Does the FAA Permit Class Arbitration when the Arbitration Agreement is Silent?
Below, Stanford Law School’s Vivian Wang previews Stolt-Nielsen S.A., et al. v. AnimalFeeds International Corp. (08-1198), which will be heard by the Supreme Court on Wednesday, December 9. Check the Stolt-Nielsen SCOTUSwiki page for additional updates.
At issue in Stolt-Nielsen S.A., et al. v. AnimalFeeds International Corp. is whether the Federal Arbitration Act permits arbitrators to impose class arbitration on parties whose arbitration agreements are silent regarding class arbitration. Given the ubiquitous use of arbitration agreements across a wide range of industries, the outcome of this case could have far-reaching effects.
Petitioners are a group of four major maritime shipping companies accused of price-fixing by their customers, including respondent Animalfeeds. The shipping transactions between petitioners and their customers are governed by form contracts with arbitration clauses. In 2003, Animalfeeds and other customers filed separate suits in federal district court, which sent the claims to arbitration pursuant to the parties' arbitration agreements. The parties agreed that their arbitration agreements were indeed silent regarding class arbitration, but they disagreed about whether that silence precluded the claims from being arbitrated as part of a class. The arbitrators ruled, in favor of Animalfeeds, that class arbitration could proceed. Petitioners sought judicial review of that decision in federal district court, which vacated the arbitrators' decision. On appeal, the Second Circuit reversed.
Petition for Certiorari
Petitioners filed a petition for certiorari in which they urged the Court to grant certiorari to resolve the circuit split that remained after its 2003 decision in Green Tree Financial Corp. v. Bazzle. In that case, the Court did not reach the issue due to a threshold dispute over whether the arbitration agreement was truly silent about class arbitration or whether its terms actually prohibited class arbitration. A four-member plurality of the Court, joined by a fifth justice in the judgment only, remanded the case for an arbitrator to decide whether the contract was truly silent. Petitioners argued that lower courts disagreed about the precedential value of the Bazzle decision. Some courts, including the Second Circuit, interpret Bazzle as implicitly permitting arbitrators to impose class arbitration when arbitration agreements are silent, reasoning that if silence had the same effect as an explicit ban on class arbitration, the Bazzle Court would have had no need to remand the case. In contrast, the Seventh Circuit accords no precedential effect to the decision in Bazzle on the ground that no rationale garnered the support of a majority. Thus, petitioners contend, the Seventh Circuit has left in place pre-Bazzle case law holding that class arbitration is impermissible when the arbitration agreement is silent.
In their brief on the merits, petitioners emphasize that the purpose of the Federal Arbitration Act is to enforce arbitration agreements according to the parties' intent. Arbitration agreements, like other contracts, bind parties so far as they consent, and an arbitrator's powers are limited to those conferred upon her by the parties. Because class arbitration is a wholly different creature from two-party arbitration, consent to the latter form of arbitration should not be construed as consent to the former. Therefore, an arbitrator who orders class arbitration when the agreement is silent exceeds his powers and violates the FAA because he requires the parties to participate in a proceeding to which they never consented. Petitioners provide several examples of the differences between the two kinds of arbitration. First, because arbitrations are generally unappealable, arbitrating a class claim is much riskier than arbitrating an individual claim. A party may be willing to forego the safeguards of judicial review for the streamlined arbitration process when a single dispute is at stake, but it would not necessarily make the same tradeoff when a much larger amount is at stake. In this case, Animalfeeds's individual claims are worth roughly $500,000, while those of the potential class of shipping customers amount to roughly $6.5 billion. Second, class arbitration lacks many of the key advantages of arbitration in the two-party context. Two-party arbitration is generally simpler, more informal, and faster than litigation, whereas class arbitration involves complexities that may require judicial supervision or intervention at various stages. In two-party arbitration, parties typically get to jointly select the arbitrator or arbitrators; by contrast, in class arbitrations the defendant cannot select different arbitrators for different members of the would-be class. Two-party arbitrations are generally confidential, whereas hearings and filings in class arbitrations are often made public. Class arbitrations may also lack the finality of two-party arbitration because arbitrators cannot bind absent class members to the results of an arbitration. Additionally, foreign nations may not recognize the results of a class arbitration. Finally, petitioners emphasize that class arbitration is especially inappropriate for maritime disputes because the need for speed, certainty, and confidentiality is particularly acute in that industry.
In response, Animalfeeds argues that the arbitrators acted within the scope of their powers because the parties had agreed that the arbitrators could construe the text of the agreement with respect to class arbitration. The arbitrators were thus empowered to decide that class arbitration could proceed under a silent agreement. Animalfeeds counters that petitioners' alleged problems with class arbitration are both largely unfounded as an empirical matter and, in any event, the unremarkable consequence of entering into a contract with non-specific terms that leave open the possibility of an arbitrator filling in the gaps. Furthermore, the arbitrators' decision was sound. Class arbitration is consistent with the FAA because the FAA favors arbitration as a general matter and does not specifically disapprove of class arbitration. Animalfeeds contends that petitioners erroneously seek a heightened intent requirement, i.e., explicit approval of class arbitration before it may proceed. Instead, the correct approach is to allow the arbitrator to use standard contract interpretation principles to fill in the gaps of an agreement as needed. Because the arbitration agreement covered "all disputes," the arbitrators reasonably read the agreement to permit class arbitrations. Moreover, class arbitration serves the public interest because the arbitration of complex claims often entails significant fixed costs which would not be bearable by an individual claimant. Also, the confidentiality of two-party arbitration prevents an individual claimant from benefitting from the collateral estoppel effect of favorable arbitrations that came before his. Finally, Animalfeeds argues, as it did in its opposition to certiorari, that the Court's review is premature in this case because no class has yet been certified.