In Stotl-Nielsen S.A. v. AnimalFeeds Internat’l Corp., decided on April 27, 2010, the United States Supreme Court held, in a 5-3 decision with Justice Sotomayor not participating, that class action arbitration cannot be imposed on parties whose arbitration agreement is silent on the question. The decision is a victory for those who want arbitration to remain a lower cost alternative to litigation and who seek to circumscribe arbitrator discretion.
The case arose out of a dispute between shipping companies (including petitioner Stotl-Nielsen) and their customers (such as AnimalFeeds) following a criminal investigation finding that Stotl-Nielsen and others had engaged in price-fixing. AnimalFeeds and other similarly situated customers filed putative class action antitrust cases in federal court, but because of an arbitration provision contained in the parties’ contract, the Second Circuit Court of Appeals ruled that the claims had to be arbitrated. The parties then agreed to submit to a panel of the arbitrators the question of whether or not the arbitration of class claims was appropriate. They specifically agreed that the relevant arbitration provision was silent on the question of class arbitration.
The arbitration panel determined that class arbitration was allowable under the clause, reasoning that requiring parties to expressly agree to class arbitration before such a process could be imposed would exclude too many cases from the benefits of arbitration. That decision was reversed by the federal district court in the Southern District of New York, which in turn was reversed by the Second Circuit Court of Appeals.
The Supreme Court began by noting that under the Federal Arbitration Act, 9 U.S.C. §1, and the circumstances present in this case, an arbitration panel’s decision could be overturned only if it “exceeded [its] powers.” Nonetheless, the Court held that even that high threshold had been satisfied and that the arbitrators had “simply impose[d] [their] own view of sound policy regarding class arbitration.” It faulted the panel for failing to divine the parties’ intentions by examining applicable law under the Federal Arbitration Act, maritime law, or the law of the state where the arbitration was to occur.
Reinforcing the concepts that “‘private agreements to arbitrate [must be] enforced according to their terms,’” that “‘the parties’ intentions control,’” and that the arbitrators’ powers are derived from the parties’ agreement, the Court 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.” It reasoned that class arbitration was sufficiently different from arbitration between two parties that a decision maker could not conclude, simply from the fact of the arbitration agreement itself, that the parties had consented to class arbitration.
A dissent by Justice Ginsburg, which was joined by Justices Stevens and Breyer, noted that the Court’s decision stopped short of requiring that parties must expressly consent to class arbitration before it could be imposed. It further noted that the parties to the arbitration clause were sophisticated business entities, thus suggesting that the result might be different in another context.
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