On April 27, 2010, the U.S. Supreme Court issued an important arbitration opinion in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., No. 08-1198, holding that parties to an agreement to arbitrate cannot be required to engage in class-action arbitration proceedings unless they agreed to do so and that silence on the subject in the agreement cannot be interpreted as implicit consent to arbitrate on a class basis.
The enforceability of arbitration clauses in consumer financial services contracts has been one of the hottest issues in class action jurisprudence of the past decade. Industry advocates maintain that arbitration clauses are a fair and effective means to control litigation costs, particularly for small dollar claims under any of the panoply of federal and state statues that provide for recovery of attorneys’ fees by successful plaintiffs. Plaintiffs’ lawyers decry the use of arbitration clauses in consumer financial contracts because they have the effect of defeating class actions.
Faced with that reality, some ingenious plaintiffs’ lawyer lighted upon the idea of class arbitration. The concept was that since a class action should not go forward in litigation, why not push for class arbitration?
The U.S. Supreme Court appeared to give the green light to class arbitration in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003). In Green Tree, an arbitrator conducted class arbitration even though the arbitration clause was silent on the subject, and the South Carolina Supreme Court affirmed the arbitral awards. In a plurality opinion, the U.S. Supreme Court concluded that the South Carolina Supreme Court erred, because the decision about whether an arbitration clause that was silent on the issue of class arbitration permitted class arbitration should have been made by the arbitrator, not by the court. The implication seemed to be that the arbitrator had the option to order class arbitration even though the class arbitration agreement was silent on the subject.
To the financial services industry, this seemed like the worst of all worlds. Class proceedings are complex; they involve high stakes, difficult legal issues and the rights of many people. Courts have experience and established procedures for handling class actions. Arbitrators have neither, and their errors are not subject to correction on appeal.
A fairer, sounder decision would have permitted class arbitration only with the consent of the parties. In Stolt-Nielsen, the Supreme Court agreed. Four justices joined an opinion written by Justice Alito, which held that imposing class arbitration on parties who did not authorize such proceedings violates the Federal Arbitration Act (FAA). Justice Ginsburg wrote a dissent that was joined by Justices Stevens and Breyer. Justice Sotomayor took no part in the consideration of the case.
Stolt-Nielsen began as a putative class action antitrust dispute that was referred to arbitration. The plaintiff sought arbitration on a class basis. The parties agreed to submit the issue of whether the arbitration could proceed on a class basis to the arbitration panel and stipulated that the arbitration clause was silent on the issue of class arbitration. The panel held that the arbitration clause permitted class arbitration.
In the majority opinion, Justice Alito noted that no single rationale commanded a majority in Green Tree, and that the plurality in that case merely decided that an arbitrator, rather than a court, should decide whether the contract at issue was silent on the issue of class arbitration. Justice Alito emphasized that the intentions of the parties to an arbitration agreement control the interpretation of the agreement and that courts and arbitrators must give full effect to the contractual rights and expectations of the parties.
Justice Alito noted that in certain contexts it is appropriate to presume that parties to an arbitration agreement implicitly authorize the arbitrator to adopt procedures needed to give effect to the parties’ agreement. But an implicit agreement to authorize class arbitration is not a term that the arbitrator may infer solely from the fact of the parties’ agreement to arbitrate. This is so because class arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator, Justice Alito reasoned.
“We think that the differences between bilateral and class-action arbitration are too great for arbitrators to presume, consistent with their limited powers under the FAA, that the parties’ mere silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings,” Justice Alito said in the opinion.
Justice Alito concluded that imposing non-bargained-for class arbitration on parties would frustrate the parties’ purposes for agreeing to arbitrate their disputes and the assumptions that underlay that decision. “[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.”
In dissent, Justice Ginsburg contended that the only issue was whether the arbitration panel exceeded its authority, and in her view the panel acted appropriately because the parties expressly asked it to decide whether the arbitration agreement permitted class arbitration. She took the occasion to note two limitations on the majority’s decision. First, she noted that the majority did not insist upon express consent to class arbitration. Rather, it held only that there must be a contractual basis for concluding that the parties agreed to class arbitration. Second, she commented that because the majority noted that the parties were of equal bargaining power, the majority “apparently spares” from its holding contracts of adhesion offered on a take-it-or-leave-it basis. Presumably then, her argument follows, the majority opinion does not encompass most consumer contracts. But that seems difficult to reconcile with Justice Alito’s emphasis on the point that parties cannot be forced into class arbitration against their will. That issue seems certain to be the subject of future litigation, as well as the effect of the Stolt-Nielsen decision on class arbitrations that were ordered before the decision and are now underway.
Stolt-Nielsen also calls into question judicial decisions holding arbitration clauses unconscionable on the grounds that they expressly prohibit class arbitration. In the wake of Green Tree, many companies revised their arbitration agreements to expressly state that they did not agree to class arbitration. Courts have considered, and in some cases accepted, the argument that prohibitions on class arbitration are unenforceable, either because they are unconscionable or because the costs of arbitrating or litigating on an individual basis would effectively preclude vindication of statutory rights. Stolt-Nielsen suggests that these decisions may be inconsistent with the FAA. Indeed, on May 3, 2010, the Supreme Court vacated and remanded for further consideration in light of Stolt-Nielsen the Second Circuit’s decision in American Express Co. v. Italian Colors Restaurant, 554 F.3d 300 (2d Cir. 2009) (Sotomayor, J. on the panel), which held, on the facts of the case, a waiver of the right to proceed as a class, whether in arbitration or litigation, “should not be enforced because enforcement of the clause would effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs.”
Despite some uncertainty about the scope and effect of the decision, Stolt-Nielsen appears to represent a significant victory for parties seeking to enforce agreements to arbitrate. By emphasizing the long-standing rule in favor of interpreting agreements to arbitrate according to the parties’ intentions, the Court assures parties increased certainty and protects them from being forced into complex and expensive class arbitrations to which they did not agree. The Court has fairly and successfully patched the hole left in its class arbitration jurisprudence by Green Tree, and ensured that parties seeking to arbitrate their disputes will more effectively and predictably be able to achieve their goals.
Before taking a victory lap, however, arbitration proponents in the financial services industry may wish to review pending financial reform legislation that is expected to pass Congress in the coming days. The House has already passed H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009, and the Senate is considering S.3217, the Restoring American Financial Stability Act of 2010. Both bills provide that a proposed new consumer financial protection regulatory agency “may prohibit or impose conditions or limitations on the use of any agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties” based upon a finding “that such a prohibition or imposition of conditions or limitations are in the public interest and for the protection of consumers.”
In other words, Congress appears poised to authorize the new agency to abrogate the 85-year-old FAA for arbitration agreements between consumers and financial services companies. If that happens, Stolt-Nielsen may have little or no practical effect for the industry that more than any other industry has used arbitration clauses to control the costs of litigating individual and class action claims.
Stephen G. Harvey and James H. S. Levine
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