Arbitration--United States Supreme Court sounds the death knell for class arbitration--Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 130 S. CT. 1758 (2010).

• Author: Sugumaran, Keerthi

Over the last few decades arbitration has gained increasing popularity because consumer, commercial, and employment contracts regularly incorporate mandatory arbitration clauses. (1) As a result, numerous questions exist regarding the scope and enforceability of arbitration clauses, particularly with respect to the use of class arbitration. (2) In Stolt-Nielsen S.A. v. AnimalFeeds International, Corp., (3) the United States Supreme Court considered whether imposing class arbitration on parties whose arbitration clauses are silent on the use of class arbitration is consistent with the Federal Arbitration Act ("FAA")--an issue that previously divided federal courts. (4) Sharply retreating from precedent, the Court held that the FAA prohibits arbitrators from imposing class arbitration on parties who did not previously agree to such a stipulation. (5)

Stolt-Nielsen S.A., joined by other petitioner-companies in the case, is a shipping company that charters parcel tankers to customers that ship liquids in small quantities. (6) AnimalFeeds, the respondent, is a customer that ships its goods pursuant to a charter party contract that contains a mandatory arbitration clause. (7) In 2003, AnimalFeeds filed an antitrust suit in the United States District Court for the Eastern District of Pennsylvania against the petitioners alleging that the petitioners had engaged in a global conspiracy to restrain competition in the parcel tanker shipping industry through price fixing. (8) A judicial panel on multi-district legislation transferred the case to the District of Connecticut, where Stolt-Nielsen moved to compel arbitration. (9) The district court denied the motion, which the United States Court of Appeals for the Second Circuit subsequently reversed, holding that the charter party agreements governed the proceedings and contained legally enforceable agreements to arbitrate. (10)

The parties commenced arbitration and entered into an agreement requiring the arbitrators to follow and apply Rule 3 and Rule 7 of the American Arbitration Association's ("AAA") Supplementary Rules for Class Arbitrations. (11) The arbitration panel interpreted the arbitration clauses contained in two common charter party agreements, known as the Vegoilvoy charter party and the Asbatankvoy charter party. (12) Both charter parties mandate arbitration, but are silent on the issue of whether class arbitration may be utilized. (13) In December 2005, the arbitration panel ruled that both agreements permit class arbitration, consistent with other arbitration decisions considering this issue. (14)

Stolt-Nielsen petitioned the United States District Court for the Southern District of New York to vacate the arbitration panel's partial award. (15) Granting Stolt-Nielsen's motion, the district court concluded that the award was granted in "manifest disregard of the law." (16) After AnimalFeeds appealed, the Second Circuit reversed the district court's decision. (17) The Second Circuit explained that the question presented is for the arbitrators to decide, not the courts. (18) Moreover, the court held that the arbitration panel's construction of the clause was not in "manifest disregard of the law" because no part of the FAA prohibits class arbitration where the relevant arbitration clause is broadly worded in scope, but silent on the issue. (19) Petitioner appealed to the United States Supreme Court and the Court granted certiorari. (20)

Historically, there has always been a strong policy in favor of resolving disputes through arbitration--one that the Supreme Court emboldened through a series of decisions during the last decade. (21) In 2002, the Court in Howsam v. Dean Witter Reynolds, Inc. (22) limited the scope of arbitration issues that a court could address solely to the issue of whether the parties submitted a particular dispute to arbitration. (23) One year later, in Green Tree Financial Corp. v. Bazzle, (24) the Court had the opportunity to consider whether class arbitration could be imposed on parties when the agreement was "silent" on the issue. (25) However, the Court in Bazzle did not reach that issue because the Court determined that as a threshold matter the arbitrator, not the court, must decide whether the contract was in fact silent on class arbitration. (26) Additionally, in PacifiCare Health Systems, Inc. v. Book, (27) the Supreme Court held that arbitrators should determine issues pertaining to the enforceability of certain provisions within an arbitration agreement, rather than courts. (28)

In particular, the Bazzle holding led many arbitration institutions to create procedures to handle class action arbitrations. (29) For instance, the American Arbitration Association promulgated special procedures to facilitate class arbitration, while the International Chamber of Commerce rules remained silent on class arbitration. (30) Additionally, federal and state courts continued to hold differing views on class arbitration particularly in light of the Court's ambiguous ruling in Bazzle (31) Many courts held that class arbitration was an issue of contract interpretation and that such procedural issues were ultimately for the arbitrator and not the courts to decide. (32) On the other hand, at least one circuit has taken the view that class arbitration may not be imposed in the absence of an agreement because it alters the parties negotiated cost-benefit analysis. (33)

In reaching its decision, the Court in Stolt-Nielsen relied on Section 10(a)(4) of the FAA, which permits a court to vacate an arbitration decision when "the arbitrators exceeded their powers." (34) The Court then considered AnimalFeeds's arguments in support of imposing class arbitration--specifically that public policy favored the imposition of class arbitration. (35) The Court criticized this argument and the arbitration panel because the panel was acting as though it had the common law authority of a court to develop laws based on public policy. (36) The Court cautioned that the arbitration panel should have focused on a discernible rule of law for guidance, such as the FAA, maritime law, or New York law. (37)

Next, the Court considered the application of its decision in Bazzle to the present case. (38) In Bazzle, a plurality opinion, the Court concluded that the determination of whether a contract was silent on class arbitration rested with the arbitrator and not the courts. (39) Writing for the majority, Justice Alito insinuated that, because a plurality reached this conclusion, it was not a binding requirement. (40) The majority also agreed that Bazzle did not resolve the issue of what rule to apply when deciding whether class arbitration is permitted. (41) In guiding the Court's ultimate resolution of this issue, the majority relied on the basic precept that arbitration "is a matter of consent, not coercion." (42) Accordingly, the Court concluded that a party must not be compelled to submit to class arbitration unless there is a contractual basis suggesting that the parties agreed to do so. (43)

In Stolt-Nielsen, the Supreme Court drastically departed from prior precedent by trumping the arbitration panel's authority to determine an important procedural issue. (44) The decision contravenes a number of cases holding that arbitrators should decide procedural questions relating to arbitration, and the Court denies the panel the opportunity to clarify the class arbitration's limits by defining the parties and issues within the prospective class. (45) Additionally, the majority mistakenly emphasizes the coercive effects of class arbitration. (46) The arbitration panel's class arbitration award is not coercive for three reasons: (1) the parties expressly consented to the authority of the arbitration panel to determine this issue; (2) the parties agreed to resolve their disputes through arbitration; and (3) the parties collectively stipulated the types of disputes that could be resolved through arbitration. (47) In fact, traditional rules of contract interpretation suggest that even though the contract was silent on the use of class arbitration, it is reasonable to infer such a provision because the parties agreed to the terms above. (48) The Court's holding essentially permits the objecting party to define the agreement by citing its own general opposition to class arbitration as the basis for finding that the parties did not agree to such arbitration in the agreement. (49) As such, the decision proves problematic because it vitiates the panel's authority to decide this procedural question and undermines nearly a decade of jurisprudence limiting the judiciary's role in arbitration matters. (50)

Importantly, the Stolt-Nielsen decision fails to clarify the holding's scope or the type of language required to demonstrate that the parties consented to class arbitration. (51) First, the dissent recognizes that the holding's scope is too broad and fruitlessly attempts to mitigate its impact by suggesting that the holding does not apply to contracts of adhesion that are offered on a "take-it-or-leave-it" basis. (52) Unfortunately, this analysis will have little practical effect because the holding does not focus on the parties' relatively equal bargaining power, but instead relies on whether there is a contractual basis for the parties' consent to class arbitration. (53) By failing to define the holding's scope, the Court's decision negatively impacts groups such as employees and consumers who have inferior bargaining power against big corporations that are responsible for drafting contracts and arbitration clauses in the first place. (54) Furthermore, the Court fails to provide any guidance on the type of contractual language required to demonstrate that the parties contemplated or consented to class arbitration. (55) Specifically, the Court states that silence...