The Supreme Court’s decision on Tuesday, April 27 in Stolt-Nielsen v. AnimalFeed may not be the final death knell for class-wide adjudication of claims subject to arbitration agreements, but it is pretty darn close.  While plaintiffs’ lawyers can be expected to assert numerous grounds for distinguishing their cases from Stolt-Nielsen, Justice Alito’s sweeping decision leaves them very little wiggle room.

Congress and the courts have long recognized that when contracting parties agree that disputes arising out of their contractual arrangements should be settled by private arbitration, the agreement is valid and enforceable.  But such agreements rarely provide any detailed rules governing how an arbitration proceeding is to be conducted, and it has generally been left up to the arbitrator to fill in those gaps.  In particular, until very recently virtually no arbitration agreements specified whether the arbitrator could certify a proceeding as a class action and permit the claimant to sue on behalf of similarly situated individuals.  After the Supreme Court’s 2003 decision in Green Tree Financial Corp. v. Bazzle left open the possibility that classwide arbitrations might be permissible, the number of instances in which the arbitrator has permitted the proceedings to go forward on that basis has increased tremendously.

One such case was the maritime proceeding that came before the Supreme Court in Stolt-Nielsen. The Petitioners were maritime shipping companies which allegedly conspired to fix prices.  One of their customers, AnimalFeed, sought arbitration of antitrust claims not only on its own behalf, but also on behalf of all similarly situated customers.  The parties stipulated that the arbitration agreement was utterly silent on the issue of class-wide arbitration.  The arbitrators ultimately sided with AnimalFeed, on the basis that other arbitrators had granted class-wide arbitration in similar post-Bazzle proceedings.

The Supreme Court reversed, using language suggesting that arbitrators should virtually never authorize class-wide arbitration.  Justice Alito noted that arbitrators derive their authority solely from the consent of the parties, and thus that they have no authority to adopt procedural rules to which the parties never agreed.  He recognized that, despite the absence from the arbitration agreement of any express authorization for class certification, the parties likely expected the arbitrators to fill in any gaps when devising procedural rules.  But given that class-wide arbitrations represented such a sharp departure from procedures customarily adopted throughout the centuries-long history of private arbitrations, he concluded that the parties could not reasonably be assumed to have consented to class certification.  Moreover, he concluded that federal courts were authorized by § 10(a)(4) of the Federal Arbitration Act (FAA) to overturn the arbitrators’ decision because they had “exceeded their powers.”

So what can plaintiffs’ attorneys do to try to distinguish their cases from Stolt-Nielsen?  Well, they can try to argue that there is evidence in their case that the parties consented to class-wide arbitration.  Good luck on that one.  I am unaware of any standard arbitration agreement that includes any evidence suggesting such consent.  Most such agreements were drafted before the recent spate of class-wide arbitrations, so there can be no argument that the parties entered into their agreement with an understanding — based on the history of arbitration proceedings — that the arbitrator might certify a class.  And many arbitration agreements drafted in recent years include provisions explicitly prohibiting class-wide arbitration.

Plaintiffs’ attorneys can also point out that all parties in Stolt-Nielsen were sophisticated businesses.  They are likely to assert that their clients, in contrast, are unsophisticated consumers who should not be held to the same standards as AnimalFeed.  The problem with that analysis is that it does not address the basis for the Supreme Court’s holding:  a party cannot be forced to submit either to arbitration or to specific arbitration procedures unless it provided advance consent when it signed the arbitration agreement.  The Supreme Court’s no-unconsented-class-actions rationale applies just as fully to unsophisticated parties as it does to sophisticated parties.

Plaintiffs can also argue that a prohibition on class-wide arbitration is unconscionable and thus unenforceable, at least where a small potential recovery makes individual arbitration proceedings uneconomic.  A number of state courts have reached just such an unconscionability determination, and those determinations most likely can survive a claim of preemption under the FAA.  But the most that a plaintiff can gain from such a determination is an order directing that the dispute be settled in court rather than through arbitration.  In light of Stolt-Nielsen’s no-unconsented-class-actions rationale, the FAA prohibits courts from citing unconscionability as a reason for ordering a party to submit to a class-wide arbitration to which it never consented.