In an important decision for domestic and international arbitrations, the United States Supreme Court issued a ruling on April 27, 2010, striking down an arbitration panel’s decision that allowed an arbitration to proceed as a class action where the contract was silent on the issue. Stolt-Nielsen, S.A. v. AnimalFeeds International Corp., No. 08-1198. The Court emphasized that arbitration is a product of the parties’ agreement, and it held that the arbitration panel’s decision ordering class arbitration where the contract was silent was “fundamentally at war with the foundational FAA [Federal Arbitration Act] principle that arbitration is a matter of consent.” 

Although Justice Ginsberg’s dissent suggests that this contract interpretation should be limited to maritime charter agreements or those between “sophisticated business entities,” the Court’s reasoning suggests that silence should not normally be construed as contractual consent to class arbitration. While this decision may give comfort to businesses that wish to avoid class action arbitrations, it may also increase the pressure on the U.S. Congress and courts applying state laws to deny enforcement of arbitration clauses that prohibit class arbitrations, at least in the context of consumer and perhaps franchise agreements. In addition, the Court’s decision to set aside the arbitrators’ decision seems to open the door, if only slightly, to challenging the merits of an arbitration award.

Stolt-Nielsen is the first of two arbitration cases before the Court this term that are important to the business community. The other case, Rent-A-Center, West. v. Jackson, No. 09-497, argued this week, presents the question of whether courts or arbitrators should decide whether an arbitration agreement is unconscionable.

Background
Stolt-Nielsen is a shipping company that transports goods under form charter-party agreements. After the U.S. Department of Justice revealed it was investigating allegations of criminal price fixing, AnimalFeeds and other plaintiffs brought a series of antitrust lawsuits against Stolt-Nielsen in federal courts. The Second Circuit held that the claims were subject to arbitration clauses in the charter parties, and AnimalFeeds commenced an arbitration on behalf of a putative class. The parties stipulated that the charter party was “silent” with respect to class arbitration. After holding an evidentiary hearing, the arbitration panel issued a “partial final award” determining that the case should proceed as a class arbitration. Stolt-Nielsen challenged the award, and the district court set it aside, holding that the decision was in “manifest disregard” of the law. The Second Circuit reversed, holding that the arbitration panel’s decision did not “manifestly disregard” the law because there was no compelling rule of law against class arbitration.

The Court's Decision and Its Significance
In an opinion by Justice Alito, the Supreme Court reversed 5-3 (Justice Sotomayor did not participate). The Court emphasized that arbitration is a product of the parties’ consent, and therefore, whether class arbitration may proceed is a question of contract interpretation. Applying routine contract interpretation principles, the Court held that silence in the charter party could not be interpreted as an agreement to arbitrate disputes as a class action. It rejected what it called the arbitrators’ “policy” arguments that it was more efficient and fair to litigate disputes as a class rather than individually. In strong language, it concluded that the “panel’s decision is fundamentally at war with the foundational FAA principle that arbitration is a matter of consent.”

The Court’s holding on its face appears to limit class arbitration significantly unless the arbitration clause expressly authorizes class arbitration. Justice Ginsberg, in dissent (joined by Justices Stevens and Breyer), suggests that silence in other types of contracts should be construed differently, particularly consumer class actions where in recent years there has been acceptance of class arbitrations. The Court’s majority opened the door slightly to such arguments in a footnote, where it said that it had “no occasion to decide” what “contractual basis” could support a conclusion that the parties had agreed to class arbitration.

One common situation squarely raising that issue involves arbitration clauses adopting the rules of the American Arbitration Association (AAA). It has adopted Supplementary Rules for Class Arbitration that by their terms apply to agreements that are silent about class arbitrations. Although the parties’ agreement to follow AAA Rules may be deemed contractual consent to class arbitration, that answer is less clear after Stolt-Nielsen’s holding that class-action authorization “is not a term the arbitrator may infer solely from the fact of the parties’ agreement to arbitrate.” Parties should, therefore, continue to consider carefully class arbitration when drafting arbitration agreements, perhaps addressing class arbitration specifically, particularly when incorporating wholesale rules of arbitration institutions like the AAA.

Further, the Court’s holding may increase the pressure to deny enforcement of arbitration clauses that prohibit class arbitrations. Several state and federal courts have held that such clauses are unconscionable under state law. The Court’s decision in Stolt-Nielsen may increase momentum in Congress to pass some version of the Arbitration Fairness Act or other similar pending proposals that would restrict the scope of arbitration clauses.

The Court’s decision in Stolt-Nielsen also may make it easier to challenge arbitration awards. Normally, arbitration awards, like the one in this case, are very difficult to set aside. The FAA spells out limited grounds for vacating awards, but in years past, courts had added an additional ground — “manifest disregard of the law.” The standard was ill-defined, and courts had difficulty interpreting and applying it. The Supreme Court’s 2008 decision in Hall Street Associates, L.L.C. v. Mattel, Inc. appeared to some to have closed that avenue to challenge arbitration awards. The district court in this case decided the motion to vacate before Hall Street, and it set aside the class arbitration award on “manifest disregard” grounds. The Second Circuit held that “manifest disregard” survived Hall Street as a “judicial gloss” on the grounds set forth in the FAA. The Supreme Court sidestepped that debate, stating in a footnote that it was not deciding whether manifest disregard was an independent ground or simply a judicial gloss. It went on to assume that the standard applies, without defining the standard, and held that the arbitration award met the manifest disregard standard. The Court also emphasized its prior decision in Major League Baseball Players Assn. v. Garvey, a labor-arbitration case, which said that awards may be set aside when the arbitrator “dispenses his own brand of industrial justice.” Thus, despite the great weight favoring the enforceability of arbitration awards, the Supreme Court gave little pause in setting this award aside. Indeed, the dissent contended that the majority’s “de novo” review was far more searching than the FAA allows. Regardless of whether “manifest disregard” remains an independent ground to challenge an award, the Court’s decision in Stolt-Nielsen likely makes it easier for U.S. courts to set aside arbitration awards when they disagree with the arbitrators’ legal reasoning.

For more information, please contact Vinson & Elkins lawyers Alden Atkins, Tim Tyler, or James Loftis. Visit our website to learn more about V&E's International Dispute Resolution practice, or e-mail one of the practice contacts.