US Supreme Court Limits Class Arbitrations

July 16, 2010 by

In a decision that may spark Congress to pass legislation limiting contractual arbitration provisions, the U.S. Supreme Court in Stolt-Nielsen S.A. v. AnimalFeeds International Corp.,130 S.Ct. 1758 (2010), 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.”

In this case, AnimalFeeds brought antitrust class action claims against Stolt-Nielsen, and the parties agreed to submit the issue of class arbitration to an arbitration panel.  The parties stipulated that the agreement was “silent,” however, with respect to class action arbitration.

The arbitration panel concluded that the arbitration clause allowed class arbitration.  Stolt-Nielsen filed an application to vacate the arbitrators’ award in the U.S. District Court for the Southern District of New York.  The District Court vacated the award, determining that the panel failed to conduct a choice-of-law analysis, which would have resulted in the application of federal maritime law. The Second Circuit Court of Appeals reversed, holding that because Stolt-Nielsen cited no authority applying a federal maritime rule of custom and usage against class arbitration, the panel’s decision was not in manifest disregard of federal maritime law.

The Supreme Court reversed the Second Circuit’s decision, concluding that the panel’s decision was not based on a determination regarding the parties’ intent and the panel thus exceeded its powers. Ultimately, the Court determined that absent an explicit agreement to do so, “a party may not be compelled under the FAA to submit to class arbitration.”

Justice Ginsburg authored a dissent, which was joined by Justices Stevens and Breyer. The dissent first questioned whether the case was ripe for Supreme Court review. Section 16 of the FAA allows appellate review of a district court decision “confirming or denying confirmation of an award or partial award.” Here, the dissent suggested, the panel’s determination was neither an award nor a partial award.

When it turned to the merits of the arbitration panel’s decision, the dissent noted that the parties had agreed to refer this specific question to the panel. “The parties’ supplemental agreement, referring the class-arbitration issue to an arbitration panel, undoubtedly empowered the arbitrators to render their clause-construction decision. That scarcely debatable point should resolve the case.”

Finally, the dissent noted that the majority decision is limited because the majority observed that the parties were “sophisticated business entities” and that AnimalFeeds chose the charter party. The dissent suggests that the majority decision leaves open the issue of whether the result would be different under a consumer contract.

I think the majority was wrong in at least two respects.  First, the FAA requires that appellate review is limited to “arbitration awards.”  What was at issue in this case was not an award—just a preliminary procedural ruling.

Second, this holding should be limited to situations where the parties have equal bargaining power.  In consumer transactions, where one party is being forced into arbitration against its will, the party with the small claims that can only effectively be advanced in a class action will find itself completely without effective remedies if arbitration clauses are considered to be inherently incompatible with class actions unless they are expressly authorized.

Nonetheless, the Stolt decision is going to drastically limit the number of class-action arbitrations.  We are going back to where we were 10 years ago.

However, the Stolt decision might light a fire under Congress to pass the Arbitration Fairness Act, which has been introduced in both the U.S. Senate and the House of Representatives. If passed, the law would bar arbitration clauses contained in consumer, employment, and franchisee agreements. If an arbitration clause in a consumer contract is unenforceable, you never get to the issue of class arbitration because you proceed to a class action.

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Steve Larson
An experienced trial lawyer who handles both hourly and contingent fee cases, Steve has expertise in class actions, consumer cases, antitrust litigation, securities litigation, corporate disputes, intellectual property disputes, unfair competition claims, employment matters, and disputes involving family wealth. Steve regularly represents individuals and businesses in federal and state court and has obtained class-wide recovery in multiple class actions. A veteran practitioner, Steve's clients value his creative approach to resolving complex litigation matters.

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