Litigation Alert

    View Authors April 2010

    On April 27th, the United States Supreme Court held that "a party may not be compelled under the [Federal Arbitration Act] to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so." Stolt-Nielsen v. AnimalFeeds Int’l Corp., Case No. 08-1198, at 20 (April 27, 2010)(emphasis in original). In other words, class arbitrations are not permitted unless the parties contractually agree to authorize such actions – silence in an arbitration clause will not suffice. This decision will impact both the enforceability of arbitration agreements that are silent on the issue of class actions, as well as arbitration agreements that expressly waive the parties’ right to participate in class action lawsuits and arbitrations. Indeed, state and federal court decisions striking class action waivers from arbitration agreements and permitting class arbitrations appear to be fundamentally at odds with the Court’s ruling in Stolt-Nielsen.

    Businesses should consider how to structure their future arbitration agreements, particularly those with employees and consumers, and how to address cases arising under their existing agreements, in view of the Supreme Court’s guidance in Stolt-Nielsen.

    The parties’ arbitration agreement in Stolt-Nielsen was silent on whether class arbitrations were permitted. A panel of arbitrators determined that the "silent" arbitration agreement allowed for class arbitration. The Supreme Court held that the arbitration panel exceeded its powers when it determined that class arbitrations should be permitted rather than identifying and applying a rule of decision derived from the Federal Arbitration Act (the FAA) or from either maritime or New York law.

    The Court held that while the interpretation of an arbitration agreement is generally a matter of state law, "the FAA imposes certain rules of fundamental importance, including the basic precept that arbitration ‘is a matter of consent, not coercion.’" Slip Op. at 17. The Court emphasized that the consensual nature of private dispute resolution allows parties to structure their arbitration agreements as they see fit. Importantly, the Court held that it is clear from "precedents and the contractual nature of arbitration that parties may specify with whom they choose to arbitrate their disputes," and "courts and arbitrators must give effect to these contractual limitations." Id.at 19, 20 (emphasis in original). 

    In reaching its decision, the Court recognized that the "relative benefits of class-action arbitration are much less assured" as compared to bilateral arbitration. Slip. Op. at 22. In class-action arbitration an arbitrator is no longer resolving a single dispute between two parties, but instead is charged with resolving many disputes between hundreds or thousands of parties, some of whom are absent parties. The private and confidential nature of arbitration is lost, and while the stakes of class arbitrations are just as high as class action lawsuits, the scope of judicial review is much more limited. Id. at 23. "[T]he differences between bilateral and class-action arbitration 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."Id.

    The Court’s decision could have a significant impact on the current litigation involving the treatment of arbitration agreements which are silent on class proceedings and the enforceability of class action waivers in arbitration agreements. Moreover, there is at least one other case currently before the Court on a petition for certiorari that appears to have been held by the Court pending Stolt-Nielsen. The Court’s actions on that case may give further guidance on how Stolt-Nielsen will be applied.  

    For more information on the Stolt-Nielson case or Squire Sanders arbitration practice, please contact your principal Squire Sanders lawyer or one of the lawyers listed in this Alert.

    Squire Sanders lawyers counsel clients in nationwide, multistate and statewide class action proceedings in both litigation and arbitration throughout the United States. We routinely represent clients in litigation involving the enforceability of arbitration agreements. But before actual disputes ever arise, our lawyers anticipate the potential for challenges and craft strong arbitration clauses for our firm’s clients.