal Arbitration Act (FAA) Requires Agreement To Arbitrate Claims Brought As Class Action

Party to Arbitration Clause Governed b y FAA (Federal Arbitration Act) may not be Compelled to Arbitrate Class Action Claims where Arbitration Clause is Silent on Class Action Arbitration Supreme Court Holds

Plaintiff AnimalFeeds is a company that “supplies raw ingredients, such as fish oil, to animal-feed producers around the world”; “AnimalFeeds ships its goods pursuant to a standard contract known in the maritime trade as a charter party.” Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., ___ U.S. ___ (April 27, 2010) [Slip Opn., at 1]. Defendants are various “shipping companies that serve a large share of the world market for parcel tankers—seagoing vessels with compartments that are separately chartered to customers wishing to ship liquids in small quantities.” Id. The charterers – like plaintiff – “typically select the particular charter party that governs their shipments”– not the shipowners. Id., at 2. And the contracts here at issue contained an arbitration clause that was silent as to the availability of class action relief in any arbitration, id. After a Department of Justice criminal investigation uncovered an illegal price-fixing conspiracy among the defendants, plaintiff filed a class action complaint in federal district court alleging antitrust violations. Id., at 2-3. The Judicial Panel on Multidistrict Litigation eventually consolidated the class action with similar class action lawsuits brought by other charterers. Id., at 3. The parties agreed that plaintiff must arbitrate the antitrust dispute, and plaintiff served defendants with a demand for class action arbitration in New York. Id. Defendants argued that class action relief was unavailable under the arbitration clause because “[a]ll the parties agree that when a contract is silent on an issue there’s been no agreement that has been reached on that issue”; the parties agreed to submit the question of class arbitration to a panel of three arbitrators. Id., at 3-4. The arbitrators disagreed and concluded that class action relief could be had under the arbitration clause. Id., at 4. Defendants moved the district court to vacate the arbitrators’ award; the district court agreed with defendants that the arbitrators’ decision constituted a “manifest disregard” of federal maritime law and accordingly vacated the award. Id., at 4-5. The Second Circuit reversed on the ground that “because [defendants] had cited no authority applying a federal maritime rule of custom and usage against class arbitration, the arbitrators’ decision was not in manifest disregard of federal maritime law.” Id., at 5. The Supreme Court granted certiorari “to decide whether imposing class arbitration on parties whose arbitration clauses are ‘silent’ on that issue is consistent with the Federal Arbitration Act (FAA), 9 U. S. C. §1 et seq.” Id., at 1. The High Court reversed.

The arbitration clause at issue provides: “Arbitration. Any dispute arising from the making, performance or termination of this Charter Party shall be settled in New York, Owner and Charterer each appointing an arbitrator, who shall be a merchant, broker or individual experienced in the shipping business; the two thus chosen, if they cannot agree, shall nominate a third arbitrator who shall be an Admiralty lawyer. Such arbitration shall be conducted in conformity with the provisions and procedure of the United States Arbitration Act [i.e., the FAA], and a judgment of the Court shall be entered upon any award made by said arbitrator.” Stolt-Nielsen, at 2. The standard of review of the arbitrators’ decision is very narrow: the Supreme Court explained, “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.” Id., at 7 (citation omitted).

The High Court quoted the three grounds advanced in support of permitting class action arbitration: “The parties’ arbitration clause should be construed to allow class arbitration because (a) the clause is silent on the issue of class treatment and, without express prohibition, class arbitration is permitted under Bazzle; (b) the clause should be construed to permit class arbitration as a matter of public policy; and (c) the clause would be unconscionable and unenforceable if it forbade class arbitration.” Stolt-Nielsen, at 8. The arbitrators had allowed class action arbitration on the second ground, agreeing with the public policy argument. Id. The Supreme Court noted that the arbitrators “expressly rejected [the] first argument…and said nothing about the third.” Id. The arbitrators did not address whether they were basing their decision on the Federal Arbitration Act (FAA), maritime law, or on New York law. Id., at 8-9. “Rather than inquiring whether the FAA, maritime law, or New York law contains a ‘default rule’ under which an arbitration clause is construed as allowing class arbitration in the absence of express consent, the panel proceeded as if it had the authority of a common-law court to develop what it viewed as the best rule to be applied in such a situation.” Id., at 9. In the Supreme Court’s view, “The conclusion is inescapable that the panel simply imposed its own conception of sound policy.” Id., at 11. In sum, “In sum, instead of identifying and applying a rule of decision derived from the FAA or either maritime or New York law, the arbitration panel imposed its own policy choice and thus exceeded its powers.” Id., at 12.

The issue then became whether to remand to the arbitrators for rehearing or whether the Supreme Court should rule on the issue: the Court explained, “Because we conclude that there can be only one possible outcome on the facts before us, we see no need to direct a rehearing by the arbitrators.” Stolt-Nielsen, at 12. The Court first explained that Bazzle did not control in this case, particularly since the plurality opinion failed to gain a majority on any of the three issues before the Court. See id., at 12-15. For this reason, the Bazzle opinion “baffled the parties in this case at the time of the arbitration proceeding” because, for example, they “believed that the judgment in Bazzle requires an arbitrator, not a court, to decide whether a contract permits class arbitration.” Id., at 15. Bazzle did not resolve that issue, as “only the plurality decided that question,” but in light of the parties’ agreement to submit the issue to the arbitration panel the Supreme Court found it unnecessary to resolve this question. Id., at 15-16. The parties also misunderstood Bazzle to hold “that it established the standard to be applied by a decision maker in determining whether a contract may permissibly be interpreted to allow class arbitration.” Id., at 16. But “Bazzle did not establish the rule to be applied in deciding whether class arbitration is permitted.” Id. The Supreme Court turned, therefore, to this question left open by Bazzle. Id., at 16-17.

The High Court began by discussing the FAA, which “imposes certain rules of fundamental importance, including the basic precept that arbitration ‘is a matter of consent, not coercion.’” Stolt-Nielsen, at 17 (citation omitted). And the FAA expressly addresses arbitration agreements in maritime transactions, id., at 18. But the focus of the Court’s analysis does not appear to be limited to maritime law. On the contrary, the Supreme Court’s analysis is cast in broad strokes: the opinion focuses on the intent of the parties, because “courts and arbitrators must ‘give effect to the contractual rights and expectations of the parties’” and because “[the] parties may specify with whom they choose to arbitrate their disputes.” Id., at 18-20 (citations omitted). In other words, “It falls to courts and arbitrators to give effect to these contractual limitations, and when doing so, courts and arbitrators must not lose sight of the purpose of the exercise: to give effect to the intent of the parties.” Id., at 20 (citation omitted).

The Supreme Court therefore reversed, finding that “[t]he panel’s conclusion is fundamentally at war with the foundational FAA principle that arbitration is a matter of consent.” Stolt-Nielsen, at 20. Based on its analysis, the Court stated at page 20, “From these principles, it follows 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.” (Italics added.) And the parties had not done so here. Id. More to the point, the High Court held at page 21, “An implicit agreement to authorize class-action arbitration, however, is not a term that the arbitrator may infer solely from the fact of the parties’ agreement to arbitrate. 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.” Accordingly, “consistent with our precedents emphasizing the consensual basis of arbitration, we see the question as being whether the parties agreed to authorize class arbitration. Here, where the parties stipulated that there was ‘no agreement’ on this question, it follows that the parties cannot be compelled to submit their dispute to class arbitration.” Id., at 23. The Supreme Court therefore held that class action arbitration could not be compelled, and reversed. Id.

NOTE: Justice Ginsburg dissented, joined by Justices Stevens and Breyer, on the grounds that review was improvidently granted and, if she were to reach the merits, the award should be upheld. Justice Ginsburg summarized her conclusions on the first page of her dissent as follows:

When an arbitration clause is silent on the question, may arbitration proceed on behalf of a class? The Court prematurely takes up that important question and, indulging in de novo review, overturns the ruling of experienced arbitrators.

The Court errs in addressing an issue not ripe for judicial review. Compounding that error, the Court substitutes its judgment for that of the decisionmakers chosen by the parties. I would dismiss the petition as improvidently granted. Were I to reach the merits, I would ad-here to the strict limitations the Federal Arbitration Act (FAA), 9 U. S. C. §1 et seq., places on judicial review of arbitral awards. §10. Accordingly, I would affirm the judgment of the Second Circuit, which rejected petitioners’ plea for vacation of the arbitrators’ decision. (Footnotes omitted.)

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