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Silence Is Not Consent: Supreme Court Decides That A Party May Not Be Compelled To Submit To Class Arbitration Unless It Contractually Agreed To Do So

April 28, 2010

 

On April 27, 2010, the Supreme Court decided an issue that had divided lower courts since at least the early 1990s: whether a party to an arbitration agreement that is silent about the permissibility of class arbitrations can be forced to arbitrate a dispute on a classwide basis. The issue is a critical one for credit card companies, software developers, homebuilders, and a host of other businesses that use arbitration agreements to facilitate efficient resolutions of customer disputes without the procedural and cost impediments of class actions. Many in the business community had hoped that the Supreme Court would provide guidance on the issue in 2003, when the Court took up the Green Tree Financial Corporation v. Bazzle[1] case, but to the disappointment of many at the time the Court avoided the underlying issue and instead issued only plurality opinion holding that, under the Federal Arbitration Act (FAA), an arbitrator and not a court should decide whether a contract providing for arbitration is, in fact, silent on the issue of class arbitration.

In the Stolt-Nielsen decision handed down yesterday, the Court finally addressed the substantive question of class arbitration in a 5-3 opinion.[2] The Court decided 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.”[3] Thus, where the parties have agreed to submit their disputes to arbitration but do not have an agreement affirmatively authorizing classwide arbitration, an arbitral panel may not simply construe silence as consent. Rather, given the substantial differences between an individual dispute and a classwide dispute, arbitrators confronting silence must look to controlling law for any default rules that decide whether class arbitration is permitted. Though the Court did not find that contractual silence on class arbitration could never constitute consent—an issue that will depend on background substantive law—the likely effect of the decision is that arbitrators confronting a lack of agreement between the parties will be much less likely to find class arbitration permissible.

In the underlying dispute in Stolt-Nielsen, respondent AnimalFeeds sold animal-feed ingredients to customers around the world, and contracted with petitioners to transport the ingredients. Petitioners had been illegally fixing their transportation prices. Since its contract provided for arbitration of disputes, AnimalFeeds served a demand for arbitration on petitioners on behalf of a class of all direct purchasers of petitioners’ transportation services for certain ingredients. The arbitration panel issued an interim award finding that classwide arbitration was permissible even though the parties had reached no agreement on the subject. The Southern District of New York vacated the award as being in “manifest disregard” of the law under the FAA. It found that the arbitrators had failed to conduct a choice-of-law analysis, and that had they done so, they would have applied federal maritime law requiring that contracts be interpreted in light of custom and usage. The Second Circuit reversed and reinstated the arbitral decision, finding that since petitioners “had cited no authority applying a federal maritime rule of custom and usage against class arbitration, the arbitrators’ decision [that class arbitration was permitted] was not in manifest disregard of federal maritime law."[4]

The Supreme Court reversed the Second Circuit, holding as a matter of law that class arbitration was not permissible. Since the parties had stipulated that their agreement was silent on class arbitration, the Court reasoned that arbitrators’ “proper task was to identify the rule of law that governs in that situation."[5] But instead of ascertaining whether FAA, maritime law, or New York law provided a default rule on whether class arbitration is permitted in the absence of express consent by the parties, the arbitral panel improperly relied on a supposed consensus among other panels: “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."[6]

Drawing on precedent that the primary purpose of the FAA is to ensure that “private agreements to arbitrate are enforced according to their terms,”[7] the Court held 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."[8] To construe a lack of agreement on the permissibility of class arbitration as permitting class arbitration, as the arbitral panel had done, was “fundamentally at war with the foundational FAA principle that arbitration is a matter of consent."[9] The Court found that “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."[10] For example, in a class arbitration, an arbitrator no longer decides a single dispute between parties to a single agreement, and instead decides “many disputes between hundreds or perhaps thousands of parties."[11] Further, the “commercial stakes of class-action arbitration are comparable to those of class-action litigation."[12] These “crucial” differences are “too great for arbitrators to presume, consistent with their limited powers under the FAA, that the parties’ mere silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings."[13]

Though the Court’s decision will likely reign in arbitrators tempted to permit classwide arbitration where the agreement is silent, the decision leaves open a number of questions, such as the following examples. First, the Court expressly declined to decide what contractual basis would support a finding that the parties agreed to authorize class arbitration, because the parties before it had stipulated that there was “no agreement” on the subject.[14] For instance, does the mere fact that an arbitration clause cites AAA rules as the governing rules of procedure provide sufficient evidence of an agreement to arbitrate on a class basis, given that AAA rules have included class procedures since 2003? What if the underlying contract was executed prior to 2003? .Second, it remains to be seen whether the Court’s holding will be applied with equal force to consumer class actions, or whether consumer plaintiffs will be able to argue successfully that Stolt-Nielsen applies only in disputes between “sophisticated business entities.” Third, the Court reiterated that Bazzle did not produce a majority opinion on whether an arbitrator rather than a court must decide whether a contract permits class arbitration. And, since the Stolt-Nielsen parties expressly assigned the issue to the arbitral panel and no party argued the assignment was improper, the Court did not need to revisit the question.




[1] 539 U.S. 444 (2003).

[2] Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., No. 08-1198, 599 U.S. ___ (Apr. 27, 2010) (slip op.).
[3] Stolt-Nielsen, slip op. at 20 (emphasis in original).

[4] Id. at 5 (emphasis in original).

[5] Id. at 8.

[6] Id. at 20.

[7] Id. at 18 (quoting Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U. S. 468, 479 (1989)).

[8] Stolt-Nielsen, slip op. at 20 (emphasis in original).

[9] Id. at 20.

[10] Id. at 21.

[11] Id. at 22.

[12] Id. at 22-23.

[13] Id. at 23.

[14] Id. at 23 n.10.