Supreme Court Rules that Class Arbitration Not Permitted if Arbitration Agreement Silent

By Ted Olsen

For years, employers, employees, businesses and consumers have debated the merits of so-called "class arbitration," when a claimant pursues his/her personal claims as well as those of similarly-situated individuals in an arbitration forum. Employees and consumers generally favor the availability of class arbitration, often because their own personal claims are weak, but can be bolstered by the class members' claims. Some contend that individual claims are not economical, and that illegal practices will only be stopped by class claims. Employers and businesses generally oppose class arbitration (just as they oppose class actions in court) because it multiplies proceedings and imposes huge costs on defendants. Also, some complain that individuals with strong claims may pursue their claims, if they wish, and that claimants with weak cases should not be permitted to speak on their behalf. Further, the relative informality of the arbitration process is not well-suited for class action litigation, which typically requires tight court control.

One outcome of this ongoing debate is that some employers have implemented "class arbitration waivers" in their arbitration agreements, in an effort to preclude class arbitrations. While the majority of courts have upheld such provisions, a growing minority have found such provisions invalid. Coady v. Cross Country Bank, Inc, 729 N.W. 2d 732, 746 (Wis. App. 2007).

Most arbitration agreements are silent on the subject of class arbitrations, however, making the U.S. Supreme Court's decision in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., No. 08-1198 (U.S. April 27, 2010), highly significant. There, the parties' arbitration agreement did not address the subject of class arbitrations, and the Supreme Court held that - in light of such contractual silence - the Federal Arbitration Act, 9 U.S.C. § 1 et seq., would not permit an arbitrator to hear and decide class claims.

In the case before the Supreme Court, the claimant (AnimalFeeds) pursued an antitrust class action on behalf of purchasers of parcel tanker transportation services and against shipping companies for alleged price-fixing. AnimalFeeds was party to an arbitration agreement, and the parties ultimately agreed that the claimant's individual claims were subject to arbitration. AnimalFeeds argued further, however, that the silence of the arbitration agreement as to class arbitration permitted the arbitrators to hear and decide class claims as a matter of public policy.

The majority of the Supreme Court rejected this argument, emphasizing that parties are generally free to structure their arbitration agreements as they see fit, and that the FAA's central purpose is to ensure that private agreements to arbitrate are enforced according to their terms. The Court also emphasized that parties to arbitration agreements may specify with whom they choose to arbitrate their disputes. "From these principles, it follows that a party may not 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 panel's conclusion is fundamentally at war with the foundational FAA principle that arbitration is a matter of consent."

The Court recognized that arbitrators have the authority to implement procedural rules in the proceedings over which they preside, despite the parties' silence on such matters. However, because of the dramatic differences between class arbitration and traditional two-party arbitration, arbitral authority to hear and decide class claims may not be inferred from such contractual silence.

Consider just some of the fundamental changes brought about by the shift from bilateral arbitration to class-action arbitration. An arbitrator chosen according to an agreed upon procedure . . . 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. . . . Under the Class Rules, "the presumption of privacy and confidentiality" that applies in many bilateral arbitrations "shall not apply in class arbitrations," . . . thus potentially frustrating the parties' assumptions when they agreed to arbitrate. 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. . . even though the scope of judicial review is much more limited. . . . 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.

Sherman & Howard has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation. This does not create an attorney-client relationship between any reader and the Firm. If you want legal advice on a specific situation, you must speak with one of our lawyers and reach an express agreement for legal representation.

	Contact Us Services Attorneys News and Events Publications About the Firm Inclusiveness Careers In the Media Events and Registration Press Releases Speaking Engagements Articles Client Advisories Subscriptions History Offices Pro Bono Interlaw Contact Us Culture Legal Opportunities Support Staff Publications Client Advisories Home > Publications > Client Advisories > View Supreme Court Rules that Class Arbitration Not Permitted if Arbitration Agreement Silent By Ted Olsen For years, employers, employees, businesses and consumers have debated the merits of so-called "class arbitration," when a claimant pursues his/her personal claims as well as those of similarly-situated individuals in an arbitration forum. Employees and consumers generally favor the availability of class arbitration, often because their own personal claims are weak, but can be bolstered by the class members' claims. Some contend that individual claims are not economical, and that illegal practices will only be stopped by class claims. Employers and businesses generally oppose class arbitration (just as they oppose class actions in court) because it multiplies proceedings and imposes huge costs on defendants. Also, some complain that individuals with strong claims may pursue their claims, if they wish, and that claimants with weak cases should not be permitted to speak on their behalf. Further, the relative informality of the arbitration process is not well-suited for class action litigation, which typically requires tight court control. One outcome of this ongoing debate is that some employers have implemented "class arbitration waivers" in their arbitration agreements, in an effort to preclude class arbitrations. While the majority of courts have upheld such provisions, a growing minority have found such provisions invalid. Coady v. Cross Country Bank, Inc, 729 N.W. 2d 732, 746 (Wis. App. 2007). Most arbitration agreements are silent on the subject of class arbitrations, however, making the U.S. Supreme Court's decision in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., No. 08-1198 (U.S. April 27, 2010), highly significant. There, the parties' arbitration agreement did not address the subject of class arbitrations, and the Supreme Court held that - in light of such contractual silence - the Federal Arbitration Act, 9 U.S.C. § 1 et seq., would not permit an arbitrator to hear and decide class claims. In the case before the Supreme Court, the claimant (AnimalFeeds) pursued an antitrust class action on behalf of purchasers of parcel tanker transportation services and against shipping companies for alleged price-fixing. AnimalFeeds was party to an arbitration agreement, and the parties ultimately agreed that the claimant's individual claims were subject to arbitration. AnimalFeeds argued further, however, that the silence of the arbitration agreement as to class arbitration permitted the arbitrators to hear and decide class claims as a matter of public policy. The majority of the Supreme Court rejected this argument, emphasizing that parties are generally free to structure their arbitration agreements as they see fit, and that the FAA's central purpose is to ensure that private agreements to arbitrate are enforced according to their terms. The Court also emphasized that parties to arbitration agreements may specify with whom they choose to arbitrate their disputes. "From these principles, it follows that a party may not 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 panel's conclusion is fundamentally at war with the foundational FAA principle that arbitration is a matter of consent." The Court recognized that arbitrators have the authority to implement procedural rules in the proceedings over which they preside, despite the parties' silence on such matters. However, because of the dramatic differences between class arbitration and traditional two-party arbitration, arbitral authority to hear and decide class claims may not be inferred from such contractual silence. Consider just some of the fundamental changes brought about by the shift from bilateral arbitration to class-action arbitration. An arbitrator chosen according to an agreed upon procedure . . . 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. . . . Under the Class Rules, "the presumption of privacy and confidentiality" that applies in many bilateral arbitrations "shall not apply in class arbitrations," . . . thus potentially frustrating the parties' assumptions when they agreed to arbitrate. 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. . . even though the scope of judicial review is much more limited. . . . 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. Sherman & Howard has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation. This does not create an attorney-client relationship between any reader and the Firm. If you want legal advice on a specific situation, you must speak with one of our lawyers and reach an express agreement for legal representation. ©2010 Sherman & Howard L.L.C. May 10, 2010 Copyright 2000-2012 Sherman & Howard L.L.C. All rights reserved. Privacy Policy \| Terms of Use