by ~ John N. Love (Email) (Web Site) ~ and ~ Ann F. Ketchen (Email) (Web Site) Just Because You Agree to Arbitration Does Not Mean You Agree to Class Arbitration, so says the Supreme Court.
In Stolt-Nielsen, S.A., et al. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010), the Supreme Court considered whether the Federal Arbitration Act (FAA) permits arbitrators to impose class arbitration on parties whose arbitration agreements are silent regarding class arbitration. Given the ubiquitous use of arbitration agreements in the insurance and reinsurance arena, the Courts holding that class arbitration requires express consent could have far-reaching effects.
The petitioners (Stolt-Nielsen) were a group of four maritime shipping companies accused of price-fixing by their customers, including the respondent, AnimalFeeds. The shipping transactions between Stolt-Nielsen and its customers were governed by form contracts with arbitration clauses. In 2003 AnimalFeeds and other customers filed separate lawsuits in federal district court. Their claims were ordered to arbitration pursuant to the parties arbitration agreements. The parties agreed that their arbitration agreements were silent regarding class arbitration, but they disagreed about whether that silence precluded the claims from being arbitrated on a class basis. The dispute was resolved by the arbitrators, who favored AnimalFeeds and allowed class arbitration. Stolt-Nielsen sought judicial review, and the federal district court vacated the arbitrators decision. See, Stolt-Nielsen, S.A., et al. v. AnimalFeeds International Corp., 435 F. Supp. 2d 382 (S.D.N.Y. 2006). On appeal, the Second Circuit reversed. See, Stolt-Nielsen, S.A., et al. v. AnimalFeeds International Corp., 548 F.3d 85 (2d Cir. N.Y. 2008).
The Supreme Court, in turn, reversed the Second Circuit in a 5-3 decision. The Court recognized that petitioners faced a high hurdle under Section 10(a)(4) of the FAA, which requires a showing not merely that the panels decision was erroneous, but that the panel had in fact exceeded [its] powers. The Court found that this stringent standard had been met because the panel did not identify and apply a rule or decision derived from the FAA or from either maritime or New York law, but instead, simply imposed their own policy choices and preferences in favor of class arbitration. The Court observed that, pursuant to Section 10(b) of the FAA, it could either remand the issue to the panel for further consideration or decide the issue itself. Explaining that there could be only one possible outcome of the facts in this case that the panel cannot impose class arbitration the Court opted for the latter approach.
Saying that the opinions in Bazzle appear to have baffled the parties, the Court seemed to retreat from its recent plurality opinion in Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 452-53 (2003), under which arbitrators, and not courts, were to decide whether a contract permits class arbitration. The Stolt-Nielson court said the issue of who decides, in the first instance, whether a contract permits class arbitration remains open. It did not resolve that question because the parties here agreed that the arbitrator would answer it. But by distinguishing the class issue from the type of procedural issues inherently left to arbitrators, the majority strongly inferred that the class issue may be more like the type of gateway issues that are committed to the courts.
The Court pointed out that precedent has held that parties to an arbitration agreement are generally free to structure their arbitration agreements as they see fit, a freedom which includes (1) limiting the issues to be arbitrated; (2) selecting the rules under which the arbitration will proceed; (3) identifying who will resolve specific disputes; and, (4) agreeing with whom the parties will arbitrate disputes. Applying these principles, the majority held that because both parties acknowledged that the contract was silent on the issue of class arbitration, ipso facto, there was no consent to class arbitration; thus, class arbitration was not permissible:
[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 [T]he panel regarded the agreements silence on the question of class arbitration as dispositive. The panels conclusion is fundamentally at war with the foundational FAA principle that arbitration is a matter of consent.Moreover, the court pointed out, because class arbitration is fundamentally different from a standard arbitration between the parties (for example, class arbitration lacks confidentiality protections and requires the adjudication of the rights of absent parties), it cannot be assumed that a party consenting to the latter would also consent to the former. Id. at 1776.
It is also noteworthy that as an initial matter, the Court addressed the fact that the Second Circuit applied the manifest disregard of the law standard in determining whether the arbitrators decision should have been reversed by the district court. Specifically, the Court of Appeals considered whether the arbitrators knew of the relevant [legal] principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it. Stolt-Nielsen, 130 S. Ct. at 1768, n.3. The Supreme Court declined to state whether the manifest disregard of the law standard should apply. It noted that if manifest disregard did apply, that standard would be met here. Buying replica handbags,replica watches,replica omega and cartier replica online can save you big.Id.
John Love may be reached at email@example.com
Ann Ketchen may be reached at firstname.lastname@example.org
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