United States Supreme Court Issues Class Arbitration Ruling

The United States Supreme Court yesterday issued its decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., --- S.Ct. ---, 2010 WL 1655826 (U.S. April 27, 2010). In a case involving large shipping companies and their commercial customers, the Court held that an arbitrator does not have discretion to impose class arbitration where the parties to the arbitration agreement stipulate that the agreement is "silent" as to whether class arbitration is allowed.

Writing for a five-to-three majority (Justice Sotomayor did not take part), Justice Alioto emphasized the contractual nature of arbitration, beginning by noting that "the [Federal Arbitration Act ("FAA"). 9 U.S.C. Section 1, et seq.] imposes certain rules of fundamental importance, including the basic precept that arbitration “is a matter of consent, not coercion..." and "as with any other contract, the parties' intentions control." Slip op. at 11.

From these principles, it follows 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, however, the arbitration panel imposed class arbitration even though the parties concurred that they had reached "no agreement" on that issue...

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An implicit agreement to authorize class-action arbitration, however, 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.

Slip op. at 13.

The Court concluded: "[W]e see the question as being whether the parties agreed to authorize class arbitration. Here, where the parties stipulated that there was 'no agreement' on this question, it follows that the parties cannot be compelled to submit their dispute to class arbitration."

In her dissent, Justice Ginsburg wrote:

The Court errs in addressing an issue not ripe for judicial review. Compounding that error, the Court substitutes its judgment for that of the decisionmakers chosen by the parties. I would dismiss the petition as improvidently granted. Were I to reach the merits, I would adhere to the strict limitations the Federal Arbitration Act (FAA) 9 U.S.C. Section 1 et seq., places on judicial review of arbitral awards. Section 10. Accordingly, I would affirm the judgment of the Second Circuit, which rejected petitioners' plea for vacation of the arbitrators' decision.

Slip op. at 15.

Interestingly, the majority notes that the respondent "made three arguments in support of construing the arbitration clause to permit class arbitration:"

The parties' arbitration clause should be construed to allow class arbitration because (a) the clause is silent on the issue of class treatment and, without express prohibition, class arbitration is permitted under Bazzle ; (b) the clause should be construed to permit class arbitration as a matter of public policy ; and (c) the clause would be unconscionable and unenforceable if it forbade class arbitration.

The majority addresses the first and second of these issues, disagreeing with the respondent, but does not address the third issue: whether arbitration agreements that are silent on class arbitration -- and therefor forbid class arbitration -- are unconscionable. I would expect to see plaintiffs' attorneys raise this argument under Armendariz and Gentry.