(April 28, 2010, Supreme Court Watch)
Supreme
Court
Watch
The Supreme Court held yesterday in
Stolt-Nielsen S.A. v. AnimalFeeds International Corp. that a party may not be compelled under the Federal Arbitration Act (FAA) to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.
The arbitration clause at issue appeared in form contracts governing transactions between major maritime shipping companies and AnimalFeeds International Corp., which supplies raw ingredients to animal-feed producers around the world. AnimalFeeds, along with other shipping customers, sued the maritime companies for antitrust violations after a federal criminal investigation revealed an illegal price-fixing conspiracy. The Judicial Panel on Multidistrict Litigation ordered consolidation of the suits in the District of Connecticut; and, following a Second Circuit ruling requiring arbitration of the antitrust claims, AnimalFeeds served the shipping companies with a demand for class arbitration.
Consistent with the Supreme Court’s plurality decision in
Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), the parties selected a panel of arbitrators to determine, as a threshold matter, whether AnimalFeeds could proceed to arbitrate on behalf of a class. All parties stipulated that the arbitration clause was “silent” as to class arbitration but disputed the effect of silence on the class-arbitration analysis. After hearing argument and expert testimony, the panel concluded that the parties’ agreement allowed for class arbitration. Specifically, the panel determined that the shipping companies had not demonstrated “inten[t] to preclude class arbitration,” and it found persuasive other arbitrators’ post-
Bazzle rulings permitting class arbitration in a variety of contexts. The shipping companies successfully moved to vacate the award in federal district court, which held that the award was made in “manifest disregard” of choice-of-law requirements and of contract principles under maritime law. On appeal, however, the Second Circuit reversed, holding that the shipping companies cited no maritime principles militating against class arbitration and thus no manifest disregard of law occurred.
In reviewing the Second Circuit’s judgment, the Supreme Court declined to address whether “manifest disregard” remains a permissible basis to vacate an arbitration award following the Court’s decision last term in
Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), which limited judicial review to grounds specified in §10 of the FAA, none of which include that phrase. Although “manifest disregard” has been characterized as “judicial gloss” on §10, the Court in
Stolt-Nielsen focused on the terms of the statute itself and, in a 5-3 decision (Justice Sotomayor did not participate) held that the arbitrators had “exceeded their powers”—a ground for vacating an award under 9 U.S.C. §10(a)(4).
Writing for the majority, Justice Alito reasoned that the arbitrators impermissibly made a policy judgment rather than determining what legal principles govern an arbitration clause that is silent on class arbitration. “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.” In particular, the majority criticized the panel’s focus on whether the agreement reflected intent to “preclude” class arbitration, viewing that interpretive approach as “fundamentally at war with the foundational FAA principle that arbitration is a matter of consent.”
Although
Stolt-Nielsen does not require “express” consent to arbitrate on a class-wide basis, it places significant limitations on class arbitrations by requiring a contractual basis for inferring parties’
actual consent to proceed in that manner. The decision could have its greatest impact on cases involving consumers and other actions in which the cost of litigating an individual suit may greatly exceed the potential recovery for a single litigant.
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