Consolidation of arbitrations after Stolt-Nielsen.
Last year, in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp. (1) ("Stolt-Nielsen"), the Supreme Court considered whether an arbitration panel may order class arbitration where an arbitration clause is silent on that issue. In a five-to-three decision, the Court held that the Federal Arbitration Act (2) (FAA) does not permit imposing class arbitration unless there is a "contractual basis for concluding that the parties agreed to do so." (3) Since the decision was issued, there has been extensive commentary on the impact this decision will have on consolidated arbitrations. While it is clear that the effect of the decision will be widespread and varied--from who decides the issue to what contractual basis is necessary to find the parties agreed to consolidation--exactly how these changes will play out is not.
In Stolt-Nielsen, a group of liquid chemical manufacturers brought an antitrust lawsuit against Stolt-Nielsen, a major shipping company. After a court ordered arbitration pursuant to the arbitration clause, the parties submitted the issue of whether the arbitration clause permitted class arbitration to the arbitral panel. Importantly, the parties stipulated that the arbitration clause was "silent" as to class arbitration. The arbitration clause, in relevant part, provided: "Any dispute arising from the making, performance or termination of this Charter Party shall be settled ... [by] arbitration conducted in conformity with the provisions and procedure of ... [the FAA]." (4)
After hearing arguments regarding the custom and usage of class arbitration in maritime trade, the arbitration panel ultimately determined the class arbitration could proceed, stating that petitioners had failed to show an "inten[t] to preclude class arbitration." (5) The panel emphasized the role public policy considerations played in its interpretation of the arbitration clause.
The Supreme Court granted certiorari in June 2009. In its April 27, 2010 decision the Court held that the parties could not be compelled to submit the antitrust claims to class arbitration. Three conclusions were central to the Court's decision. First, the Court found that the arbitration panel had reached a decision based on its own policy choices, rather than "identifying and applying a rule of decision derived from the FAA or either maritime or New York law." (6) Emphasizing that judicial review of arbitration awards is extremely limited, the Court held that vacating the panel's judgment pursuant to section 10(a)(4) (7) was nevertheless appropriate because the panel had failed to consult the appropriate bodies of law in making its determination, thereby exceeding its power.
Second, the Court concluded that Green Tree Financial Corp. v. Bazzle (8) addressed the narrow question of who should interpret the relevant contractual agreement to determine whether or not the parties were silent as to class arbitration; by contrast, the parties in Stolt-Nielsen stipulated that the arbitration clause was silent. Based on this narrow application of Bazzle, the Court concluded that Bazzle did not establish the rule to be applied in deciding whether class arbitration is permitted. (9)
Finally, the Court concluded that imposing class arbitration on parties, in the absence of an affirmative agreement between those parties, would be inconsistent with the FAA. The Court underscored the consensual nature of arbitration, emphasizing that the FAA's central purpose is to ensure that private agreements to arbitrate are enforced according to their terms. (10) Therefore, the Court concluded that while arbitral panels are permitted to resolve procedural matters that are not addressed in the arbitration agreement, class arbitration does not fall within this purview 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." (11) Emphasizing the vast differences between the nature of bilateral and class arbitrations, the Court concluded absent some contractual basis for determining that the parties agreed to authorize class arbitration, the FAA does not permit class arbitration.
The impact of the Court's decision in Stolt-Nielsen on consolidated arbitration proceedings remains unclear. What is known is that parties may consent to agreements that permit (or require) the consolidation of separate arbitration proceedings. However, whether courts, or perhaps more importantly, arbitral panels, retain the authority to order consolidation in the absence of the explicit consent of the parties was not directly addressed in Stolt-Nielsen. (12) The decision may be interpreted as being limited solely to class arbitrations. Supporting this view, some commentators have argued that the factors suggested by the court apply differently in consolidated arbitrations than in class action arbitrations. (13) Or, in other words, that the "crucial differences" implicated in class action arbitrations are not, or may not be, implicated in consolidated arbitration proceedings. In Stolt-Nielsen, the Court identified four:
"fundamental changes brought about by the shift from bilateral to class arbitration. An arbitrator ... no longer resolves a single dispute between the parties to a single agreement, but instead resolves many disputes between hundreds or perhaps even thousands of parties ... the presumption of privacy and confidentiality [does] not apply in class arbitrations.... The arbitrator's award no longer purports to bind just the parties to a single arbitration agreement, but adjudicates the rights of absent parties as well. And the commercial stakes of class-action arbitration are comparable to those of class-action litigation, even though the scope of judicial review is much more limited[.]" (14)
Some commentators have argued that because these factors are implicated to a much lesser extent in consolidated proceedings than in a class arbitration, the necessary consent required by Stolt-Nielsen may be presumed even where the agreement is silent.
On the other hand, other commentators point out that the Court did not find an analysis of these factors necessary to determine the question of whether the consolidation of arbitrations into a class proceeding was appropriate. Instead, it could be argued that the Court merely looked at "potentials" of what a class arbitration could entail and decided that these negative potentials just further confirmed that the parties' silence cannot create consent to class arbitration. (15) This argument suggests that even in a consolidated arbitration proceeding there must be a contractual basis evidencing the parties consent.
Commentators also argue that Stolt-Nielsen supports the view that it is possible in certain instances to show the parties' consent to consolidated arbitration absent express language in the contract. These commentators suggest that intent to permit consolidated arbitration may be established through introduction of evidence regarding the applicable law or custom and usage. (16) As discussed above, the Court indicated that the panel made a serious mistake in failing to inquire "whether the FAA, maritime law, or New York law contain[ed] a 'default rule' under which an arbitration clause is construed as allowing class arbitration in the absence of express consent." (17) Under this interpretation of Stolt-Nielsen, depending on the applicable law and the terms of the arbitration agreement, courts may look to evidence of custom and practice to establish intent to consent to consolidated arbitration. (18)
Finally, some open critics of the decision have argued: the fact that silence effectively translates to an explicit preclusion of class arbitration does not mean that that bar is impervious to an unconscionability challenge. (19) However, that argument's prospects for success were dealt a significant blow in light of the Court's decision this past term in AT&T Mobility LLC v. Concepcion. (20) The Court held that California's "Discover Bank" rule (21) was preempted by section 2 of the FAA, prohibiting states from conditioning the enforceability of certain arbitration agreements on the availability of class-wide arbitration procedures. An unconscionability challenge, therefore, may be vulnerable to similar federal preemption.
III. Going forward
While the scope of the Court's decision in Stolt-Nielsen remains to be seen, what is clear is the absence of language explicitly authorizing consolidated arbitration confers a significant advantage on defense counsel seeking to protect against the prospect of consolidated arbitration. The scope of this decision will be subject to great dispute over the next few years, and we can expect guidance on the various potential impacts of this decision on consolidation in the near future.
(1) 130 S.Ct. 1758 (2010).
(2) 9 U.S.C. [section] 1, et seq.
(3) Stolt-Nielsen, 130 S.Ct. at 1775 (emphasis in original).
(4) Id. at 1765.
(5) Id. at 1768 (emphasis added).
(6) Id. at 1770.
(7) Providing that the appropriate federal district court may order vacatur of arbitration awards "where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made." 9 U.S.C. [section] 10(a)(4).
(8) 539 U.S. 444 (2003).
(9) Stolt-Nielsen, 130 S.Ct. at 1770.
(10) 9 U.S.C. [section] 4.
(11) Id. at 1775.
(12) Indeed, the Court explicitly stated that it had "no occasion to decide what contractual basis may support a finding that the parties agree to authorize class-action arbitration." Stolt-Nielsen, 130 S.Ct. at 1776 n.10. In so stating, the Court emphasized the parties' agreement that there "was 'no agreement' on the issue of class-action arbitration." Id.
(13) Susan Jordan, Stolt-Nielsen's Effect On Consolidation of Arbitrations, LAW360, July 2010 [hereinafter Jordan].
(14) Stolt-Nielsen, 130 S.Ct. at 1776.
(15) See Jordan, supra note 13.
(16) See, e.g., Teresa Snider, Consolidation of Arbitration Proceedings, ARIAS-U.S. QUARTERLY, 3rd Quarter 2010 at 16-17 [hereinafter Snider].
(17) Stolt-Nielsen, 130 S.Ct. at 1768-69.
(18) See Snider, supra note 16.
(19) See, e.g., Fensterstock v. Education Finance Partners, 611 F.3d 124 (2d Cir. 2010).
(20) 131 S.Ct. 1740(2011).
(21) A California state contract law which deemed certain collective-arbitration waivers in consumer contracts unconscionable (and therefore unenforceable.) Id. at 1746.
Keith A. Dotseth is one of the founding partners of Larson King, LLP. Throughout his career he has devoted his practice to complex civil litigation and strategic counseling. Keith has practiced and has been admitted pro hac vice in numerous jurisdictions around the country and has appeared before national and international arbitration tribunals. Keith has presented before industry members at conferences sponsored by Mealey's, ARIAS-US, PLUS and USLAW, among others. He is a Fellow of the American Bar Foundation and on the Board of Directors for The Fund for the Legal Aid Society and is the Vice Chair of the IADC Insurance and Reinsurance Committee. Hilary J. Loynes is an attorney with Larson King, LLP. She focuses her practice on business litigation, reinsurance litigation, and mortgage lending and servicing litigation. Hilary has assisted clients in litigation, arbitration and other dispute resolution. The authors would like to give special thanks to their Summer Associate, Paul Shapiro, for his assistance.
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|Author:||Dotseth, Keith A.; Loynes, Hilary J.|
|Publication:||Defense Counsel Journal|
|Date:||Jul 1, 2011|
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