Diamond Post

 Business & Commercial Newsletter

Avoiding Unwanted Class Arbitrations: Stolt-Nielsen S.A. v. Animalfeeds International Corporation

A recent U.S. Supreme Court opinion may lend much needed support in the tenuous situations in which class arbitration would defeat the fundamental purposes behind bilateral arbitration agreements.  Too often arbitration agreements fail to expressly address class arbitration, or, even if they attempt to expressly preclude it, they are disregarded by the courts.  Increasingly, this has become more of a problem for corporate defendants, resulting in many companies facing unintended and unwanted arbitration of claims on a class-wide basis. 

In Stolt-Nielsen S.A. v. Animalfeeds Int'l Corp., 550 U.S. __ (April 27, 2010), the Court addressed the issue of "[w]hether imposing class arbitration on parties whose arbitration clauses are silent on that issue is consistent with the Federal Arbitration Act."  The Court ultimately held parties cannot be compelled to class arbitration wherein there is no "agreement" to do so.  This decision will likely limit significantly the ability of plaintiffs and arbitrators to expand arbitrated matters to a class.

In Stolt-Nielsen S.A., AnimalFeeds initially brought a class action against major shipping companies, asserting antitrust claims against them arising out of alleged price fixing.  Under the terms of the shipping contract entered into by AnimalFeeds, arbitration was ordered by the court.  AnimalFeeds sought class arbitration.  The parties agreed to submit the question of class arbitration to a panel of arbitrators who determined the arbitration clause allowed for class arbitration even though it was "silent" on this issue.  Following appeals to the district court and the Second Circuit, the U.S. Supreme Court held the arbitrators had exceeded their powers by imposing their own "conception of sound policy."  The Court noted arbitrators are charged with the task of interpreting and enforcing a contract, not making public policy.

The Court then turned to the question left unanswered by the panel of arbitrators and the lower courts: what standard governs the determination of whether class arbitration is permitted under the terms of an arbitration agreement?  The Federal Arbitration Act ("FAA") provides the answer to this question, under which the Court held a party may not be compelled "to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so."  In applying this rule, the Court noted the arbitration panel imposed class arbitration even though the parties concurred they had reached "no agreement" on that issue.  The panel's conclusion was noted to be "fundamentally at war with the foundational FAA principle that arbitration is a matter of consent."

Most corporate defendants would object to class-action arbitration because it significantly changes the nature of arbitration.  In this case, the Court recognized that concern.  Based upon these considerations and the FAA, the Court held where there is no agreement between the parties to authorize class arbitration, "it follows that the parties cannot be compelled to submit their dispute to class arbitration."  As a result, even though there may be some bases to distinguish future cases, Stolt-Nielsen will likely have a significant practical impact on future arbitrated matters. 

First, the decision presents a formidable obstacle to compelling class arbitration when not expressly addressed in the contract.  Essentially, an affirmative agreement to arbitrate on a class-wide basis should be required.  Furthermore, numerous attacks have recently been levied on class arbitration waiver provisions on the grounds such clauses are unconscionable and/or violate public policy.  The Stolt-Nielsen decision will likely be a great blow to such challenges and, in fact, should offer affirmative support for enforcing these provisions.  Businesses facing arbitration should be able to rely on this decision to prevent arbitrators from over-reaching their powers in attempts to expand the arbitrated matters to an entire class.