Oral argument: Dec. 9, 2009
Appealed from: United States Court of Appeals for the Second Circuit (Nov. 4, 2008)
ARBITRATION, FEDERAL ARBITRATION ACT, ADMIRALTY LAW, MARITIME LAW
AnimalFeeds filed a class action lawsuit against the four major parcel tanker transportation companies, including Stolt-Nielsen, alleging antitrust violations. As per a written contact between the parties, the case was referred to an arbitration panel. The contract, however, is silent as to whether class arbitrations are permissible. Stolt-Nielsen argues that the silence in the agreement should mean that class arbitration is not permitted, while AnimalFeeds claims the decision should be left to the arbitrators. The arbitrators decided to allow class arbitration, but the district court (S.D.N.Y.) refused. The Second Circuit reversed. The Supreme Court's decision will place an economic burden on the losing side and may affect international businesses decisions on whether to select a forum in the United States.
In Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), this Court granted certiorari to decide a question that had divided the lower courts: whether the Federal Arbitration Act permits the imposition of class arbitration when the parties' agreement is silent regarding class arbitration. The Court was unable to reach that question, however, because a plurality concluded that the arbitrator first needed to address whether the agreement there was in fact “silent.” That threshold obstacle is not present in this case, and the question presented here - which continues to divide the lower courts - is the same one presented in Bazzle:
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.
Is reading a contract to allow class arbitration, when the contract does not expressly allow it, consistent with the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq.?
The Respondent in this case, AnimalFeeds International Corp., (“AnimalFeeds”) entered into international maritime agreements with the Petitioners parcel tanker transportation companies, Stolt-Nielsen SA, Stolt-Nielsen Transportation Group Ltd., Odjfell ASA, Odjfell Seachem AS, Odjfell USA, Inc., Jo Tankers B.V., Jo Tankers, Inc., and Tokyo Marine Ltd. (collectively, “Stolt-Nielsen”). See Stolt-Nielsen SA et al., v. AnimalFeeds International Corp., 548 F.3d 85, 87 (2d Cir. 2008).
On September 4, 2003, in the federal district court of the Eastern District of Pennsylvania, AnimalFeeds filed a class action lawsuit against Stolt-Nielsen, alleging that the shipping companies were violating antitrust laws by colluding to restrict competition in the shipping trade. See Stolt-Nielsen, 548 F.3d at 87. The court transferred the action to Connecticut to consolidate the action with a similar case (other companies had also alleged a conspiracy to fix the price of international shipments). See id. at 87–88. Stolt-Nielsen then filed a motion to compel arbitration, but the district court denied the motion. See id. at 88. In a separate case, the Second Circuit reversed the district court's decision on the motion, holding that the antitrust claims were arbitrable and were governed by the contracts that required arbitration. See id. (referencing JLM Indus., Inc. v. Stolt-Nielsen SA, 387 F.3d 163, 168 (2d Cir. 2004) (although AnimalFeeds was not a party to this case, it is undisputed that the decision had the effect of also requiring arbitration of AnimalFeed's claims.))
The parties agreed that the arbitrator would be guided by Rules 3 through 7 of the American Arbitration Association’s Supplementary Rules for Class Arbitrations (“Supplementary Rules”). See Stolt-Nielsen , 548 F.3d at 88. Significantly, Rule 3 gives the power to the arbitrator to determine “whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class.” See id. (quoting Supplementary Rules). AnimalFeeds filed a demand for class arbitration and a panel was appointed to determine, in connection with Rule 3, whether the contracts between the parties permitted class arbitration. See id. The two relevant standard-form agreements that are used when shipping companies lease space on a vessel, the Vegoilvoy and Asbatankvoy, are both silent on the issue. See id. In 2005, the arbitrators made a decision resolving the narrow contract interpretation issue and determined the agreements would tolerate class arbitration. See id.
Stolt-Nielsen, unhappy with the arbitrators’ decision, petitioned to the Southern District of New York to vacate the decision. See Stolt-Nielsen, 548 F.3d at 90. The district court vacated the award and declared that it was made “in manifest disregard of the law.” Id. The district court ruled that the arbitrators should have considered the custom and usage of maritime law. See id. AnimalFeeds appealed the district court’s opinion to the Second Circuit Court of Appeals, which reversed the district court; the Second Circuit held that the arbitration panel did not act in manifest disregard of the law. See id. at 98. Stolt-Nielsen appealed to the Supreme Court.
When an arbitration agreement in a contract does not address whether a dispute may be brought as a class arbitration, should class arbitration be permitted or should the agreement be read to implicitly deny its permissiveness?
Petitioners, Stolt-Nielsen S.A., et al., argues that allowing class arbitration when it is not in the arbitration agreement violates the Federal Arbitration Act (“Arbitration Act”), a statute that protects arbitration agreements. See Brief for Petitioners, Stolt-Nielsen, et al. at 15. Stolt-Nielsen looks to the underlying purpose behind the congressional passing of the Arbitration Act and cites Supreme Court precedent which declares that the Arbitration Act was enacted “to ensure ‘that private agreements to arbitrate are enforced according to their terms.’” See id. at 16–17 (quoting Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 53–54 (1995) (quoting Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989)). The Respondent, AnimalFeeds International Corp., contends that the parties delegated power to the arbitrators, and the arbitrators applied basic contract interpretation principles, consistent with the Arbitration Act, to determine that class arbitration was permissible. See Brief for Respondent, AnimalFeeds at 26–30.
The Supreme Court's decision in Stolt-Nielsen S.A. et al. v. AnimalFeeds International Corp. may have significant effects across the business sector, perhaps most importantly by determining the extent to which individuals pursue arbitration against businesses and the extent to which businesses choose to settle before final decision.
Amicus supporting Stolt-Nielsen argue that reading a term into the agreement that allows class arbitration proceedings will force defendants into unfavorable settlements. The Chamber of Commerce of the United States of America explains that class arbitration aggregates potential liabilities into one lawsuit possibly subjecting the defendant to enormous risk. See Brief of Amicus Curiae Chamber of Commerce of the United States of America in Support of Petitioners at 17–20. DRI-The Voice of the Defense Bar (“DRI”) elaborates on this point and explores the consequences that potential for enormous liability has on a defendant’s decision making. DRI argues that defendants are unlikely to risk bankruptcy in a large class action suit and that the lack of procedural tools available in arbitration as compared to litigation (i.e. summary judgment) will further increase the pressure on defendants to settle cases claiming high damage figures. See Brief of Amicus Curiae DRI-The Voice of the Defense Bar in Support of Petitioners at 17–20. Amici point out that the Senate has recognized that class actions lawsuits give plaintiffs’ lawyers “unbounded leverage” and allow them seek “blackmail settlements.” Id. at 32.
Conversely, amici supporting AnimalFeeds argue that denying class arbitration would place an economic burden on the party bringing the suit. Dub Herring Ford Lincoln-Mercury, Inc. contends that, without class arbitration, small businesses would have to pay huge sums of money to resolve similar and often duplicative claims. See Brief of Amicus Curiae Dub Herring Ford Lincoln-Mercury, Inc. in Support of Respondent at 10–11. This in turn runs the risk of inconsistent rulings. See id. at 12. Additionally, they cite to recent research which reveals that big businesses are not the facing off in arbitration contests; it is mostly small businesses, and individuals that would be affected by the high cost of the inefficiency that would result from denying class arbitration without explicit permissive clause. See id. at 12 (referencing Eisenberg, Miller and Sherwin 2 Judicature 118 (2008)). The American Antitrust Institute (“AAI”) encourages class arbitration because the government is unable to enforce antitrust law on its own and relies on private citizens to contribute to policing antitrust violations. See Brief of Amicus Curiae American Antitrust Institute in Support of Respondent at 12. AAI recognizes that antitrust cases are often uneconomical for a single individual to bring because the stakes to each member aren’t high enough when considered alongside the cost of the suit. See id. at 16. In other words, “‘[e]conomic reality dictates’ that such actions ‘proceed as a class action or not at all.’” Id. (quoting Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 161 (1974)). The Lawyers Committee for Civil Rights Under Law argues dramatic implications for civil rights enforcement could flow from this decision as class litigation is important to the enforcement of civil right law. See
Brief of Amici Curiae The Lawyers Committee for Civil Rights Under Law, et al. in Support of Respondent at 12. The amount of damages may be too small for an individual to find capable counsel to bring suit. See id. at 21. Amici argue that without class arbitration, violations will persist because the arbitration clauses are boilerplate and employees are often not in a position to negotiate with employers over these terms. See id. at 22
The association of Ship Brokers and Agents, et al., point out that class actions are not permitted universally; “the class action is a uniquely American procedural device.” Brief of Amici Curiae Ship Brokers and Agents et al. in Support of Petitioner at 27 (quoting Edward F. Sherman, Group Litigation Under Foreign Legal Systems: Variations and Alternatives to American Class Actions, 52 DePaul L. Rev. 401, 401 (2002)). Amici express that imposing class arbitrations on ship owners, charterers, and oil companies would encourage these companies to pursue other trading partners and that they would be very unlikely to refuse to have New York or the United States serve as an arbitral forum. See id. at 41–43.
Is the imposition of class arbitration consistent with the Federal Arbitration Act, 9 U.S.C. §§ 1, et seq. if the parties never agreed to class proceedings?
Petitioners, Stolt-Nielsen SA, Stolt-Nielsen Transportation Group Ltd., Odjfell ASA, Odjfell Seachem AS, Odjfell USA, Inc., Jo Tankers B.V., Jo Tankers, Inc., and Tokyo Marine Ltd. (collectively “Stolt-Nielsen”) argue that while class arbitration is permissible under the Federal Arbitration Act (“Arbitration Act”) if it is contractually authorized by the parties’ agreement, the Arbitration Act does not compel arbitration if the parties never actually agree to it. See Brief of Petitioners, Stolt-Nielsen, et al. at 15, 17 (citing EEOC v. Waffle House, Inc., 534 U.S. 279, 289 (2002)). Stolt-Nielsen argues that arbitration “is a matter of consent not coercion.” See Brief of Petitioners at 17 (citing Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989)). Hence, the Arbitration Act gives the parties discretion to delineate the scope of their arbitration through a “written provision” in a contract or a separate “agreement in writing.” See Brief of Petitioners at 17 (citing 9 U.S.C. § 2). However, in this case, Stolt-Nielsen points out that the Vegoilvoy arbitration clause was silent as to class proceedings, and the parties did not agree to permit one. See id. at 21. Hence, in such circumstances, Stolt-Nielsen contends that the court should not impose arbitration. Doing so, Stolt-Nielsen argues, would be contrary to legislative intent, and moreover, there is no federal policy favoring arbitration. See id. at 17 (citing Volt Info. Sciences, Inc., 489 U.S. at 476).
In contrast, the Respondent, AnimalFeeds International Corp. (“AnimalFeeds”) asserts that the parties’ arbitration clause should be construed to permit class arbitration under the Arbitration Act. See Brief for Respondent, AnimalFeeds at 26. First, contrary to Stolt-Nielsen’s argument, AnimalFeeds claims that the Arbitration Act does not bar class arbitration when the arbitration clause is silent on the matter. See id. AnimalFeeds relies on Green Tree Financial Corp. v. Bazzle to support this contention. See id. at 27. In Bazzle, the Court concluded that arbitration could proceed on a class basis so long as the parties’ contract did not specifically prohibit it. See id. at 27 (citing Bazzle, 539 U.S. 444, 454 (2003) (plurality)). AnimalFeeds also cites to the American Arbitration Association (“AAA”), which also “understood Bazzle to endorse the proposition that, under the [Arbitration Act], class arbitrations are permissible where the parties’ arbitration agreement is construed to permit class arbitration.” See id. at 27?28 (quoting Brief of AAA as Amicus Curiae in Support of Neither Party (08-1198) at 9.). Finally, AnimalFeeds contends that class proceedings should be permitted as a matter of public policy. See id. at 41. This is because any contrary interpretation of the Arbitration Act would single out class arbitrations by placing such proceedings off limits to arbitrators. See id. Such a reading would also bar individual claimants from seeking arbitration. See id. at 51.
However, the heart of Stolt-Nielson’s argument is that imposing class arbitrations would fundamentally alter the nature of the parties’ arbitration agreement. See Brief for Petitioners at 25. Rather than construing the Arbitration Act on public policy grounds, as Stolt-Nielson believes that the arbitration agreement should be enforced strictly “in accordance with [the parties’] terms.” See id. at 25 (citing 9 U.S.C. §4). For support, Stolt-Neilson looks to the text of the Arbitration Act which does not refer, directly or indirectly, to class arbitration. See id. at 25?26. Additionally, Stolt-Nielson claims that when a class is certified, there is a high risk of an erroneous result which “retroactively alters the core economics” of the arbitration contract. See id. at 28. For these reasons, Stolt-Nielson states that the court should not unexpectedly impose class arbitrations because doing so would “transfor[m] a process for resolution of bilateral, naturally circumscribed commercial disputes into sprawling, high-stakes quasi-litigation.” Id. at 28.
AnimalFeeds counters that there is no legal basis for these claims. See Brief for Respondent at 39. In AnimalFeeds’ view, Stolt-Nielsen’s references to the contracting parties’ intent suggest an impermissible heightened specific-intent requirement beyond ordinary contract principles. See id. According to AnimalFeeds, the point of the Arbitration Act which requires courts to enforce arbitration agreements “in accordance with [the parties’] terms” is to treat arbitration contracts as any other contract, not to impose a tighter mandate on Arbitration Act-governed arbitration agreements. See id. at 40. In other words, AnimalFeeds argues that every term does not need to be made explicit in the contract to provide authority to arbitrators to proceed with a class arbitration. See id.
Stolt-Nielson, on the other hand, raises a series of supplementary points in support of their claim that class arbitrations should not be imposed. First, Stolt-Nielson argues that class proceedings are complex and unworkable, and particularly impracticable in an international case involving parties from different countries. See Brief for Petitioners at 42. Second, Stolt-Nielson contends that class arbitration “denies defendants their core right to select different arbitrators to resolve disputes with different members of the would-be class.” See id. at 35. Third, Stolt-Nielson asserts that the need for judicial oversight confirms that class arbitration is improper without “actual consent.” See id. at 37. Additionally, Stolt-Nielson maintains that class arbitration cannot be “meaningfully confidential.” See id. at 38. Finally, class arbitration, in Stolt-Nielson’s view, cannot provide finality and repose. See id. at 39?41.
In response to these points, AnimalFeeds asserts that arbitrators are in fact able to handle complex, multi-national disputes. See Brief for Respondent at 46. Furthermore, AnimalFeeds claims that contrary to Stolt-Nielsen’s assertion, class arbitrations are an efficient means for dispute resolution. See id. 46. Next, replying to Stolt-Nielson’s contention that class arbitration denies defendants their right to select arbitrators, AnimalFeeds claims that there is no merit to this argument because by the time the parties select the arbitrators, they are aware of the fact that claimants are seeking to proceed as a class, and therefore, they may select arbitrators suited to their needs. See id. at 46. In response to Stolt-Nielsen’s concern about the need for judicial oversight, AnimalFeeds argues that class certification is possible by both arbitrators and courts. See id. at 47. AnimalFeeds also contends that there is no requirement under the Arbitration Act for absolute confidentiality. See id. at 47. Finally, in AnimalFeeds’ view, arbitral awards are sufficiently final. See id. at 47.
Was the arbitrators’ decision to impose a class arbitration correct?
Stolt-Nielson argues the arbitrators “exceeded their powers” under Arbitration Act 9 U.S.C. § 10(a)(4) by imposing class arbitrations without the parties express consent. See Brief of Petitioners at 23-24. This is because the arbitrator’s authority, Stolt-Nielson claims, is limited by what the parties have agreed to confer to him. See id. at 18. In this case, Stolt-Nielson suggests that the arbitrator was erroneous in reading a silent arbitration clause as permitting the imposition of class arbitration on public policy grounds rather than on the intent of the parties. See id. at 24.
AnimalFeeds, on the other hand, claims that the arbitrators did not manifestly disregard the law in authorizing class proceedings. See Brief for Respondent at 38. In their view, the arbitrators correctly applied common law principles of both maritime and New York contract law. See id. at 32. Moreover, AnimalFeeds contends that the parties’ contract provision authorizing arbitrators to decide “any” dispute reflects an agreement to grant arbitrators discretion to proceed with a class arbitration. See id. at 34. Additionally, AnimalFeeds contends that the arbitrator’s decision comports with the growing body of arbitral decisions construing arbitration clauses to permit class-wide procedures. See id. at 38.
The United States Supreme Court’s decision in this case will affect whether international businesses’ decision as to whether to select the United States as a forum to hear their claims. The Petitioners, Stolt-Nielsen SA, Stolt-Nielsen Transportation Group Ltd., Odjfell ASA, Odjfell Seachem AS, Odjfell USA, Inc., Jo Tankers B.V., Jo Tankers, Inc., and Tokyo Marine Ltd. argue that, because the arbitration clause is silent as to class proceedings, it should be construed against arbitration since any other interpretation would be contrary to the parties’ intent. The Respondent, AnimalFeeds International Corp., asserts that the decision to proceed with a class arbitration should be left to the arbitrator. The Supreme Court’s decision will determine whether class arbitrations are allowed when the contract is silent.
Edited by: James McConnell
· Wex: Law about Admiralty
· Wex: Law about Arbitration
· American Arbitration Association's Policy on Class Arbitration