I happen to be teaching class and consumer arbitration this week, a propitious moment for the Supreme Court to hand down its decision in Stolt-Nielsen v. Animalfeeds Int’l (2010 U.S. LEXIS 3672). I’ll be talking about the case in class today, and I cannot get over how extraordinary the decision is. It challenges the theoretical basis for twenty-plus years of Supreme Court arbitration jurisprudence, and serves almost as a dare to Congress to call the Court’s bluff.
The case involves an attempt by a party to an arbitration agreement to manufacture a class arbitration (it is not a consumer case, incidentally). The agreement was silent on class arbitration and the parties expressly stated to the panel that no agreement had been reached on class arbitration. The panel concluded that there was no intent to preclude class arbitration, found that after Bazzle class arbitration had been allowed in a wide variety of settings, and thus concluded that the arbitration clause should be read to allow for class actions.
Writing for the conservative majority, Justice Alito concluded that the panel had “exceeded its powers” under FAA section 10(a)(4), because the panel decided to allow class arbitration based on its considerations of public policy instead of on the terms of the parties agreement. The majority then held that “an implicit agreement to authorize class-action arbitration is not a term that the arbitrator may infer solely from the fact of the parties’ agreement to arbitrate. This is so because class-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.” Effectively the case holds that silence on the issue of class arbitration can only be read as precluding class arbitration.
To me, that is a remarkable holding. For decades, the Court has held that courts have no business reviewing the decisions of arbitrators as long as the arbitrators are in fact interpreting the contract. As we all know, most arbitration clauses are written in very general and broad terms, and arbitrators have been known to do all kinds of odd things. No judicial review allowed. Here, the contract is silent on the term—the parties stated that they had not reached agreement either way. The arbitrators effectively supplied a term allowing class arbitration, reasoning that because class arbitrations were widely allowed, class arbitration should be permitted here. That is the conclusion the Court rejects as being improperly based on public policy, declaring instead that the panel should have looked to applicable legal rules. But is it the case that no party would want contract terms to be interpreted in light of public policy instead of legal rules? If what this panel did does not constitute “interpreting the agreement”, then what other kinds of decisions by arbitrators will not constitute “interpreting the agreement”? Is there a reason to single out judgments based on “public policy” as singularly inappropriate bases for supplying contract terms?
I can’t imagine the Court would want the decision to be interpreted to allow lower courts to review the rationales arbitrators use to supply missing contract terms. That would destabilize the entire arbitration edifice. Even if the holding is limited to barring arbitrators from supplying terms based on public policy, it will open an avenue to judicial review that can only undercut the finality that the Court has always claimed is its arbitration lodestar. So it is difficult to read the decision as anything but a an attempt to single out and eliminate class arbitration, except in cases where the parties explicitly provide for class arbitration (which will be never). That’s where I see the challenge to Congress. This case goes even beyond the concern, raised by Jean Sternlight and others, that companies will be able to check a box to exempt themselves from class actions. Now they are automatically exempt as long as they include a silent arbitration clause.
Justice Ginsburg, in dissent, makes the point that this decision does not necessarily foreclose class arbitrations in consumer cases. But it’s logic does not stop at complex commercial disputes. As I said, I see this as an extraordinary decision.