Supreme Court Requires “Contractual Basis” for Class Arbitration

April 29, 2010

In Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., the Supreme Court held that it is inconsistent with the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq., to impose a class action on parties to an arbitration proceeding simply for public policy reasons. Rather, there must be a “contractual basis,” above and beyond the mere agreement to bilateral arbitration, showing that the parties agreed to class arbitration. Although the Court left several important questions open, its decision should nonetheless limit class arbitrations in cases subject to the FAA going forward.

Under the FAA, arbitrators can handle only disputes parties have agreed to arbitrate. The question in Stolt-Nielsen, then, was whether parties presumptively agree to submit class actions to arbitration when they agree to submit a bilateral dispute to arbitration. The Court’s ruling turns on the differences between class arbitration and bilateral arbitration. According to the Court, the benefits of bilateral arbitration — its efficiency, inexpensiveness and privacy — rarely exist in class arbitrations. Thus, the Court held there is no warrant to presume that someone who agrees to bilateral arbitration also agrees to class arbitration. Instead, “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”

Notably, the Court did not specifically address what counts as a contractual basis for finding an agreement to have class arbitration. Portions of the Court’s opinion suggest that, even when the terms of an agreement are silent on class arbitration, a court or arbitrator may look to commercial custom or substantive contract law to construe that silence as an implicit agreement to submit to class arbitration. Additionally, because the parties in Stolt-Nielsen did not press it, the Court did not address the question whether, under the FAA, a court or an arbitrator should decide whether parties have agreed to have class arbitration. In avoiding that question, the Court cast a shadow of uncertainty over the plurality opinion in Green Tree Financial Corp v. Bazzle, 539 U.S. 456 (2002), in which four justices reasoned that arbitrators, not courts, should decide whether an arbitrator may preside over a class action.

Import for Future Cases
On its face, Stolt-Nielsen bears only on cases governed by the FAA. (Other arbitration statutes may, or may not, speak more specifically to class arbitration.) And at its core, Stolt-Nielsen holds that, under the FAA, class arbitration may not be imposed on an unwilling party simply because a court or arbitrator believes that class actions are good public policy. Something more than just an agreement to arbitrate bilateral disputes is needed to show an agreement to arbitrate class actions. With only slight guidance on what to look for, Stolt-Nielsen does not preclude the possibility of an implied agreement for class arbitration in some cases. Yet because of the uncertainty, it is likely that a court or arbitrator in a particular case will not find an implied agreement for class arbitration without significant briefing and litigation over the question.

The long-term impact of Stolt-Nielsen may depend on another case the Supreme Court is considering, Rent-A-Center v. Jackson, No. 09-497, which was argued on April 26, 2010, and should be decided by the end of June. The question in Rent-A-Center is whether, under the FAA, courts or arbitrators should decide whether an agreement to arbitrate is unconscionable. Several federal and state courts that hold that courts have authority to address unconscionability have used that authority to require class actions even when parties have expressly agreed to arbitrate only bilateral disputes. First, relying on the public policy of a forum state that disapproves of class-action waivers, the courts refuse to follow contractual choice-of-law provisions selecting the law of another state that allows class-action waivers. Second, again relying on the forum state’s public policy, the courts hold class-action waivers unconscionable and thus allow class actions to proceed in arbitration or, in some cases, in court. See, e.g., Omstead v. Dell, Inc., 594 F.3d 1081 (9th Cir. 2010). In essence, those courts invoke a forum state’s public policy to defeat a contract’s choice-of-law provision and its class-action waiver. That result is in real tension with Stolt-Nielsen’s holding that class arbitration cannot be required as a matter of public policy. Accordingly, Stolt-Nielsen’s holding that class arbitration cannot proceed without a contractual basis may mean little if courts can effectively require class actions as a matter of public policy.

Stolt-Nielsen, in sum, leaves several questions unanswered. This therefore will likely be an area the Supreme Court will revisit in future cases.

For more information about the subject matter of this alert, please contact any of the lawyers listed below:

Ky Kirby, Partner, Entertainment, Media and Communications Group

David Salmons, Chair, Appellate Group

This article was originally published by Bingham McCutchen LLP.