This article summarizes the U.S. Supreme Court decisions in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. and AT&T Mobility LLC v. Concepción, as well as related earlier decisions. The discussion focuses on the effect of those decisions on arbitration jurisprudence. It was printed in the September 2011 issue of The Colorado Lawyer (Volume 40, Page 47) and will publish in two CBA-CLE Legal Connection blog posts. Reproduced by permission of the Colorado Bar Association. © Colorado Bar Association. All rights reserved.
Editor’s Note: This segment of the article highlights the Stolt-Nielsen decision. Dirk W. de Roos, co-author of this article, presented a CLE program on this subject and addressed issues arising out of class action arbitrations and the enforceability of contractual “class action arbitration” waivers. The presentation discussed the fundamentals of class action waivers, judicial enforcement, the status of case law and Colorado law on the issue, and the future of class arbitrations. The program is available as a homestudy in two formats: video on-demand and mp3 download.
By Dirk W. de Roos, Russell O. Stewart
In Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp.,1 the U.S. Supreme Court held that no party is obligated to submit to class arbitration under the Federal Arbitration Act (FAA) when an arbitration agreement is silent about the parties’ intent to allow for class arbitration. In the later case of AT&T Mobility LLC v. Concepción,2 the Court held that the FAA preempted California law mandating class actions as a viable arbitration remedy. This article discusses both opinions and their impact on arbitration in the United States.
Stolt-Nielsen—Facts and Background
Respondent AnimalFeeds International Corp. (AnimalFeeds) supplied ingredients to animal-feed production businesses worldwide.3 AnimalFeeds shipped its ingredients in petitioners’ seagoing vessels.4 The parties conducted business using a standardized contract known as a “charter party,” which governs trade needs between parties in the shipping industry.5 The charter party included an arbitration provision requiring any disputes to be settled in New York using the rules of the FAA.6 Under the agreement, the parties could appeal an arbitrator’s decision in federal court.7
In 2003, an investigation by the U.S. Department of Justice revealed that the petitioners were engaging in a price-fixing conspiracy.8 AnimalFeeds brought suit, alleging antitrust claims against petitioners in the Eastern District of Pennsylvania.9 Other charterers also brought suit and the Judicial Panel on Multidistrict Litigation consolidated the pending actions in the District of Connecticut. The parties then determined that they were obligated to arbitrate the dispute.
In 2005, AnimalFeeds brought arbitration in New York City and sought to represent a class of charterers affected by the price-fixing conspiracy. The parties agreed that a panel of arbitrators would decide whether the charter party allowed class arbitration. The parties also agreed that the charter party remained silent as to the parties’ intent to allow class arbitration. The arbitration panel determined that the agreement allowed for class arbitration, despite its silence on the issue, because no evidence showed intent to preclude class arbitration.
The arbitrators then stayed the arbitration proceeding to allow for judicial review of the decision. The U.S. District Court for the Southern District of New York vacated the decision. The court of appeals reversed the lower court, finding no custom or usage against class arbitration in maritime law.10 The U.S. Supreme Court found in favor of petitioners, vacated the panel’s decision, and remanded the case.11
Legal Conclusions of the Supreme Court in Stolt-Nielsen
The U.S. Supreme Court concluded that the arbitration panel exceeded its authority and that parties must consent to matters of arbitration. These conclusions are discussed below.
The Arbitration Panel Exceeded Its Authority
For a court to vacate an arbitration decision, a standard higher than a mere showing of serious error must be met.12 An arbitrator’s decision may be unenforceable only when he or she “strays from interpretation and application of the agreement,” effectively creating his or her own version of justice.13 A court may vacate the arbitrator’s decision under § 10(a)(4) of the FAA, which limits the arbitrator’s role to interpreting or enforcing a contract, rather than making public policy.14
The arbitration panel based its decision on the fact that the arbitration agreement remained silent and that, as a matter of public policy, an agreement should be construed to permit class arbitration.15 However, the Court noted that the panel failed to look to the FAA, maritime law, or New York law to determine what rule governs when a contract remains silent.16 Rather, the panel analyzed Green Tree Financial Corp. v. Bazzle, a case where the U.S. Supreme Court held that arbitrators must decide when a contract remains silent with regard to class arbitration.17 The panel then relied on cases interpreting Bazzle that broadly construed silent arbitration clauses to allow for class arbitration.
The Court in Stolt-Nielsen found that the panel acted as a common law court, developing what it believed to be the best rule, rather than identifying the intent of the parties and applying the governing rule of law from a relevant jurisdiction.18 Finding that the panel had exceeded its powers under § 10(b) of the FAA, the Court decided the question of class arbitration instead.19
Bazzle Does Not Determine Whether Class Arbitration is Permitted
Bazzle concerned a dispute between a commercial lender and its customers over contracts with arbitration clauses that did not expressly mention class arbitration. In a plurality decision, the U.S. Supreme Court held that an arbitrator, rather than a court, has the power to determine the arbitration issue when a contract remains silent with regard to class arbitration.
The parties in Stolt-Nielsen misconstrued Bazzle by interpreting it as allowing an arbitrator to determine whether a contract permitted class arbitration.20 Instead, the decision held only that an arbitrator may decide if a contract remains silent regarding class arbitration.21 The Court noted that Bazzle did not clarify the first issue, because only a plurality decided that an arbitrator should determine when a contract allows for class arbitration.22 The Court declined to decide the question in Stolt-Nielsen.23 The Court also clarified that Bazzle did not establish a standard for determining whether an arbitration agreement allows for class arbitration.24
Parties Must Consent to Matters of Arbitration
The FAA requires that parties consent to all provisions of an arbitration agreement.25 Section 4 of the FAA allows a party to “petition a United States district court for an order directing that ‘arbitration proceed in the manner provided for in such agreement.’”26 Therefore, the FAA guarantees that arbitration agreements between private parties are implemented under the terms on which the parties intended to agree.27
The Court concluded that parties cannot consent to a contractual agreement without the intent to do so; because both parties concur that the agreement remained silent, the parties did not consent to class arbitration.28 Although an implicit agreement to class arbitration may exist in other cases, the parties here agreed that the contract remained silent.29
According to the Court, class arbitration is significantly different from bilateral arbitration.30 Rather than resolving a dispute between two parties, class arbitration has the potential to include thousands of parties. The presumption of privacy disappears, and the arbitration panel’s award binds present and absent parties.31 In light of the stark differences between class and bilateral arbitration, the Court held that consent to class arbitration is necessary, and the agreement’s silence on the matter could not be construed as consent.32
Judicial Reaction to Stolt-Nielsen
Stolt-Nielsen has influenced multiple cases since it was decided; however, no court has yet analyzed its precedential value. In May 2010, the Supreme Court granted certiorari in American Express Co. v. Italian Colors Restaurant.33 The Second Circuit had held that an arbitration agreement was unenforceable on public policy grounds because it waived class arbitration.34 The Supreme Court remanded the case, directing the Second Circuit to reconsider its decision in light of Stolt-Nielsen.35
In McArdle v. AT&T Mobility LLC, the Northern District of California found Stolt-Nielsen to be a narrow decision. The court held that the FAA does not preempt the California state law that makes arbitration agreements that waive class arbitration unenforceable.36 One court recently observed that Stolt-Nielsen fails to clarify many outstanding questions regarding arbitration, such as which standard to apply when vacating an arbitrator’s award.37
Stolt-Nielsen’s Impact on Arbitration Law
Legal scholars have noted the impact of Stolt-Nielsen on arbitration law. First, the decision raised the question of whether the FAA preempts state laws addressing class arbitration and unconscionability. Many state and federal courts have held class action waivers in arbitration agreements unenforceable as against public policy.38 Many state courts have found barring class arbitration unconscionable because in many circumstances, the parties entering into an agreement hold unequal bargaining power.39 Because the damages for most parties would be small, little incentive exists for an aggrieved party to pursue his or her rights if an agreement bars class arbitration.40
The Court in Stolt-Nielsen did not address whether the FAA preempts state courts from allowing class arbitration under state law, even when an agreement is silent.41 However, as discussed below, the Supreme Court recently decided AT&T v. Concepción, concluding that the FAA preempts states from conditioning the validity of arbitration provisions on the inclusion of specific procedures, including class arbitration.
The Stolt-Nielsen decision implies that the U.S. Supreme Court may prevent the arbitration of public policy issues. The Court noted that an arbitrator must interpret a contract using law from applicable jurisdictions, not create public policy.42 That said, questions of public policy present themselves in commercial arbitration settings when parties argue that the enforceability of a contract is based on public policy.43 By defining the arbitrator’s role as solely applying contract terms, but not analyzing public policy, the Court may have undermined an arbitrator’s power to arbitrate claims and defenses based on public policy grounds.44
The decision may limit the frequency of class arbitration. The Court interpreted the FAA restrictively, limiting arbitration to the explicit scope of the parties’ agreement.45 Previously, many lower courts interpreted the FAA broadly to permit class arbitration, even when an agreement did not specify parties’ intent.46 The Court has made it more difficult for parties to demonstrate intent under the FAA absent an express provision.47 Interpreting the FAA restrictively, the Court narrowed circumstances in which parties may be allowed to use class arbitration.48
Finally, the Court’s application of § 10(b)(4) of the FAA may lead to an increased use of the provision. In vacating the arbitrators’ decision, the Court used the “exceeding powers” standard of § 10(b)(4), rather than the “manifest disregard” standard often used by lower courts.49 Confusion about the manifest disregard standard has existed for some time, but the Court did not address the issue.50 Therefore, other courts likely will follow suit in using the alternative standard of review from § 10(b)(4) to determine when to vacate an award.51
Other Changes in the Arbitration Setting
In June 2010, the U.S. Supreme Court decided Rent-A-Center, West, Inc. v. Jackson,52 where it determined the arbitrability of arbitration clauses in contracts. The Court held that under the FAA, an arbitrator must determine an agreement’s enforceability if an arbitration agreement includes a clause delegating authority to the arbitrator to determine whether the agreement is fair.53 However, a district court may consider challenges to the enforceability of the individual delegating clause.54
1. Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758, 1776 (2010).
2. AT&T Mobility LLC v. Concepción, __ S.Ct. __ 2011 WL 1561956 (April 27, 2011) (slip op.).
3. Stolt-Nielsen, supra note 1 at 1764.
5. Id. at 1764-65, n.1.
6. Id. at 1765.
10. Id. at 1766.
11. Id. at 1777.
12. See id. at 1767, citing E. Associated Coal Corp. v. Mine Workers, 531 U.S. 57 (2000).
13. Id., quoting Major League Baseball Players Assn. v. Garvey, 532 U.S. 504 (2001) (per curiam).
17. Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003).
18. Stolt-Nielsen, supra note 1 at 1769-70.
19. Id. at 1770.
20. Id. at 1772.
25. Id. at 1773.
26. Id., quoting 9 U.S.C. § 4.
28. Id. at 1775.
30. Id. at 1776.
33. Am. Express Co. v. Italian Colors Restaurant, 130 S.Ct. 2401, 2401 (2010).
34. In re Am. Express Merchants’ Litigation, 554 F.3d 300 (2d Cir. 2009).
35. Am. Express, supra note 33 at 2401.
36. McArdle v. AT&T Mobility LLC, No. C 09-1117 CW, 2010 WL 1875812 at *1-2 (N.D.Cal., May 10, 2010).
37. See, e.g., Republic of Argentina v. BG Group PLC, No. 08-485 (RBW), 2010 WL 2264957 at *3 n.7 (D.D.C., June 7, 2010) (noting that the court declined to determine whether an award could be vacated due to “manifest disregard of the law” by an arbitrator).
38. Loree, “Stolt-Nielsen Delivers A New FAA Rule—And Then Federalizes the Law of Contracts,” 28 Alts. to High Cost Litig. 121 (2010).
39. See, e.g., Gentry v. Superior Court, 165 P.3d 556 (Cal. 2007) (holding arbitration clauses that preclude class certification unenforceable).
40. Wolson, “The Law of Unintended Consequences: Did the Stolt-Nielsen Decision Inadvertently Invalidate Millions of Arbitration Provisions?” 241 Legal Intelligencer (2010).
41. See Haines, “Arbitration Ruling Handed Down from the U.S. Supreme Court and California Law,” California Employee Advocate (May 17, 2010), available at www.californiaemployeeadvocate.com/tags/stolt
42. Stolt-Nielsen, supra note 1 at 1767-70.
43. Loree, supra note 38.
44. See id.
45. See Stolt-Nielsen, supra note 1 at 1767-70.
46. See id. at 1769 (discussing a consensus among courts that class arbitration is beneficial).
47. See id.
48. See Doyle and Ruben, “Stolt-Nielsen S.A. et al. v. AnimalFeeds International Corp.,” ABA Section of Lab. & Emp. Law (2010), available at www.abanet.org/labor/lel-hottopics/10/stolt-nielsen.html.
49. See Stolt-Nielsen, supra note 1 at 1768-69.
50. See id. at 1768 n.3.
51. See Loree, supra note 38.
52. Rent-A-Center, West, Inc. v. Jackson, 561 U.S. __ (2010).
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