Supreme Court Rules Against Class Arbitration in Contracts that are Silent as to Class Claims
In Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 2010 WL 1655826 (April 27, 2010), the Supreme Court addressed the permissibility of class action arbitration when the parties' agreement is silent about whether the arbitration tribunal may address claims of multiple parties. The Supreme Court held that it is inconsistent with the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., to impose a class action on parties to an arbitration proceeding solely for public policy reasons. Instead, a "contractual basis" beyond agreement to bilateral arbitration is necessary, showing that the parties agreed to class arbitration. Although the Court left several important questions open, this decision should limit class arbitrations in cases subject to the FAA.
Under the FAA, arbitrators can handle only disputes parties have agreed to arbitrate. The question in Stolt-Nielsen was whether class-action arbitration authorization can be inferred from an arbitration agreement that only relates to two parties. The Court's ruling turns on the differences between class arbitration and bilateral arbitration. According to the Court, the benefits of bilateral arbitration — its efficiency, economy and privacy — often do not exist in class arbitrations. Thus, the Court held that no basis exists to presume that a party who agrees to bilateral arbitration also agrees to class arbitration. Instead, "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."
The Court did not specifically address what contractual basis would be necessary to find an agreement authorizing class arbitration. Some of the Court's opinion suggests that, even when the terms of an agreement are silent on class arbitration, commercial custom or substantive contract law might be used to interpret silence as implied agreement to class arbitration.
Impact for Future Cases
Stolt-Nielsen holds that under the FAA, class arbitration may not be imposed on an unwilling party simply because a court or arbitrator believes that class actions are good public policy. Something more than just an agreement to arbitrate bilateral disputes is needed to show an agreement to arbitrate class actions. Stolt-Nielsen provides minimal guidance on what more is needed, but does not preclude the possibility of an implied agreement for class arbitration in some cases.
The Court has made clear that the parties' intent regarding class arbitration, discerned from the terms of the arbitration agreement, will control whether an arbitration agreement permits class arbitration. Therefore, employers that have arbitration agreements with their employees should take steps to be clear. If the employer wants to prohibit class arbitration, the arbitration agreement should include a statement precluding arbitral treatment of the claims of multiple parties.
Under the FAA, arbitrators can handle only disputes parties have agreed to arbitrate. The question in Stolt-Nielsen was whether class-action arbitration authorization can be inferred from an arbitration agreement that only relates to two parties. The Court's ruling turns on the differences between class arbitration and bilateral arbitration. According to the Court, the benefits of bilateral arbitration — its efficiency, economy and privacy — often do not exist in class arbitrations. Thus, the Court held that no basis exists to presume that a party who agrees to bilateral arbitration also agrees to class arbitration. Instead, "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."
The Court did not specifically address what contractual basis would be necessary to find an agreement authorizing class arbitration. Some of the Court's opinion suggests that, even when the terms of an agreement are silent on class arbitration, commercial custom or substantive contract law might be used to interpret silence as implied agreement to class arbitration.
Impact for Future Cases
Stolt-Nielsen holds that under the FAA, class arbitration may not be imposed on an unwilling party simply because a court or arbitrator believes that class actions are good public policy. Something more than just an agreement to arbitrate bilateral disputes is needed to show an agreement to arbitrate class actions. Stolt-Nielsen provides minimal guidance on what more is needed, but does not preclude the possibility of an implied agreement for class arbitration in some cases.
The Court has made clear that the parties' intent regarding class arbitration, discerned from the terms of the arbitration agreement, will control whether an arbitration agreement permits class arbitration. Therefore, employers that have arbitration agreements with their employees should take steps to be clear. If the employer wants to prohibit class arbitration, the arbitration agreement should include a statement precluding arbitral treatment of the claims of multiple parties.
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