Supreme Court Rules Against Inference of Class Arbitration in "Silent" Contracts

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May 06, 2010

April 27, 2010, with Justice Samuel Alito writing for the 5-3 majority (Justice Sonia Sotomayor abstained), the U.S. Supreme Court addressed class-action arbitration when the parties' agreement was silent regarding the aggregation of multiple parties' claims. According to the Court, the arbitration panel's imposition of class arbitration – despite the parties' stipulation that they had not reached an agreement on this issue – is "fundamentally at war" with the Federal Arbitration Act (FAA) principle that arbitration is a matter of consent. "[A]n implicit agreement to authorize class action arbitration," the Court ruled, "is not a term that the arbitrator may infer solely from the fact of an agreement to arbitrate." Stolt-Nielsen S. A. et al. v. AnimalFeeds International Corp., Supreme Court of the United States, No. 08–1198 (April 27, 2010).

Factual Background

The dispute in this case stemmed from a standard maritime trade contract, known as a "charter party," entered into between several shipping companies and one of their customers, AnimalFeeds International Corp. The charter party in this case included an arbitration clause, which was silent regarding class-action arbitration.

AnimalFeeds (and other companies that had chartered with the shipping companies) brought suit against the shipping companies after the Department of Justice revealed they were engaging in an illegal price-fixing conspiracy. After various, similar actions were consolidated, AnimalFeeds and the shipping companies agreed they were bound to arbitrate their antitrust dispute.

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The parties later entered into an agreement providing for the question of class arbitration to be submitted to a panel of three arbitrators who were to follow "Rules 3 through 7 of the American Arbitration Association's Supplementary Rules for Class Arbitrations." Class Rule 3 requires an arbitrator, as a threshold matter, to determine "whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class." The parties then stipulated that there was no agreement regarding class-action arbitration.

The arbitrators concluded the parties' arbitration clause permitted class-action arbitration. The district court vacated the award, concluding the arbitrators' decision was made in "manifest disregard" of the law because the arbitrators failed to conduct an appropriate choice-of-law analysis. AnimalFeeds appealed to the Second Circuit Court of Appeals, which reversed the district court.

Legal Analysis

After deciding that the arbitration panel exceeded its powers in this case, Justice Alito discussed the issue that was originally referred to the panel, i.e., can class-action arbitration authorization be inferred from an arbitration agreement that is silent regarding the subject. The Court noted that the "primary" purpose of the FAA is to ensure private arbitration agreements are enforced according to their terms. When enforcing or construing arbitration agreements, "courts and arbitrators must 'give effect to the contractual rights and expectations of the parties.'" The Court ultimately concluded that "a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so."

In this case, given the arbitration agreement's silence regarding class-action arbitration, the Court found the arbitration panel erroneously "proceeded as if it had the authority of a common-law court to develop what it viewed as the best rule to be applied in such a situation." In other words, the Court believed the panel "impose[d] its own policy preference" because the arbitration agreement was silent regarding class-action arbitration. The Court ruled that this "conclusion is fundamentally at war with the foundational FAA principle that arbitration is a matter of consent."

The Court noted that, in some contexts, one may appropriately presume the parties to an arbitration agreement may, by their silence, implicitly authorize an arbitrator to adopt procedures that are necessary to give effect to the parties' intent. However, the Court determined that class-action arbitration and bilateral arbitration are fundamentally different. According to the Court, "the differences between bilateral and class-action arbitration are too great for arbitrators to presume, consistent with their limited powers under the FAA, that the parties' mere silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings." For these reasons, the Court ruled that "[a]n 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." Thus, because the parties stipulated they did not have an agreement about the viability of class-action arbitration, the parties could not be compelled to submit their dispute to class-action arbitration.

Writing for the dissent, Justice Ruth Bader Ginsburg disagreed with the majority's reasoning on the merits and argued the appropriateness of class-action arbitration was not ripe for judicial review. More specifically, the dissent concluded, "No decision of this Court, until today, has ever approved immediate judicial review of an arbitrator's decision as preliminary as the 'partial award' made in this case."

Practical Impact

According to Patrick Hulla, co-leader of Ogletree Deakins' Class Action Defense Group, "The primary lesson learned from the Court's opinion is that the parties' intent regarding class arbitration should be clear from the face of the arbitration agreement. For example, if an employer wants to preclude class arbitration, the arbitration agreement should clearly include a statement prohibiting the aggregation of multiple parties' claims. A plainly drawn arbitration agreement should eliminate the need to look beyond the four corners of the parties' agreement in order to determine their intent."

Additional Information

Should you have any questions about the impact of this ruling, please contact the Ogletree Deakins attorney with whom you normally work or the Client Services Department at 866-287-2576 or via e-mail at [email protected].

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