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Forthcoming Supreme Court Case Critical For Cost-Effective Dispute Resolution
Topic: Litigation Strategies
By John M. Masslon II, a legal intern at Washington Legal Foundation and participant in the Koch Foundation Internship Program during the summer of 2009. John is currently a second-year law student at Georgetown University Law Center.
Legal Backgrounder, October 2, 2009, 4 pages
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Publication Summary:

WLF Legal Backgrounder

Forthcoming Supreme Court Case Critical For Cost-Effective Dispute Resolution

By John M. Masslon
October 2, 2009 (Vol. 24 No. 31)

On June 15, 2009 the U.S. Supreme Court granted certiorari in Stolt-Nielsen, et al v. AnimalFeeds International Corp (08-1198). The case presents the important question of whether the Federal Arbitration Act (FAA) precludes an arbitration panel from allowing class arbitration when an arbitration clause in a contract is silent on the matter. The Supreme Court has previously granted certiorari on this question, but failed to address it directly.  In Stolt-Nielsen, the U.S. Court of Appeals for the Second Circuit held that the FAA does not preclude the imposition of class arbitration when the agreement is silent on the issue;1 however, other Circuits have the contrary.2  The Supreme Court's resolution of this split in the circuits will have a substantial impact on both domestic and international commerce.

Background of Case.
Stolt-Nielsen and AnimalFeeds entered into a maritime contract for the charter of a ship carrying liquid chemicals. The contract was a form charter party, called the VEGOILVOY, that is provided by the Association of Shipbrokers and Agents as a service to the shipping industry. The contract has been in continuous use since 1950 and provides that any dispute arising under the contract be arbitrated under the FAA3 in New York City.

AnimalFeeds accused Stolt-Nielsen and the other petitioners in this case of conspiring to fix the price of shipping services for liquid chemicals in violation of the Sherman Antitrust Act and Connecticut state law. AnimalFeeds filed suit in U.S. District Court, and Stolt-Nielsen moved to compel arbitration under its agreement with AnimalFeeds. The district court denied the motion, but the Second Circuit overturned the decision and ordered that the matter be submitted to arbitration.4

The two sides agreed to submit their claims to a clause construction panel, in accordance with the American Arbitration Association's (AAA) Supplemental Rules for Class Arbitration, to determine if the arbitration clause allows for class arbitration.5  Both sides stipulated that the arbitration clause is silent on the matter. The panel concluded that the contract's arbitration clause permits class arbitration, marking the first time in the sixty year history of VEGOILVOY, and possibly the first time in maritime shipping history, that class arbitration was allowed to proceed in this manner.

Stolt-Nielsen filed a motion with the district court seeking vacation of the class construction award. The district court granted the motion, holding that the arbitrators had acted with "manifest disregard of the law."6  The district court never addressed whether the FAA prohibits class arbitration when the contract is silent on the matter.

Supreme Court's Bazzle Opinion.  
The last time the Supreme Court heard arguments on the issue of contractual silence on class action arbitration was in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003).7  The resulting plurality opinion, though, did not address the question.  Instead, the Court decided that the arbitrator, not the courts, should decide first whether a contract's arbitration clause is silent, and second, whether the contract allows for class arbitration if it is in fact silent on the matter.

Chief Justice Rehnquist filed a dissenting opinion in Bazzle which first argued that the initial determination is one to be made by the judiciary, and, second, asserted that almost all arbitration provisions are in fact not silent on class arbitration.

In support of his first point, Chief Justice Rehnquist relied upon First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995). In Kaplan, the Court held that what can be arbitrated under an arbitration agreement is a matter for a court, not the arbitrator, to decide. The Kaplan majority reasoned that allowing the arbitrator to make the decision would too often force parties to arbitrate issues that they did not agree to arbitrate. He argued that making a decision on whether a contract allows for class arbitration is similar to deciding which issues are going to be arbitrated.  When that issue arises, as with class arbitration, it brings in disputes from other parties and is the parties are thus submitting additional claims to the arbitrator for a final determination.

Chief Justice Rehnquist then argued that by forcing class arbitration to occur, the Court was contravening the terms of the contract to which the parties agreed. He stated that any arbitration provision that says arbitrators are to be chosen by the parties is not silent on class arbitration but rather forbids class arbitration. In other words, allowing for class arbitration fails to enforce the contract as written.

After Bazzle, the AAA, along with other industry leaders, formulated rules for determining whether a contract was silent on class arbitration, and if it was found to be silent, whether the class arbitration should be granted.  In addition, the rulemaking effort set procedures to be followed during class arbitration. 

Many courts have interpreted Bazzle as allowing class arbitration when the contract is silent on the matter.8  These courts believe that the Supreme Court's holding that arbitrators are the ones that need to make the initial decision is an implicit endorsement of class arbitration when the contract is silent on the matter.9

Second Circuit's Opinion in Stolt-Nielsen.  
The Second Circuit relied heavily upon the FAA's limits on when courts may overturn the decision of an arbitrator.10  The appeals court focuses mostly on the district court judge's finding that the arbitrators manifestly disregarded the law.  Second Circuit precedent had held such disregard to be an additional ground for vacating an arbitrator's decision.11

The Second Circuit ruled that there was no clear legal rule, in either federal maritime law or New York State law,12 which prohibited the imposition of class arbitration when the parties' agreement was silent on the issue.  It held that there could be no manifest disregard of the law if: (1) the law was not crystal clear at the time the arbitrator considered the matter; (2) the law was brought to the arbitrator's attention prior to a decision being rendered; and (3) the arbitrator still decided to disregard the law and rule for the other side.  In the court's view, great deference must be granted to the arbitration panel's decision to force class arbitration.           

The panel then took a slight detour to examine whether Hall Street Associates v. Mattel, 128 S. Ct. 1394 (2008) allows lower courts to apply a manifest disregard test in order to vacate an award by an arbitrator. The panel held that Hall Street did not prevent courts from using a manifest disregard test because it could be viewed as encompassing the elements of § 10 collectively and not an additional ground for vacating an arbitrator's decision. Thus, the panel changed how the Second Circuit views the manifest disregard test, but not the substance of the test.

Next, the Second Circuit considered the question on which the Supreme Court granted certiorari - whether class arbitration can be imposed when the contract is silent on the issue. The court gave a brief summary of the pre-Bazzle cases addressing the issue and then held that Bazzle had clarified the issue so arbitrators are able to utilize class arbitration even when the contract is silent on the issue.

Finally, the court considered whether the arbitrators had overstepped their authority in granting the class certification. The panel held that by agreeing to have the AAA's Supplemental Rules govern the class construction process, the two sides had granted the arbitrators the authority to determine if the contract allowed for class arbitration to occur.

Potential Impact
This case is vitally important to businesses in the United States and around the world.  Arbitration agreements offer business entities prompt, definitive, and cost-effective resolution of disputes. Class arbitration provides neither.  Class arbitration proceedings must be overseen by a court so that absent class members are adequately represented, dramatically increasing cost and time. 

Many international agreements, including those which are between two non-American firms, select New York City,13 which lies in the Second Circuit, as the location for arbitration. If the Supreme Court upholds the Second Circuit's decision, few international corporations will be willing to arbitrate in New York. This will adversely impact the economy of the United States and will force most international arbitrations to be held in Europe, especially London.

The cost of negotiating contracts governed by the FAA will increase dramatically as parties negotiate on class arbitration issues. Currently, parties to arbitration do not negotiate on the class issue because they believe that the contracts do not allow for class arbitration. Those contracts already in force will have to be amended to explicitly prohibit the use of class arbitration. 

Outlook.
Justice Kennedy is the only justice on record as saying that he believes the FAA prohibits class arbitration when the contract is silent on the issue. Justice Thomas has said that he does not believe the FAA applies to state court cases, but has yet to decide a case on appeal from a federal court on this issue. Justice Stevens is the only justice that has stated publicly that the FAA does not prohibit class arbitration when the contract is silent on the issue. Justices Breyer, Ginsburg, and Scalia all dodged the question in Bazzle, and thus their views on the issue are not known. Chief Justice Roberts and Justices Alito and Sotomayor have all joined the Court since the last time this issue was heard. It appears as though the outcome of Stolt-Nielsen will not be based on justices' perceived ideological views, but will likely lead to an unlikely alliance of votes, as is often the case in business-oriented Supreme Court cases.

John M. Masslon II was a legal intern to Washington Legal Foundation, and a participant in the Koch Foundation Internship Program, in the summer of 2009.  He is currently a second-year law student at Georgetown University Law Center.

Notes:
1. Stolt-Nielsen, et al v. AnimalFeeds International Corp, 548 F. 3d 85 (2d Cir. 2008).

2. See, e.g., Champ v. Siegel Trading Co., 55 F. 3d 269 (7th Cir. 1995).

3. The contract refers to the "United States Arbitration Act," which is today known as the FAA.

4. JLM Industries Inc. v. Stolt-Nielsen, 387 F. 3d 163 (2d Cir. 2004). AnimalFeeds was not a named party in the case but both sides agreed that the 2nd Circuit's opinion bound AnimalFeeds to submit their claim against Stolt-Nielsen to arbitration as well. The other contract at issue in JLM will not be before the Court and thus only those issues arising from the AnimalFeeds contract will be discussed in this LEGAL BACKGROUNDER.

5. Stolt-Nielsen stipulated that they were not agreeing to be bound by the panel's award and that they reserved the right to challenge class arbitration for a contract dispute that was silent on the class arbitration issue. They were only agreeing to the proceedings in order to follow Bazzle's mandate.

6. Stolt-Nielsen, et al v. AnimalFeeds International Corp., 435 F.Supp.2d 382 (S.D.N.Y. 2006).

7. There was no opinion for the Court in Bazzle, rather there was a plurality opinion by Justice Breyer. Because of this, some lower courts have held that Bazzle has no precedential effect; however, most lower courts have tried to follow Justice Breyer's opinion in the case. Compare Employers Insurance Co. of Wausau v. Century Indemnity Co., 443 F.3d 573 (7th Cir. 2006) with Stolt Nielsen 548 F. 3d 85.

8. See, e.g., Shroyer v. New Cingufar Wireless Servs., Inc., 498 F.3d 976 (9th Cir. 2007); Kinkel v. Cingular Wireless, 857 N.E.2d 250 (Ill. 2006); Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005).

9. Shroyer, 498 F.3d at 992.

10. See 9 U.S.C. § 10.

11. The district court in this case was just following Second Circuit precedent prior to the Supreme Court's ruling in Hall Street.

12. Stolt-Nielsen, the arbitration panel, the district court, and the Second Circuit believe that federal maritime law and New York law do not differ on the issues presented in this case so the Second Circuit did not discuss which law should be applied.

13. The form contract at issue in this case asks the parties to choose between New York City and London for arbitration proceedings. Many other form contracts have a similar choice.

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