Alaska Employment Law

Introduction

The United States Supreme Court issued an opinion yesterday clarifying whether and when courts may impose class arbitration on parties where the arbitration agreement is silent on the question.  The case is Stolt-Nielsen S.A. v. AnimalFeeds International Corp.  This summary briefly reviews the case and its significance.

The Case

Can courts impose class arbitration on parties where the arbitration agreements are silent on the question?  AnimalFeeds and Stolt-Nielsen were parties to maritime contracts containing arbitration clauses.  After a dispute arose, AnimalFeeds sought arbitration not only on its own behalf but also on behalf of a class of chemical companies located throughout the world.  Stolt-Nielsen opposed, arguing that the arbitration agreements did not include any clause or provision authorizing class arbitration.  A panel of arbitrators concluded that class arbitration was allowed because the arbitration agreement did not preclude it.  Stolt-Nielsen sought review and the district court vacated the decision.  On further appeal, the Second Circuit reversed.  The court’s primary reason was that arbitration awards should be vacated only in rare circumstances where it can be shown that the arbitrator disregarded controlling law.

Opinion

The Court reversed 5-3 with Justice Sotomayor not participating.  In an opinion authored by Justice Alito, the majority held that class arbitration could not be imposed unless there was a contractual basis for doing so and there did not appear to be any factual basis for concluding that the parties consented to class arbitration because the parties stipulated that no such agreement had been reached.  It necessarily followed that the lower court erred by imposing class arbitration.

Justice Ginsburg dissented, joined by Justices Stevens and Breyer.  The dissent criticized the majority for reaching an issue that the parties referred to the arbitrators. The dissent observed that under the FAA a court only had restricted powers to overturn an arbitration decision.  None of the specified statutory grounds for overturning an arbitration decision applied (in the dissent’s view) and therefore the dissenting justices would have affirmed.

Significance

Although one can see either side to this issue, in my own opinion the majority’s opinion seems to have the better argument. In our annual Term preview, we predicted:

In AnimalFeeds, I think the Court will reverse.  The underlying issue has divided lower courts for many years.  It is correct that arbitration agreements are contracts, and it is also correct that contracts may be supplemented by relevant extrinsic evidence.  The context is probably also important.  The parties were involved in international maritime shipping.   However, I am not sure that the Second Circuit’s reasoning can be validated.  It seems problematic to uphold an arbitrator’s decision just because of the principle that such decisions should be seldom vacated.  The principle assumes authority to arbitrate. Courts ordinarily determine arbitrability unless the parties have agreed to allow an arbitrator to do so. On the merits, courts are not supposed to write terms for parties.  If a contract is ambiguous or vague, it may be supplemented by relevant extrinsic evidence.  But if the contract is completely silent on a particular issue (here, class arbitration) it is troubling that a court would step in and impose such a term.  Courts examining this question under the FAA have concluded that arbitration is a matter of consent, not coercion, and have refused to impose class arbitration unless there was some indication that the parties agreed to it.   I believe that these principles will compel reversal.