Thursday, September 16, 2010

Deconstructing Bazzle: Stolt-Nielsen and Class Arbitration (Part Three in a Series)

Third in a series of posts discussing the United States Supreme Court's decisions addressing arbitration, in the context of existing South Carolina case law and particularly the South Carolina Supreme Court's Herron decision. Previous posts are here and here.

The Herron Result

The South Carolina Supreme Court determined that the prohibition against class actions found in the parties' arbitration agreement was unenforceable because it conflicted with clear language in the Dealers Act allowing class actions. Because the arbitration agreement contained a severability clause ("[i]f any part of this Agreement shall be deemed or found unenforceable for any reason, the remainder of the Agreement shall remain enforceable"), the class action prohibition would be stricken from the agreement and the case could go forward in arbitration.

However, the S.C. Supreme Court declined to compel the matter to arbitration, based upon a statement by counsel for Century at oral argument that the Respondents did not "wish to invoke the severance clause," and the underlying proposition that severability is predicated on the intent of the parties. This result is somewhat surprising, in view of the fact that "if the contract's language is clear and unambiguous, the language alone determines the contract's force and effect." Schulmeyer v. State Farm Fire & Cas. Co.. There is some sense that the Herron court may have predicting the Stolt-Nielsen result. Read on.

Stolt-Nielsen

After various federal court proceedings determined that AnimalFeeds and various shipping companies including Stolt-Nielsen (petitioners) would arbitrate their antitrust price-fixing dispute, AnimalFeeds served petitioners with a demand for class arbitration. The parties agreed to submit the question of whether the action could proceed on a class basis to an arbitration panel. The parties further stipulated that the arbitration clause was "silent" with respect to class arbitration.

The arbitration panel concluded that the arbitration clause allowed for class arbitration. Petitioners moved to vacate the arbitrators' decision in federal district court, and the United States District Court for the Southern District of New York did so, concluding that the decision was made in "manifest disregard" of the law owing to a failure to conduct a choice-of-law analysis. The Second Circuit Court of Appeals reversed, holding that the arbitrators' decision was not in manifest disregard of federal maritime law or New York law. The United States Supreme Court reversed the decision of the Second Circuit.

Baffled by Bazzle

Stolt-Nielsen discusses the 2003 SCOTUS Bazzle opinion at length, so some brief background is helpful. Bazzle arrived at the United States Supreme Court following a South Carolina Supreme Court decision holding that "class-wide arbitration may be ordered when the arbitration agreement is silent if it would serve efficiency and equity, and would not result in prejudice." SCOTUS vacated the South Carolina Supreme Court decision, with four justices reasoning that the arbitrator (and not the court) should have interpreted the arbitration agreements in question, and Justice Stevens concurring in the result but not the rationale.

In the Stolt-Nielsen opinion, Justice Alito disabused the parties and the arbitration panel (and a great many practitioners) of the proposition that Bazzle 1) requires an arbitrator to determine the issue of whether a contract permits class arbitration; and 2) established a rule to be applied in deciding whether class arbitration is permitted. Neither of those issues commanded a majority opinion in Bazzle, only a plurality. (Note that the Bazzle plurality determined that the question of whether an arbitration agreement forbids class arbitration was not one of the "gateway matters" that a court should decide- see this post for more discussion).

Since the the parties had not raised the "arbitrating arbitrability" issue, Justice Alito turned to the question of class arbitration. Because arbitration under the Federal Arbitration Act is a matter of "consent" and "the intentions of the parties," the Court reasoned that a party could not be compelled to class arbitration absent "a contractual basis for concluding that the party agreed to do so." In Justice Alito's view, the arbitration panel had rendered its determination based upon the premise that the parties did not "intend[] to preclude arbitration." Accordingly, the agreement to conduct class arbitration, while not explicitly spelled out in the agreement, could be implied by the arbitration panel from the parties "silence" in failing to exclude it.

The majority disagreed, determining that an arbitration panel cannot infer an implicit agreement to authorize class arbitration "solely from the fact of the parties' agreement to arbitrate." In support of its conclusion, the majority pointed out the ways in which class arbitration is fundamentally different from "bilateral arbitration".

Justice Ginsburg wrote a lengthy dissent, pointing out as a threshold matter that the arbitration panel's interlocutory decision was not ripe for judicial review. In addition, Justice Ginsburg characterized the issue before the Court under the FAA as whether "the arbitrators had the power, based on the parties' submissions or the arbitration agreement, to reach a certain issue, not whether the arbitrators correctly decided that issue." The parties had agreed to submit the issue to the arbitration panel, and the Court's determination allows Stolt-Nielsen in essence "to repudiate its submission of the contract-construction issue to the arbitration panel . . ." Justice Ginsburg also noted the unique aspects of the case before the Court that may serve to limit the reach and applicability of the Opinion outside its specific facts.

Conclusions

Stolt-Nielsen makes clear that class arbitration may proceed if there is a contractual basis for concluding that the parties agreed to do so, and the opinion does not decide what that basis is or could be. Also fairly clear is that the tie (silence in the agreement) does not go to the runner (the party seeking class arbitration) to the extent it ever did, and as the South Carolina Supreme Court had decided in Bazzle. Accordingly, the South Carolina Supreme Court determination in Herron that the parties did not intend to allow class arbitration might follow from the silence in that particular arbitration agreement-- and might not need to rely upon counsel's statement at oral argument as the basis for that determination.