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More on Stolt-Nielsen: A New Rule ... With Limits? (Web)

Now, parties to old contracts silent on the subject of class action arbitration needn’t fear that an arbitration panel will launch a class proceeding.  Today’s decision in Stolt-Nielsen S.A. et al. v. AnimalFeeds Int’l Corp., No. 08-1198 (available here)(procedureal details and background in our earlier story, here) is unequivocal: class action arbitration cannot be imposed.

But that certainly doesn't bar the practice.

The Stolt-Nielsen decision also comes with an implicit warning for people putting arbitration into contracts--one that probably should have sunk in when the Court agreed to hear the case last year:  If you’re not already specifically excluding class actions, you should still do so, unless you, your company, or your client wants them.

In fact, the dissent emphasizes the majority’s concern with commercial practices–meaning the Stolt-Nielsen result--may at least be challengeable in the context of fine-print consumer or employment contracts.

A big test in the employment arbitration area still awaits decision, this term.  Yesterday, the Court’s heard arguments in the arbitration unconscionability case, Rent-a-Center West Inc. v. Jacksonhere).
(preview/details/transcript link
And the Arbitration Fairness Act of 2009, which would bar consumer and employment arbitration, still looms in Congress.
Commercial arbitration practitioners, however, couldn’t have asked for more in the 5-3 decision today by Associate Justice Samuel Alito.  The opinion backed arbitrators’ ability to decide on processes based on the parties’ establishment of the arbitration’s limits under their contract--in particular, the participants. 

Then, it concludes that taking those processes to class arbitration without the parties’ consent that they wanted it was a step too far.

The opinion reverses the 2008 Second U.S. Circuit Court of Appeals decision in the case, linked here.

Alito starts by analyzing the Second Circuit decision particulars, noting that the appeals panel “concluded that, because [Stolt-Nielsen and the other petitioners] had cited no authority applying a federal maritime rule of custom and usage against class arbitration, the arbitrators’ decision was not in manifest disregard of federal maritime law.” (Emphasis is the Supreme Court’s.)

The Court then examined FAA Sec. 10, and held that the arbitral decision could be overturned because the arbitrators exceeded their powers under Sec. 10(a)(4).

“In this case,” wrote Alito early in the opinion, “we must conclude that what the arbitration panel did was simply to impose its own view of sound policy regarding class arbitrations.”

The Court also concluded that the arbitrators rested their decision to permit a class arbitration on respondent AnimalFeeds’ argument that the arbitration clause “should be construed to permit class arbitration as a matter of public policy.”

Instead of identifying the applicable rule of law, Alito notes, the arbitration panel didn’t consider how the FAA would apply.  Nor did the arbitrators examine maritime or New York state law.

The result was that the arbitral panel acted “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,” the opinion states. 

The opinion says that the arbitral panel’s belief that Green Tree Financial Corp. v. Bazzle,  539 U.S. 444 (2003), allowed the Stolt-Nielsen-AnimalFeeds matter to proceed via class arbitration was incorrect.  

In Stolt-Nielsen, Alito sets out to cure longtime confusion over what the four Bazzle opinions meant, laying out the Breyer plurality opinion, which was joined by Justices Scalia, Souter, and Ginsburg, and the separate partial concurrence by Justice Stevens.

Alito writes that three questions were addressed:

ù    whether the court or arbitrator should decide whether the contracts in question were silent on the issue of class arbitration;
ù    what the standard the decision maker should apply in determining whether a contract permits class arbitration, and
ù    whether class arbitration had been properly ordered in the case by the arbitrators (which had  been affirmed by the South Carolina Supreme Court).

Alito explains that the Bazzle plurality only decided the first question, vacating the state supreme court decision and remanding the case to the arbitrator to make the threshold decision of whether the contracts were silent on class arbitration--even though the arbitrator already had conducted the proceedings.  

The Stevens opinion, Alito notes, concurred in the plurality judgment so that there would be a controlling judgment by the Court.  But Stevens instead would have affirmed the South Carolina Supreme Court’s class-action arbitration decision as a matter of law.

The Bazzle opinions, Alito writes in Stolt-Nielsen, “[u]nfortunately, . . . appear to have baffled the parties in this case at the time of the arbitration proceeding.” 

The majority opinion sidesteps the question of the viability of the application of the Bazzle plurality holding that requires the arbitrator to decide whether the contract permits class arbitration because, Alito notes, the Stolt-Nielsen parties had  agreed to send the question to the arbitrator.

But the opinion notes that Bazzle also didn’t establish a standard for deciding whether class arbitration is permitted.   The remainder of the opinion establishes that rule, against the commercial and maritime practices’ backdrop.  The opinion, relying in part on Volt Information Sciences Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U. S. 468, 479 (1989), focuses on party determination and their consent under arbitration agreements, particularly with regard to parties’ abilities to specify who the arbitration parties will be.

Alito writes, “It falls to courts and arbitrators to give effect to these contractual limitations, and when doing so, courts and arbitrators must not lose sight of the purpose of the exercise: to give effect to the intent of the parties. Volt, 489 U. S., at 479.”

Without the specific agreement on class arbitration, the Court finds that the basis of the arbitration panel’s decision, as well as the Second Circuit’s, can’t survive.  Procedural decisions are fine for arbitrators, the opinion holds, but an “implicit agreement to authorize class-action arbitration” was too far beyond the FAA’s limits for the Court.

“Even though the parties are sophisticated business entities, even though there is no tradition of class arbitration under maritime law, and even though AnimalFeeds does not dispute that it is customary for the shipper to choose the charter party that is used for a particular shipment, the panel regarded the agreement’s silence on the question of class arbitration as dispositive,“ Alito writes. “The panel’s conclusion is fundamentally at war with the foundational FAA principle that arbitration is a matter of consent.”

Alito, joined by Chief Justice Roberts, and Associate Justices Antonin Scalia, Anthony Kennedy, and Clarence Thomas, discusses at length why class-action arbitration is beyond a mere procedure step invoked by a panel at the end of the opinion.  We’ll examine his analysis in another post soon.

* * *

Justice Ruth Bader Ginsburg’s dissent says that the Court shouldn’t have taken the case because it is addressing an issue not ripe for adjudication.  She also writes that the Court shouldn’t have substituted its judgment for that of the arbitral panel, which the parties chose.  She writes that FAA Sec. 10 standards limit such judicial review and, therefore, the Stolt-Nielsen majority went too far.

In her 13-page dissent, joined by Justices John Paul Stevens and Stephen G. Breyer, Ginsburg emphasizes the interlocutory nature of the class arbitration decision.  

She notes that the arbitral panel didn’t decide whether the claims were appropriate for class resolution, nor discuss class certification. “While lower court opinions are thus divided [on the reviewability status of preliminary arbitral decisions],” notes Ginsburg, “this much is plain: 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.”

The dissent is adamant on the merits. “The parties’ supplemental agreement, referring the class-arbitration issue to an arbitration panel, undoubtedly empowered the arbitrators to render their clause-construction decision,” writes Ginsburg.  “That scarcely debatable point should resolve this case.”

Ginsburg concludes by pointing out limits to the majority opinion. First, she notes that there is no express consent requirement for a court to invoke class arbitration, writing that it may be ordered under the Alito opinion if “there is a contractual basis” for concluding that the parties agreed on a class arbitration submission.
And, Ginsburg writes, the court’s emphasis on the customs of shippers choosing the charter terms for a particular shipment “apparently spares from [the Court’s] affirmative authorization requirement contracts of adhesion presented on a take-it-or-leave-it basis.”

—Russ Bleemer, Editor, Alternatives