McGuireWoods LLP announced that it has secured a victory before the U.S. Supreme Court on behalf of firm clients Jo Tankers B.V. and Jo Tankers Inc. In a 5-3 decision in Stolt-Nielsen S.A. et al v. AnimalFeeds International Corp., No. 08-1198, 559 U.S. ___ (2010), the court addressed the key question of whether parties can be compelled to submit to class arbitration where the arbitration clause is silent on the issue of class treatment. In the decision, the 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.”
“We are very excited about this important decision, not only for our clients, but also because we believe the court now has provided clarity to any party using an arbitration clause in an agreement,” said Amy Manning, a McGuireWoods partner who worked on the matter.
The clients were represented by a team of McGuireWoods’ attorneys including Manning and partners Dick Rappaport and Angelo Russo, as well as counsel Tammy Adkins. Other firms that worked on this matter for the other defendants in the case included WilmerHale, White & Case, and the law firm Garvey Schubert and Barer.
Case and Decision Background
The AnimalFeeds case began as a class action lawsuit alleging that Stolt-Nielsen and other 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, which does not simply mean that the clause made no express reference to class arbitration, but instead meant that “there’s been no agreement … reached on that issue.” 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 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 Court of Appeals to the 2nd Circuit, the court reversed the lower court, 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 agreed to hear the case to address the question of whether imposing class arbitration on parties whose arbitration clauses are silent on that issue is consistent with the Federal Arbitration Act (FAA). The Supreme 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 arbitrators cannot force parties to arbitrate issues they did not agree to arbitrate, or with parties with whom it did not agree to arbitrate. “A party cannot be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to 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 class arbitration from the simple fact that the parties agreed to arbitrate bilaterally. The court declared, “We think that 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.”