McGuireWoods Wins Major Supreme Court Case Addressing Class Action Arbitration

April 28, 2010

On April 27, 2010, the U.S. Supreme Court ruled in favor of McGuireWoods’ clients Jo Tankers B.V. and Jo Tankers, Inc. when it issued its decision in Stolt-Nielsen S.A. et al v. AnimalFeeds International Corp., No. 08-1198, 559 U.S. ___ (2010).

The AnimalFeeds case addressed the question of whether it is consistent with the Federal Arbitration Act (FAA) to impose class arbitration where an arbitration clause is silent on class treatment. The Supreme Court held that “a party may not be compelled under the [Federal Arbitration Act] to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”

The AnimalFeeds case began as a federal class action lawsuit alleging that parcel tanker transportation companies violated the antitrust laws. Pursuant to a written contract between the parties, the case was submitted to arbitration. There, the parties stipulated that the arbitration clause at issue was “silent” with respect to class arbitration. The arbitrators ultimately concluded that the silent arbitration clause permitted class arbitration.

The parcel tanker companies filed a petition to vacate the arbitrators’ award with the U.S. District Court for the Southern District of New York. The district court vacated the award, holding that the arbitrators’ decision was made in “manifest disregard” of the law insofar as the arbitrators failed to conduct a choice-of-law analysis, which would have required them to apply maritime law.

On appeal to the Second Circuit Court of Appeals, the court reversed, holding that although the “manifest disregard” standard survived as a “judicial gloss” on the enumerated grounds for vacating arbitration awards, the arbitrators’ decision was not in manifest disregard of federal maritime law.

The Supreme Court granted certiorari to address the question of whether parties can be compelled to submit to class arbitration where the arbitration clause is silent on the issue of class treatment. The Court held that the AnimalFeeds arbitration could not proceed on a class basis where the arbitration agreement was silent on the issue.

In reaching this conclusion, the Supreme Court reasoned that imposing class arbitration on parties who have not agreed to authorize class arbitration is inconsistent with the FAA and its primary objectives. Arbitrators derive their authority from the arbitration agreement itself, and therefore, the parties’ intentions control. The arbitration agreement will govern not only what the parties arbitrate, but also with whom they will do so.

The Supreme Court also found that class arbitration is not merely a procedural question over which the arbitrators have discretionary authority. Class arbitration changes the nature of the arbitration, and thus, the arbitrators cannot infer authority or consent to impose class arbitration from the simple fact that the parties agreed to arbitrate bilaterally. The Supreme Court declared, “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.”

The decision is a major victory for corporations that utilize arbitration clauses in their agreements.

Jo Tankers B.V. and Jo Tankers, Inc. were represented in the Supreme Court by Richard Rappaport, Amy Manning, Angelo Russo, and Tammy Adkins.