GUEST-POST PART IVB | Class and Consolidated Arbitration Under the Federal Arbitration Act: What Issues Will the United States Supreme Court Confront in Stolt-Nielsen, S.A. V. AnimalFeeds Int’l Co.?


Part IVB: How will the Court Rule on the Merits?

By Philip J. Loree Jr.

I. Introduction

In Part IVA (here) we considered whether the question in Stolt-Nielsen was one for the court or the arbitrators to decide, and predicted that at least five Justices of the United States Supreme Court will hold that the court must decide it. If we are correct, then the Supreme Court will consider on a de novo basis whether the arbitration panel had the authority to impose class arbitration on the Stolt-Nielsen parties.

In this Part IVB we consider how the Supreme Court might rule on the merits of the question. We believe that at least five Justices will rule that the arbitrators should not, in the face of the agreements’ silence, have imposed class arbitration where, as here, there is no basis in the Federal Arbitration Act, New York state law or federal maritime law for implying consent to class arbitration.

We had planned to address here the alternative question of how the Supreme Court might decide the case if, contrary to our prediction, it rules that the question whether class arbitration may be imposed is for the arbitrators to decide. But doing so would have resulted in an overly lengthy post, so we’ll leave that question for Part IVC.

II. Is Imposing Class Arbitration Consistent with the Federal Arbitration Act?

Stolt-Nielsen is, like Hall Street Assoc., L.L.C. v. Mattel , Inc, 552 U.S. ___, slip op. (March 25, 2008), another case that will test how committed the Court is to its prior precedent unequivocally stating the principal purpose of the Federal Arbitration Act is to enforce arbitration agreements as written and according to their terms, even if the parties’ freely-bargained-for dispute resolution method may lead to inefficiency in the form of multiple arbitration proceedings. See, e.g., Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989); Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 220 (1985). In Hall Street the Court stopped short of enforcing the parties’ express agreement that a court apply a de novo standard review to the arbitrators’ award, because doing so would have been contrary to the express statutory command of Sections 10 and 11 of the Federal Arbitration Act, which, said the Court, established the exclusive grounds for judicial review of arbitration awards. But in Stolt-Nielsen enforcing the agreements as written, without regard to judicial or arbitral efficiency, would not contradict any provision of the Federal Arbitration Act, and, indeed, would be in accord with the express commands of Sections 2, 4, 5 and Article V(1)(d) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

But that does not make this an easy case. There is institutional, political pressure on the Court evidenced by pending anti-arbitration legislation, and exacerbated by recent events concerning consumer credit arbitration. While Stolt-Nielsen involves maritime industry arbitration, the question whether class arbitration may be imposed in the face of silence is critically important in consumer arbitration. If the parties’ contracts in consumer arbitrations are enforced as written and consistently with state general contract law, then class arbitration in the consumer context will likely be imposed far less frequently. And enforcing as written what the parties have to say about class arbitration means enforcing controversial class arbitration waivers.

The “outs” that were available in Bazzle and Hall Street are simply not available in Stolt-Nielsen, which means that the Court must face head on whether or not it will remain committed to the pro-enforcement policies articulated in Dean WitterVolt, and other cases. The outcome will likely be influenced by the doctrines of stare decisis, separation of powers, and federalism. We believe at least five members of the Court will conclude that, in the face of an agreement’s silence, class or consolidated arbitration is permitted only where applicable state contract law (supplemented by federal maritime law where applicable) permits the court to imply into the parties’ agreement consent to class arbitration, and where doing so does not offend the express provisions of the Federal Arbitration Act, such as those governing arbitrator selection. That resolution would be the most consistent with the Federal Arbitration Act and the Court’s prior jurisprudence concerning it, and would leave it to Congress to decide whether class arbitration should be permitted when the agreement is silent (or when the parties agree to class arbitration waivers).

The alternative would be for the Court to adopt a default rule under which class arbitration would be permitted in the face of the contracts’ silence. There is no statutory support in the Federal Arbitration Act for such a rule, and it would probably have to be based on whether or not applicable state arbitration law permitted courts or arbitrators to decide whether class arbitration may be imposed in the face of the contract’s silence. But in the absence of a choice of law clause unambiguously providing that state arbitration law applies, using state law as a gap filler could potentially fall afoul of the Federal Arbitration Act’s preeminent purpose, and would yield outcomes dependent upon choice of forum, forum-state choice-of-law rules and applicable state arbitration law – outcomes that could encourage forum shopping and mire courts in complicated choice-of-law questions.

In the remainder of this post, we shall explore the reasons why the Court will likely find that the application of the default rule in this case requires the conclusion that consent to class arbitration cannot be implied in Stolt-Nielsen.

A. Does Applicable State and Federal Law Permit a Court to Imply Consent to Class or Consolidated Arbitration when the Agreement is Silent on that Point?

Assuming the question whether the parties consented to class arbitration in the face of the agreements’ silence is for the Court to decide, the Court will likely apply: (a) the Federal Arbitration Act; (b) New York law governing contracts generally; and (c) federal maritime law. Just last term, in Arthur Andersen LLP v. Carlisle, 556 U.S. ___, slip op. (May 4, 2009) (Scalia, J.), the United States Supreme Court reiterated in no uncertain terms that the “savings clause” of Section 2 of the Federal Arbitration Act says that state contract law provides the rule of decision for determining the scope of an arbitration agreement:

Neither [Section 2 nor 3 of the FAA]. . . purports to alter background principles of state contract law regarding the scope of agreements (including the questions of who is bound by them). Indeed [Section] 2 explicitly retains an external body of law governing revocation (such grounds ‘as exist at law or in equity’). And we think [Section] 3 adds no substantive restriction to [Section] 2’s enforceability mandate. State law, therefore, is applicable to determine which contracts are binding under [Section] 2 and enforceable under [Section] 3 if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally. . . .

Slip op. at 6-7 (citations, quotations and footnote omitted; emphasis in original). And where, as here, the arbitration agreement is part of a maritime contract, federal maritime law applies along with state contract law. See Stolt-Nielsen SA v. AnimalFeeds Int’l Corp., 435 F. Supp. 2d 382, 385 (S.D.N.Y. 2006) (citing cases), rev’d, 548 F.3d 85 (2d Cir. 2008). Each of these bodies of law negate implied consent under the facts in Stolt-Nielsen.

1. The Federal Arbitration Act

No support for imposing class action arbitration in the face of silence can be gleaned from Supreme Court precedent on the purposes of the Federal Arbitration Act or the majority of pre-Bazzle cases concerning consolidated or class arbitration. The Federal Arbitration Act does not authorize class arbitration in the absence of express consent, and Sections 2, 3 and 4 of the Act expressly limit the Court’s role to determining whether there is an agreement to arbitrate, and if so, enforcing it. (See Part IVA, here.) Sections 9, 10 and 11 likewise are designed to enforce the parties agreement, albeit through the vacatur or confirmation of an award, or remand of an award to the arbitrators. And Section 5, and Article V(1)(d) of the Convention are designed to ensure that the arbitrator selection provisions of the agreement are carried out according to their particular terms. (See Part IVA, here.)

a. The Pre-Bazzle Majority Rule: Express Agreement Required

As previously discussed (Parts I, III & IV, here, here and here) the majority of pre-Bazzle decisions addressing whether courts can impose consolidated or class arbitration when the parties’ agreements are silent held that courts may not. These courts rely on the “enforce as written” principle articulated above. They eschew the notion that the efficiency that might result from imposing consolidated or class arbitration justifies doing so in the absence of the parties’ express consent.

b. Section 5 of the Federal Arbitration Act and Article V(1)(d) of the Convention: Implying Consent would Negate the Arbitration Agreements’ Arbitrator Selection Provisions

In StoltNielsen imposing class arbitration would not only run directly counter to the pre-Bazzle line of cases, but also to the express commands of Section 5 and Article V(1)(d) of the Convention, which require courts to enforce as written arbitrator selection provisions agreed by the parties. Unlike those in Bazzle the arbitrator selection provisions in Stolt-Nielsen conflict with one another. One requires each party-appointed arbitrator to be “a merchant, broker or individual experienced in the shipping business. . . . ,” and requires the two party-appointed arbitrators to appoint “an Admiralty lawyer” as a third arbitrator. The other provides that arbitration shall proceed “before a board of three persons, consisting of one arbitrator to be appointed by the Owner, one by the Charterer, and one by the two so chosen.” (See Part III, here.)

The arbitrators in Stolt-Nielsen have effectively decided that, for the merits phase of a class arbitration, both parties must either: (a) appoint merchants, brokers or other individuals experienced in the shipping business as party-appointed arbitrators, who will, in turn, select an admiralty lawyer as a third arbitrator; or (b) appoint whomever they please as party-appointed arbitrators, who will, in turn, appoint whomever they please as the third arbitrator. (See Part IVA, here.) But results (a) and (b) are both in derogation of the unambiguous terms of one of the two form arbitration clauses. Result (a) would negate the Stolt-Nielsen parties’ freely-bargained-for rights under certain agreements to appoint whomever they please as an arbitrator and to have the appointed arbitrators choose whomever they please as a third arbitrator. And result (b) would discharge AnimalFeeds’ and certain putative class members’ obligations under other agreements to appoint only an individual experienced in the shipping business as an arbitrator, and to have the appointed arbitrators appoint an admiralty lawyer as the third arbitrator.

The arbitrators have also effectively determined that the parties did not agree that they would have the benefit of selecting different arbitrators for each dispute that might arise under each individual arbitration agreement. As Chief Justice Rehnquist said in his dissent in Bazzle:

[P]etitioner had the contractual right to choose an arbitrator for each dispute with the other 3,734 individual class members, and this right was denied when the same arbitrator was foisted upon petitioner to resolve those claims as well. Petitioner may well have chosen different arbitrators for some or all of these other disputes; indeed, it would have been reasonable for petitioner to do so, in order to avoid concentrating all of the risk of substantial damages awards in the hands of a single arbitrator.

539 U.S. at 458-59.

In Bazzle the parties’ contract was, according to the plurality, ambiguous on whether class action arbitration was permitted in the first place, and if it were deemed by an arbitrator to permit class arbitration, then the clause, again according to the plurality, might reasonably be construed to waive the company’s rights to select different arbitrators for some or all of its individual disputes with putative class members. But where, as here, the contract is silent on whether class arbitration is permitted, there is no basis to assume that the parties intended to sacrifice their freely-bargained rights to tailor their arbitrator selection to each specific dispute between the two parties arising out of or relating to the applicable charter party. (See Part III, here.)

c. Consent Cannot Be Implied on Behalf of Stolt-Nielsen Entities that have not Agreed to Arbitrate with Each of the Class Members

One of the key tenets of both commercial arbitration under the Federal Arbitration Act and labor arbitration under federal labor law is that “arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2003) (quoting Steelworkers v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582 (1960)). In Bazzle the question was whether a single company that had entered into a series of separate, identical consumer contracts with several consumers, each of which contained an identical, broad arbitration agreement, could be compelled to arbitrate with those consumers in class arbitration when the individual contracts were ambiguous on whether the company had consented to class arbitration. The consumers all desired to arbitrate and the company had indisputably agreed to arbitrate with each one, at least in separate arbitration proceedings. (See Part II, here.)

The Stolt-Nielsen defendants are not one but several separate entities, and, to our knowledge, there are separate contracts between each Stolt-Nielsen entity and AnimalFeeds. There are also separate contracts between individual Stolt-Nielsen entities and individual class members, but, as far we know: (a) the Stolt-Nielsen entities have not agreed to arbitrate together as a group against any individual class member, let alone with all of them; and (b) each Stolt-Nielsen entity does not have a contractual relationship with each and every class member (other than AnimalFeeds). (See Part III, here.)

For the Court to imply consent to class arbitration of the type sought by AnimalFeeds, at a minimum, each Stolt-Nielsen entity must have agreed to arbitrate with each and every member of the class. But that does not appear to be the case.

The United States Supreme Court confirmed in Arthur Andersen that nonsignatories may be bound by, or invoke, arbitration agreements provided that “state law allow[s] [the] contract to be enforced by or against nonparties to the contract through [such theories as] assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver and estoppel . . .” Slip op. at 5-7 (quotation and citation omitted); see also, generally, Thomson-CSF, S.A. v. American Arbitration Assoc., 64 F.3d 773, 776-80 (2d Cir. 1995). So if there were some basis under New York law for allowing class members that are not signatories to the agreements entered into by a particular Stolt-Nielsen entity to avail themselves of the benefits of those agreements, or if there were some basis in New York law for binding each Stolt-Nielsen entity to each of the other’s contracts, then perhaps it might be plausible to consider whether the Stolt-Nielsenentities impliedly consented to class arbitration under the terms of each of the individual arbitration agreements. We are, however, aware of no facts that would, under New York law, require any of the Stolt-Nielsen entities to arbitrate with class members with whom they have no contractual relationship. And in the absence of any basis for requiring each Stolt-Nielsen entity to arbitrate with each class member, there can be no basis for implying consent on behalf of all of the Stolt-Nielsen entities to arbitrate on a class basis with each and every class member.

2. New York State Law Governing Contracts Generally

Implying consent to class arbitration cannot be squared with New York law. First, under New York law, a contract’s silence on a given point ordinarily does not mean that the contract is ambiguous, and thus subject to interpretation and construction. To ascertain whether a contract is ambiguous, courts focus on what is said, not what is omitted:

An omission or mistake in a contract does not constitute an ambiguity [and]. . . the question of whether an ambiguity exists must be ascertained from the face of an agreement without regard to extrinsic evidence.

Reiss v. Financial Performance Corp., 97 N.Y.2d 195, 199 (2001) (citations and quotations omitted). This rule should preclude a finding that the agreements’ silence enables the court (or enabled the arbitration panel) to rule that the agreements can be reasonably construed as either permitting or forbidding class or consolidated arbitration.

Second, where as here, parties omit to provide for a contractual contingency, New York law generally prohibits courts from adding implied terms to the contract, and always forbids courts from departing from the plain meaning of the words used:

Even where a [contractual] contingency has been omitted, we will not necessarily imply a term since courts may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing.

Reiss, 97 N.Y.2d at 199 (citations and quotations omitted); see also Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y. 3d 470, 475 (2004). While implying a term may be appropriate under certain limited circumstances, New York courts “will not imply a term where the circumstances surrounding the formation of the contract indicate that the parties, when the contract was made, must have foreseen the contingency at issue and the agreement can be enforced according to its terms.” 97 N.Y.2d at 199.

Implying into the parties’ agreements consent to class or consolidated arbitration would violate this principle. As discussed in Part III (here) during the period the contract were entered into, the majority rule under the Federal Arbitration Act prohibited courts from compelling class or consolidated arbitration in the face of an agreement’s silence. These cases – including two in the Second Circuit — made clear that parties had to expressly agree to consolidated or class arbitration. And while the notion of class arbitration in the maritime context was unprecedented, attempts to compel consolidated arbitration were not. The parties were therefore on notice that, if they wished to arbitrate on a class or consolidated basis, they would have to provide for that contingency in their agreement. But they did not.

3. Federal Maritime Law

As both the district court and the Second Circuit recognized, federal maritime law must also be considered because the arbitration clauses are contained in charter-party contracts, which are maritime contracts governed by a combination of federal maritime and state law. To the extent that federal maritime law is relevant, it provides little or no support for implying consent to class arbitration.

Federal maritime law requires courts to interpret maritime contracts in light of custom and usage. See Stolt-Nielsen, 435 F. Supp 2d at 385-86 (citing authority). The district court held that the arbitrators manifestly disregarded this principle because the undisputed evidence of custom and usage showed that there had never before been a class arbitration arising out of charter-party agreements. To the extent it finds that federal maritime law is relevant, the Supreme Court will likely find that its application would preclude the Court from implying consent to class arbitration.

In Part IVC we shall address how the Court might rule in the event that it finds the question was one for the arbitrators to decide. So stay tuned to Disputing….

Philip J. Loree Jr. is a partner in the boutique law firm of Loree & Loree, which focuses its practice on reinsurance dispute resolution and commercial and industry arbitration. Prior to forming Loree & Loree, Mr. Loree was a partner in the Litigation Departments of Cadwalader, Wickersham & Taft LLP and Rosenman & Colin LLP. He was also a Shareholder in Stevens & Lee, P.C.’s Litigation Department.

Mr. Loree is also blogmaster of the Loree Reinsurance and Arbitration Law Forum, where he frequently comments on issues pertinent to reinsurance, and commercial and industry ADR. He is owner and co-founder (with Disputing’s Victoria VanBuren) of LinkedIn’s Commercial and Industry Arbitration and Mediation Group, which provides an open forum for the discussion of commercial, industry and consumer ADR.

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