In Stolt-Nielsen, S.A. v. AnimalFeeds International Corp., No. 08-1198 (U.S. Apr. 27, 2010), the U.S. Supreme Court placed a significant roadblock in the path of commercial parties who desire to use arbitration as a vehicle to obtain classwide relief. 

In a 5-3 ruling (with Justice Sotomayor not participating), Justice Alito's majority opinion held that in the absence of evidence that commercial parties to an arbitration agreement intend that claims may be asserted on a classwide basis, an arbitration proceeding subject to the Federal Arbitration Act ("FAA") may address only the claims of those specific parties.  For the arbitration to proceed as a class action, either the arbitration agreement or other evidence must evince the parties' mutual intent to allow claims to be addressed on a class basis.

Question of Class Arbitration Disputed

Stolt-Nielsen and certain other shipping companies (the "Petitioners") charter seagoing vessels to customers who wish to ship small quantities of liquid products.  After a federal criminal investigation revealed that the Petitioners were involved in an illegal price-fixing conspiracy, some of their customers (including AnimalFeeds) filed putative class actions in federal court asserting antitrust claims against them. 

Eventually, all the suits were consolidated in the Southern District of New York, but not before the U.S. Court of Appeals for the Second Circuit (on appeal from a parallel lawsuit) held that the customers' antitrust claims were subject to arbitration under the terms of their charter parties (the contracts between the shipping company and the customer).  AnimalFeeds and the Petitioners thereafter agreed to arbitrate their antitrust dispute.

In initiating arbitration pursuant to its charter party, AnimalFeeds demanded class arbitration.  AnimalFeeds and the Petitioners agreed to submit to a three-arbitrator panel the threshold question of whether the arbitration could proceed on a class basis.  They stipulated that the charter party's arbitration clause was silent with respect to class arbitration and that they had not reached any agreement on this issue.

The arbitrators determined that, despite its silence, the arbitration clause permitted class arbitration because it did not preclude class arbitration.  They then stayed the arbitration to allow the parties to seek judicial review of their decision.  The district court vacated the arbitrators' decision, but the Second Circuit reversed on grounds that the decision was consistent with the absence of any indication, under either federal maritime law or applicable state law, that class arbitration is precluded unless specifically permitted.

Court Rules Silence Does Not Mean Consent

The Supreme Court reversed.  The majority opinion first concluded that the arbitrators had exceeded their authority by making a decision based on their concept of good policy rather than an evaluation of potentially applicable law.  According to the Court, the arbitrators' role was limited to identifying the rule of law that governs when an arbitration agreement is silent on the issue of class arbitration, but the panel failed to do so.  Instead, the Court observed, the arbitration panel improperly reviewed recent court decisions that "construed a wide variety of clauses in a wide variety of settings as allowing for class arbitration," and on that basis "develop[ed] what it viewed as the best rule to be applied in such a situation."

This preliminary determination that the arbitrators had exceeded their authority was necessary for the Court to address the merits of the arbitrators' decision, given the limited judicial review of arbitration awards permitted by the FAA.  The Court thereupon proceeded to rule that silence does not mean consent in the context of purported classwide arbitrations between sophisticated business entities.  In reaching this decision, the Court emphasized:

• The basic premise of the FAA that arbitration "is a matter of consent, not coercion";
• The Court's prior rulings indicating that, in light of the contractual nature of arbitration, the parties have the right to specify with whom they wish to arbitrate their disputes;
• The custom in the shipping business for the customer, rather than the shipping company, to choose the form of charter party (and thus the arbitration terms that will apply);
• The custom in the shipping business for parties to resolve disputes through bilateral, rather than class, arbitration; and
• The differing nature of bilateral and class arbitration, which reduces the probability that the anticipated benefits of arbitration found in a bilateral setting—lower cost, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes—would be attained in a class arbitration setting.

In light of these considerations, 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."  Because the arbitrators had focused on whether anything in the parties' arbitration agreement precluded class treatment, rather than whether there was evidence of intent to permit class treatment, the panel's decision was "fundamentally at war with the foundational FAA principle that arbitration is a matter of consent."  Indeed, the Court added, "the differences between bilateral and class-action arbitration are too great for arbitrators to presume, consistent with their limited powers under the FAA, that the parties' mere silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings."

Dissent Questions Court's Power to Review Arbitrator's Decision, as well as Court's Decision on the Merits

Justice Ginsburg's dissent, joined by Justices Stevens and Breyer, primarily addressed procedural matters.  First, she urged that the matter was not ripe for appellate review because the arbitrators' ruling was neither a final decision on the merits nor even a decision as to whether the claims advanced by AnimalFeeds were suitable for class resolution, who should be in the class or whether putative class members would have the right to opt out.  Second, she rejected the majority's conclusion that the arbitrators had exceeded their authority.  She urged that the limited judicial review permitted by the FAA did not allow courts to second guess the arbitrators' decision—regardless of whether that decision was legally correct.

Turning to the merits, the dissent analogized an arbitration provision to a forum selection clause and emphasized the apparent incongruity of allowing a plaintiff to assert class claims in a judicial forum but not in an arbitration forum.  This analysis, however, did not address the primary focus of the majority opinion:  that the intent of the parties necessarily must be the central consideration in any contractual analysis, including under the FAA.

Evidence of Mutual Consent to Class Arbitration Must Be Present Where Parties Are Both Sophisticated Business Entities; Different Rule May Be Appropriate in Other Situations

Stolt-Nielsen makes clear that if a commercial or other "sophisticated" entity wants to pursue classwide claims in arbitration against another commercial party, it must ensure that the applicable arbitration clause so provides.  At the very least, a commercial or other "sophisticated" entity must be able to present extrinsic evidence that the parties mutually consented to class arbitration.  Presumably, if the parties did agree that claims in arbitration may be pursued on a class basis, the Court's focus in Stolt-Nielsen on the intent of the parties will mandate that such an agreement be enforced.  Silence on this issue, however, will be construed in favor of bilateral, not class, arbitration.

It is not clear that Stolt-Nielsen will apply in settings that do not involve disputes between sophisticated business parties.  Unlike where sophisticated commercial entities are on both sides of a contract, bargaining power in these other settings—between a lender or a retailer and its customer, between a landlord and tenant, or between an employer and employee, for example—is usually unequal.  Courts and arbitrators may justifiably conclude that it is permissible in these settings to place the burden on the party who drafts (or at least chooses) the contract to expressly preclude class arbitration if that party desires to ensure that arbitration proceedings will address the claims of only a single claimant.  Businesses desirous of avoiding class arbitration therefore should be vigilant to ensure that their arbitration provisions clearly exclude the possibility of arbitration on a class basis.

Court Provides Opportunity for Broader Judicial Review of Arbitration Awards

Perhaps as important as the Court's substantive decision are the procedural aspects of its ruling.  The majority opinion cites the limited judicial review of arbitration awards permitted by Section 10 of the FAA and relies on Section 10(a)(4), 9 U.S.C. § 10(a)(4), which permits a court to vacate an arbitration award if the arbitrators "exceeded their powers."  The Court explicitly did not decide, however, whether "manifest disregard of the law," a standard developed in cases dating from the 1950s, survives as an independent ground for vacatur or as a judicial gloss on the enumerated grounds set forth in Section 10.  The viability of the "manifest disregard" standard had been, and remains, a disputed issue among the circuits.  Nonetheless, Stolt-Nielsen is likely to encourage litigants and courts to read Section 10(a)(4) as a broader license to review arbitrators' decisions than previously had been the case, and perhaps even at an earlier stage of arbitration proceedings than review typically occurs.  As the dissent points out, the Court's majority did so here, overturning a "threshold" decision by the arbitrators of the specific class-arbitration issue that the parties had explicitly referred to them.

A party that wishes to take full advantage of the arguably expanded judicial review endorsed by the Court should ensure that its arbitration provision calls for the arbitrator or arbitrators to render a reasoned award.  Absent such a provision, arbitration rules such as those of the American Arbitration Association do not require the arbitrator to issue anything other than a bottom-line award.  Indeed, to avoid judicial review, arbitrators often avoid writing a reasoned opinion.  Had the arbitrators in Stolt-Nielsen not explained their reasoning, the Court would have had much greater difficulty establishing that they had exceeded their authority as grounds to overturn their decision on arbitrability of a class action.