Stolt-Nielsen S.A. v. AnimalFeeds International Corp.

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Argued December 9, 2009. Decided April 27, 2010.

Authorship: Vivian Wang of Stanford Law School

Docket: 08-1198

Issue: Whether imposing class arbitration on parties whose arbitration clauses are silent on that issue is consistent with the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq.

1 Briefs and Documents
2 Opinion Recap
3 Oral Argument Recap
4 Argument Preview
5 Links and Further Information
- 5.1 Media Links
- 5.2 From the Blogosphere

Briefs and Documents

Decision

REVERSED AND REMANDED in a 5-3 decision with an opinion written by Justice Alito. Justice Ginsburg dissented, joined by Justices Stevens and Breyer. Justice Sotomayor took no part in the decision.

Oral Argument

Transcript (December 9, 2009)

Merits Briefs

Amicus Briefs

Certiorari-Stage Documents

Opinion below (2nd Circuit)
Petition for certiorari
Brief in opposition
Petitioner’s reply brief
Brief amicus curiae of Association of Ship Brokers & Agents(in support of petitioners)
Brief amicus curiae of Society of Maritime Arbitrators, Inc. (in support of petitioners)
Brief amicus curiae of Chamber of Commerce of the United States of America (in support of petitioners)

Opinion Recap

Vivian Wang originally wrote the following for SCOTUSblog:

In Stolt-Nielsen v. AnimalFeeds (No. 08-1198), the Supreme Court held that the Federal Arbitration Act prohibits arbitrators from imposing class arbitration on parties who have not agreed to authorize class arbitration. Justice Alito authored the majority opinion, which was joined by the Chief Justice and Justices Thomas, Kennedy, and Scalia. Justice Ginsburg filed a dissenting opinion that was joined by Justices Stevens and Breyer. Justice Sotomayor did not participate in the case.

In reversing the Second Circuit’s decision, the Court recognized that petitioners – who had challenged the decision by an arbitration panel to impose class arbitration in an antitrust dispute arising out of a shipping agreement – faced a “high hurdle” under Section 10(a)(4) of the Federal Arbitration Act (FAA), which required them to show not merely that the panel’s decision was erroneous, but that the panel had in fact “exceeded [its] powers,” straying so far from contract interpretation that its ruling effectively imposed its own public policy. In the Court’s view, that stringent standard was met in this case, in which the panel’s ruling rested not on the two bodies of law that could have applied to this dispute – New York or maritime contract law – but instead on its perceptions about the merits of class arbitration as a policy matter.

Having established that the panel had exceeded its powers, the Court observed that it could, pursuant to Section 10(b) of the FAA, either remand the case to the panel or decide the issue itself. Explaining that there could “be only one possible outcome on the facts” in this case – that the panel cannot impose class arbitration – the Court opted for the latter. It noted however, that its decision did not follow from its 2003 decision in Green Tree Financial Corp. v. Bazzle, which had left open the question of what rule an arbitrator should apply in deciding whether class arbitration is permitted.

The Court then proceeded to establish the following rule, which dictated the outcome in this case: under the FAA, an arbitrator cannot compel a party to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so. In other words, in the absence of any evidence that the parties agreed to engage in class arbitration, imposing class arbitration would violate the “foundational FAA principle that arbitration is a matter of consent.” Class arbitration is fundamentally different from a standard arbitration between two parties: for example, class arbitration lacks privacy and confidentiality protections, requires the adjudication of the rights of absent parties, and can entail the resolution of extraordinarily high-value claims – a prospect that is particularly risky given the limited judicial review of arbitration decisions. As such, the Court explained, arbitrators cannot presume that a party consenting to the latter would also consent to the former.

The opinion contains hints of caution about the scope of the Court’s rule. First, it emphasized the facts of this case – namely, the parties’ stipulation that there was “no agreement” on the issue of class arbitration, which eliminated both any ambiguity about their intent and any consideration of extrinsic factors such as parol evidence. Second, although the Court acknowledged that an arbitrator may, in some contexts, infer the implicit consent of the parties notwithstanding silence in the contract on an issue, it made clear that it was not deciding what contractual basis could support a finding that the parties agreed to authorize class arbitration.

In her dissent, Justice Ginsburg embraced an argument that did not arise at oral argument, but which respondents had made in the final pages of their brief: that the petition should be dismissed as improvidently granted because the issue is unripe. In Justice Ginsburg’s view, the decision to permit class arbitration was “highly interlocutory” and thus inconsistent with the federal courts’ general adherence to the final judgment rule, as it remained to be seen whether the arbitrators would have certified a class and found the particular antitrust claims at issue to be suitable for class resolution.

Moreover, she continued, even on the merits, respondents should prevail. She disagreed with the Court’s characterization of the panel’s decision as policy-driven, pointing to evidence that the panel had in fact considered New York law and maritime law on contract interpretation. She also expressed skepticism that the parties had stipulated to the absence of any agreement at all on class arbitration; according to the record, she suggested, the parties had merely stipulated that the contract contained no agreement to prohibit class arbitrations. Finally, she expressed concern about the potential incongruities created by the Court’s approach: although the class-action mechanism is available in courts, those parties who opt for arbitration can suddenly be stripped of their ability to bring claims as a class, whether in arbitration or in court.

Oral Argument Recap

In Stolt-Nielsen v. AnimalFeeds, the Court granted certiorari to consider “whether imposing class arbitration on parties whose arbitration clauses are silent on that issue is consistent with the Federal Arbitration Act.” But at oral argument on December 9, several members of the Court questioned whether the notion of a “silent” agreement is merely an illusion. Seth Waxman, arguing on behalf of petitioners, proposed the following rule: arbitrators generally have the authority to decide whether an agreement permits, forbids, or is silent about class arbitration, but if they find that the agreement is silent, they lack the authority to order class arbitration. Several justices expressed skepticism at this framework. Justice Ginsburg opened by inquiring why the arbitrators had not simply “answered the question which they were given authority to” resolve when the parties submitted to them “the question whether the arbitration clause permitted class treatment.” She, along with Justices Stevens, Scalia, and Breyer, seemed to take the view that an arbitrator construing an agreement with respect to class arbitration has one of only two options: she can find either that it permits class arbitration or that it forbids class arbitration. No matter how ambiguous or inexplicit the terms, the interpreter must look to other “background considerations” – such as parol evidence, custom, and practice – until the scale tips to one side or the other. There is no third alternative of finding “silence.”

When Waxman attempted to characterize the agreement as “truly silent” about class arbitration, Justice Breyer interjected that “there is no such answer. When you interpret a contract and it doesn’t say, you try to figure out” based on background considerations. Justice Scalia stated, “I really don’t understand what it means to say that the contract does not cover it. . . . The contract either requires it or does not require it.” Justice Stevens observed that the arbitrators’ conclusion that class arbitration could proceed given a supposedly “silent” agreement seemed “little different” than a conclusion “that the best reading of this agreement is that the parties intended to authorize class arbitration,” in which case, petitioners would “have no case.” Justices Kennedy and Alito also peppered Waxman with some questions but would remain silent during respondent’s argument.

During Cornelia Pillard’s argument on behalf of respondent, Chief Justice Roberts asked a steady stream of questions. Unlike the Justices who questioned Waxman, the Chief Justice seemed convinced that a contract could be truly silent, as he pressed Pillard about what should happen when the agreement “doesn’t say . . . you may arbitrate this on a class basis” and nothing in the “background rules” sheds any further light on the matter. Chief Justice Roberts seemed concerned that imposing class arbitration in such circumstances could result in a party defending itself against class members with whom it had similar agreements but different relationships and intents. Justice Scalia joined in with questions, as he did during Waxman’s argument, making it unclear which side he will ultimately find more persuasive. His main concern with respondent’s position seemed to be that arbitrators could conclude that an agreement permits class arbitration on the basis of disconcertingly weak language – in this case, that the arbitration agreement covered “any dispute arising from” the contract.

If the Justices’ questions are taken at face value, respondents have likely garnered the votes of a majority of the Court.

Argument Preview

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.

Background

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.

Merits

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.

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