No Class Arbitration Without Agreement

Below, Vivian Wang, a Stanford Law School student, discusses Tuesday’s opinion in Stolt-Nielson S.A. v. AnimalFeeds International (08-1198).  Check the Stolt-Nielson SCOTUSwiki page for earlier coverage and briefs from the case.

In Stolt-Nielsen v. AnimalFeeds (No. 08-1198), the Supreme Court held that the Federal Arbitration Act prohibits arbitrators from imposing class arbitration on parties who have not agreed to authorize class arbitration.  Justice Alito authored the majority opinion, which was joined by the Chief Justice and Justices Thomas, Kennedy, and Scalia.  Justice Ginsburg filed a dissenting opinion that was joined by Justices Stevens and Breyer.  Justice Sotomayor did not participate in the case.  (Background on the case is available here and here.)

In reversing the Second Circuit’s decision, the Court recognized that petitioners – who had challenged the decision by an arbitration panel to impose class arbitration in an antitrust dispute arising out of a shipping agreement – faced a “high hurdle” under Section 10(a)(4) of the Federal Arbitration Act (FAA), which required them to show not merely that the panel’s decision was erroneous, but that the panel had in fact “exceeded [its] powers,” straying so far from contract interpretation that its ruling effectively imposed its own public policy.  In the Court’s view, that stringent standard was met in this case, in which the panel’s ruling rested not on the two bodies of law that could have applied to this dispute – New York or maritime contract law – but instead on its perceptions about the merits of class arbitration as a policy matter.

Having established that the panel had exceeded its powers, the Court observed that it could, pursuant to Section 10(b) of the FAA, either remand the case to the panel or decide the issue itself.  Explaining that there could “be only one possible outcome on the facts” in this case – that the panel cannot impose class arbitration – the Court opted for the latter.  It noted however, that its decision did not follow from its 2003 decision in Green Tree Financial Corp. v. Bazzle, which had left open the question of what rule an arbitrator should apply in deciding whether class arbitration is permitted.

The Court then proceeded to establish the following rule, which dictated the outcome in this case:  under the FAA, an arbitrator cannot compel a party to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.  In other words, in the absence of any evidence that the parties agreed to engage in class arbitration, imposing class arbitration would violate the “foundational FAA principle that arbitration is a matter of consent.”  Class arbitration is fundamentally different from a standard arbitration between two parties:  for example, class arbitration lacks privacy and confidentiality protections, requires the adjudication of the rights of absent parties, and can entail the resolution of extraordinarily high-value claims – a prospect that is particularly risky given the limited judicial review of arbitration decisions.  As such, the Court explained, arbitrators cannot presume that a party consenting to the latter would also consent to the former.

The opinion contains hints of caution about the scope of the Court’s rule.  First, it emphasized the facts of this case – namely, the parties’ stipulation that there was “no agreement” on the issue of class arbitration, which eliminated both any ambiguity about their intent and any consideration of extrinsic factors such as parol evidence.  Second, although the Court acknowledged that an arbitrator may, in some contexts, infer the implicit consent of the parties notwithstanding silence in the contract on an issue, it made clear that it was not deciding what contractual basis could support a finding that the parties agreed to authorize class arbitration.

In her dissent, Justice Ginsburg embraced an argument that did not arise at oral argument, but which respondents had made in the final pages of their brief:  that the petition should be dismissed as improvidently granted because the issue is unripe.   In Justice Ginsburg’s view, the decision to permit class arbitration was “highly interlocutory” and thus inconsistent with the federal courts’ general adherence to the final judgment rule, as it remained to be seen whether the arbitrators would have certified a class and found the particular antitrust claims at issue to be suitable for class resolution.

Moreover, she continued, even on the merits, respondents should prevail.  She disagreed with the Court’s characterization of the panel’s decision as policy-driven, pointing to evidence that the panel had in fact considered New York law and maritime law on contract interpretation.  She also expressed skepticism that the parties had stipulated to the absence of any agreement at all on class arbitration; according to the record, she suggested, the parties had merely stipulated that the contract contained no agreement to prohibit class arbitrations.  Finally, she expressed concern about the potential incongruities created by the Court’s approach:  although the class-action mechanism is available in courts, those parties who opt for arbitration can suddenly be stripped of their ability to bring claims as a class, whether in arbitration or in court.