Abby Cohen Smutny (Partner) and Lee A. Steven (Counsel), Lauren Mandell (Associate), White & Case LLP
The United States Supreme Court has handed down its ruling in the Stolt-Nielsen case, reversing the Second Circuit decision. The Court ruled that a tribunal had exceeded its powers under the Federal Arbitration Act by construing an arbitral clause to permit class arbitration when the clause did not address that issue. The decision is significant in that it will undoubtedly create a barrier to class arbitrations and has already impacted the law regarding class action waivers. Further, the Court assumed, without deciding, that the manifest disregard standard is still viable after its decision in Hall Street LLC v Mattel.
In Stolt-Nielsen SA, et al. v AnimalFeeds Int'l Corp., 2010 WL 1655826 (U.S. Apr. 27, 2010), the US Supreme Court ruled in a 5-3 decision that an arbitral tribunal had exceeded its powers under section 10(a)(4) of the Federal Arbitration Act (FAA) by construing an arbitral clause to permit class arbitration when the clause did not address that issue. In doing so, it reversed a Second Circuit decision. Justice Alito authored the majority opinion, joined by Chief Justice Roberts and Justices Scalia, Kennedy, and Thomas. Justice Ginsburg authored a dissent, joined by Justices Stevens and Breyer. Justice Sotomayor did not take part in the consideration or decision of the case.
The case arose from an arbitral award in which the tribunal authorised class arbitration, even though the arbitration clause in question was contained in an oceanic shipping contract that the parties stipulated was silent on the issue of class arbitration. The US District Court for the Southern District of New York vacated the award, holding that the tribunal had manifestly disregarded the law by failing to conduct a choice-of-law analysis. Had the tribunal conducted such analysis, the arbitrators would have applied maritime law, which precluded class arbitration.
The Second Circuit overturned the district court's decision and upheld the award. The circuit court ruled that the tribunal did not manifestly disregard the law. Rather, it had engaged in a choice-of-law analysis and found that neither maritime nor New York law opposed class arbitration in these circumstances. The circuit court added that the tribunal did not exceed its powers under the FAA.
The Supreme Court reversed the Second Circuit's decision and held that the tribunal had erred by failing to engage in a choice-of-law analysis. Instead of identifying and applying a rule of decision derived from the FAA or either maritime or New York law, the arbitration tribunal had imposed its own policy choice and thus exceeded its powers. The Court held that the tribunal manifestly disregarded the law for the same reasons. Significantly, however, the Court only assumed, without deciding, that the manifest disregard standard is still viable after its decision in Hall Street LLC v. Mattel, 552 U.S. 576 (2008).
The Court held that the proper rule of decision was supplied by the FAA: the arbitral agreement must be interpreted in line with the intentions of the parties. As such, a party may only be compelled to submit to class arbitration if there is a contractual basis for concluding that the party agreed to do so. The Court held that there is a contractual basis for making certain inferences, for example, that the arbitrator may make decisions on procedural questions not expressly provided for in the arbitral agreement. However, a right to class arbitration may not be inferred because it fundamentally changes the nature of the arbitration. In particular, the potential drawbacks of class arbitration – related to the cost, speed and efficiency of the proceedings – "giv[e] reason to doubt the parties' mutual consent to resolve disputes through class-wide arbitration."
In the dissent, Justice Ginsburg argued that the case was not ripe for review because the tribunal's decision was not a final judgment. Even if ripe, the claim should fail on the merits because the tribunal "did just what it was commissioned to do", that is, decide whether the arbitral clause permitted class arbitration. The correctness of the decision was not a ground for vacatur for excess of powers.
Justice Ginsburg added that the majority's decision will not shut the door to all class arbitration, particularly arbitration related to standard form contracts used in business transactions. However, the decision could undoubtedly create a significant barrier to class arbitration. The decision's impact on the availability of class arbitration may depend on how lower courts construe the Supreme Court's requirement that it must have a "contractual basis" – a term that the court declined to define.
More generally, the Supreme Court's decision limits the arbitrator's discretion. Although the court reaffirmed that vacatur for excess of powers must be based on more than mere error, the court made clear that the arbitrator's powers are narrowly circumscribed by the terms of the arbitral agreement.
The Court's decision has already impacted the law regarding class action waivers, which many companies use in standard form contracts to eliminate the option of class action arbitration. On 3 May 2010, the Court vacated and remanded the Second Circuit's decision in In re American Express Merchants' Litigation, 554 F.3d 300 (2d Cir. 2009) for consideration in light of Stolt-Nielsen. In that case, the Second Circuit ruled that an arbitration clause containing a class action waiver was void as a matter of public policy on the ground that barring class action would grant the credit card companies de facto immunity from federal anti-trust laws because class action was the plaintiffs' only reasonably feasible means of recovery. The Court thus ruled on public policy grounds and did not examine whether class arbitration pursuant to the credit card agreement was consistent with the FAA, which it noted was an "intriguing" question but not an issue on appeal. After Stolt-Nielsen, the Second Circuit will have to address this question.