April 27, 2010

Stolt-Nielsen v. Animalfeeds — Major Victory for Business

By Sarah Cole

I woke up today planning to blog about the oral argument in the Rent-a-Center, West, Inc. v. Jackson case that was argued yesterday in the Supreme Court — I will get to that, but wanted to write first about a major arbitration decision the Supreme Court handed down today: Stolt-Nielsen v. Animalfeeds (http://www.supremecourt.gov/opinions/09pdf/08-1198.pdf). The Court ruled, in a 5-3 decision, written by Justice Alito, that arbitrators asked to interpret an arbitration agreement that is silent on the issue of class action arbitration, cannot rule on the basis of their policy interpretation that class action arbitration is permitted. Moreover, the arbitrators’ decision to order class action arbitration, based on their view that public policy favors class action arbitration, exceeded the scope of their powers under Federal Arbitration Act sec. 10(a)(4) and therefore can be disregarded.

Although the underlying case involved sophisticated business parties with relatively equal bargaining power, the Court’s decision would seem to be a major victory for businesses whether they are involved with repeat players (as here) or with one-shot players (like consumers and employees) (note that Justice Ginsburg, in her dissent, states “by observing that “the parties [here] are sophisticated business entities,” and “that it is customary for the shipper to choose the charter party that is used for a particular shipment,” the Court apparently spares from its affirmative-authorization requirement contracts of adhesion presented on a take-it-or-leave-it basis.” While Justice Ginsburg suggests that the majority’s holding about silent arbitration clauses is limited to cases involving sophisticated repeat players — I am not so sure that her reading is correct). I would expect to see every business with an arbitration clause maintain silence on the issue of class action arbitration or, if its clause permits class action arbitration, to amend it so that it is silent on the issue. Note here that the Court did not decide “what contractual basis may support a finding that the parties agreed to authorize class-action arbitration”. Despite that cautionary statement, a logical interpretation of the opinion suggests that silent clauses will not be interpreted to permit class action arbitration.

The Court’s decision appears to prohibit future arbitrators from interpreting an arbitration agreement that is silent on the issue of class action arbitrations to allow for such arbitrations unless the parties consented to the class action arbitration process (and that party consent will not be inferred from silence). Because businesses prefer to avoid class actions, whether in arbitration or court, I would predict that businesses return to silent arbitration clauses to avoid the possibility that arbitrators will find that they agreed to class action arbitration.

The Court also clarified the impact of Bazzle — stating that it did not create a rule to be applied in deciding whether class arbitration is permitted. Rather (and the Court reminded readers that Bazzle was a plurality decision) the Court in Bazzle stated that arbitrators, rather than courts, interpret whether the parties agreed to class action arbitration. Thus, Bazzle does not bind the Court in this case and, “[a]n 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.”

In addition to precipitating the demise of class action arbitration, the Court also seemed to circumscribe the authority of arbitrators. According to the Court, the arbitrators’ “proper task was to identify the rule of law that governs” in order to interpret the parties’ agreement. That rule of law should have come from the Federal Arbitration Act, New York law or maritime law. The Court gave teeth to the judicial review provision of the FAA, concluding that Section 10(a)(4), the provision that precludes an arbitrator from exceeding her powers, prevents an arbitrator from deciding a contract interpretation issue based on public policy, rather than a rule of law. This holding gives stronger teeth to judicial review of arbitration awards and sends a message to arbitrators to do their job — interpreting the contract. The ruling suggested also (in a footnote) that manifest disregard as a standard of review may still exist. The majority said that it was not deciding whether manifest disregard survives Hall Street v. Mattel, but that manifest disregard of the law existed in this case.

Rick Bales of Workplace Prof Blog has a couple of interesting comments on Stolt-Nielsen here: http://lawprofessors.typepad.com/laborprof_blog/

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