Part I (here) briefly discussed Chief Judge Frank H. Easterbrook’s decision in Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.), No. 09-3682, slip op. (7^th Cir. Jan. 31, 2011), and its implications on the pending Second and Fifth Circuit appeals in  Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co, No. 09 Civ. 9531(SAS), 2010 WL 653481 (S.D.N.Y. Feb. 23, 2010), and Dealer Computer Svcs., Inc. v. Michael Motor Co., No. H-10-2132, slip op. (S.D. Tex. December 29, 2010).  This Part II examines in some detail Trustmark’s background and rationale, and Part III will focus on Trustmark’s implications on the Scandinavian Re and Dealer Computer appeals.

II.  Trustmark Background

The following facts were gleaned from both the district court and Seventh Circuit opinions (the district court opinion is reported at 680 F. Supp. 2d 944 and can be found here):

Pursuant to several contracts, Trustmark Insurance Company (“Trustmark”)  agreed to reinsure John Hancock Insurance Company (U.S.A.) (“Hancock”), but not with respect to “London Market Retrocessional Excess of Loss Treaties,” which were excluded from the contracts.  Each contract was subject to a broad arbitration agreement (the “arbitration agreement”), which said the arbitrators had to be “disinterested in the outcome.”

A.  The First Arbitration and Confidentiality Agreement

A dispute arose concerning the scope of the “London Market Retrocessional Excess of Loss Treaties” exclusion, and the parties submitted the dispute to arbitration as required by the arbitration agreement.  Pursuant to the agreement, each party selected an arbitrator, and the two arbitrators selected a neutral umpire.

As is customary in reinsurance arbitration, the parties entered into a confidentiality agreement during the arbitration, which was executed by the parties and the panel members, and which prohibited Trustmark and Hancock from disclosing information concerning the proceedings and award, including evidence adduced.  The confidentiality agreement did not contain an arbitration clause.  (An example of a form of confidentiality agreement frequently used in reinsurance arbitration can be found here.   Parties frequently amend this form to suit the needs of the case, and, in any event, the Trustmark opinions do not say whether the confidentiality agreement was based on this particular form.)

In March 2004 the arbitration panel ruled in favor of Hancock, and the United States District Court for the Northern District of Illinois, Eastern Division, confirmed the award a few months later.  Hancock, relying on its interpretation of the award, billed Trustmark for balances allegedly owed under the treaties, but Trustmark refused to pay.

B.  The Second Arbitration

Hancock commenced a second arbitration in October 2004 to resolve the dispute that had arisen over the prior award and its reinsurance claims based on the award.  As one would expect, Hancock selected the same arbitrator it had appointed in the prior arbitration.  Trustmark, which had lost the prior arbitration, appointed a new arbitrator.  The two arbitrators appointed a neutral umpire, who, like Trustmark’s arbitrator, had not served in the first arbitration.

The parties knew from the outset that resolution of their dispute potentially implicated the confidentiality agreement, which Hancock’s arbitrator had signed, but which the umpire and Trustmark’s arbitrator had not.  At an organizational meeting in 2005 Trustmark expressed concern about whether Hancock’s arbitrator could abide by the confidentiality agreement.  Hancock’s arbitrator replied that although he “would scrupulously abide by confidentiality,” it might be “hard to segregate, difficult to deal with” knowledge obtained during first proceeding, which the other two panel members did not have.  Trustmark asked some further questions and consented to the appointment of Hancock’s arbitrator.

Not surprisingly, Hancock asserted that the panel should base its decision on the record of the prior arbitration.  It asked the panel to “expressly authorize the use of all materials [from the prior arbitration], without limitation.  .  .  .”  Hancock argued that the confidentiality agreement prohibited disclosures to the outside world, but not disclosures in subsequent arbitration proceedings between the parties, even proceedings involving attorneys and arbitrators who were not parties to the agreement.  Trustmark argued that the agreement covered all disclosures, including those made in subsequent proceedings to lawyers and arbitrators not involved in the original arbitration.

The umpire and Hancock’s arbitrator, over the dissent of Trustmark’s arbitrator, ruled that the panel “accept[ed] and extend[ed] the confidentiality of [the prior arbitration] to the two members of the current arbitration.  .  .  who were not parties to the previous arbitration.”

Hancock also requested that the Panel prohibit Trustmark from litigating nineteen issues that Hancock contended had been decided in the first arbitration.  A majority of the panel, over the dissent of Trustmark’s arbitrator, ruled that Trustmark was barred from relitigating several issues, including whether the retrocessional business on which Hancock’s claims arose was excluded from the treaties.  (“Retrocessional business” is the reinsurance of other reinsurance business.)

C.  Trustmark Seeks an Injunction

In 2009 Trustmark belatedly attempted to vacate the prior arbitration award, but presumably Trustmark recognized that the three-month deadline for vacating the award had expired long-ago, and that Fed. R. Civ. P. 60(b) did not authorize reopening the confirmation judgment.  It accordingly recast its claim as one for injunctive relief.

Trustmark argued that Hancock had obtained the prior award by fraudulently failing to produce four documents during discovery, and that the panel’s preclusion order was thus tainted by fraud.  Trustmark requested an order enjoining further arbitration to prevent Hancock from furthering its alleged “fraudulent scheme.”  Trustmark also sought an order enjoining:  (a) further alleged breaches of the confidentiality agreement; (b) Hancock’s alleged obstruction of access to relevant documents; and (c) further arbitration before any members of the panel.

In light of the four new documents Trustmark said should have been produced in the first arbitration, Hancock agreed to withdraw its preclusion claim and to participate in further discovery.  This mooted in part Trustmark’s claims for injunctive relief, leaving for judicial resolution its confidentiality-agreement-based claim and its claim that no further arbitration should proceed before any of the panel members.

As to the confidentiality agreement, Trustmark said the panel had no authority to resolve disputes concerning that agreement, including the dispute it had already purported to resolve, and therefore an injunction was necessary to ensure that the panel would not continue to exceed its authority by deciding confidentiality-agreement issues.  As to the constitution of the panel, Trustmark said Hancock’s arbitrator was no longer “disinterested” because he:  (a) allegedly breached the confidentiality agreement by participating in the deliberations that resulted in the confidentiality-agreement order; and (b) served as Hancock’s arbitrator in the prior arbitration.  According to Trustmark, Hancock’s arbitrator’s interest in the outcome “infect[ed]” the other two panel members, rendering them unfit to serve.

D.  The District Court Enjoins Arbitration

The district court enjoined the parties’ participation in the arbitration for as long as Hancock’s arbitrator remained on the panel.  The district court held that Hancock’s arbitrator was not “disinterested” within the meaning of the arbitration agreements, and that the panel had no authority to resolve confidentiality-agreement disputes.

As respects Hancock’s arbitrator, the district court said he was not “disinterested” in the arbitration’s outcome because he had breached the confidentiality agreement, and Trustmark may seek to hold him liable for that breach.  The district court also said the knowledge he obtained from the first arbitration made him “a fact witness not subject to examination.”  680 F. Supp. 2d at 948.  Acknowledging that courts “typically operate under the presumption that judges and arbitrators can disregard what they already know[,]” the district court concluded that Trustmark rebutted the presumption:

[Hancock’s arbitrator] has already demonstrated that he may well be unable to do this if he continues to serve on the second panel.   In Trustmark’s vetting of [Hancock’s arbitrator] as part of the Second Arbitration, [Hancock’s arbitrator] expressed some doubt that he would be able “to segregate” information he had from the First Arbitration, and stated that he would find it “difficult to deal with where the other panel members did not have the same full knowledge.” Trustmark points to one instance where, in a conference related to the Second Arbitration, Hancock made a point about a disputed issue in the First Arbitration, and [Hancock’s arbitrator], in support of Hancock, described his recollection of the First Arbitration. In response to Trustmark’s objection, [Hancock’s arbitrator] commented with regard to characterizations of certain claims made in the First Arbitration, “I feel it is my duty to correct the record as best as I understand in that regard.” The hypothetical posited by [Hancock’s arbitrator] during the organizational meeting became realized, and by his actions, he rebutted the presumption that he could disregard knowledge he already had.

680 F. Supp. 2d at 948-49.

The district court also held that the panel had no authority to resolve confidentiality-agreement disputes because that agreement did not contain an arbitration clause and because those disputes were not within the scope of the parties’ arbitration agreements.  See 680 F. Supp. 2d at 949.

Hancock appealed and the Seventh Circuit reversed.

III.  Chief Judge Easterbrook’s Decision

The Seventh Circuit was reviewing an order granting injunctive relief, which must be supported by, among other things, irreparable injury on the part of the party seeking relief.   The Court said there were “two principal problems” with the district court’s analysis of irreparable injury, the “entire discussion” of which the Court said was contained in the following passage from the district court’s opinion:

‘Trustmark cannot be forced to arbitrate issues that it did not agree to arbitrate. Forcing a party to arbitrate a matter that the party never agreed to arbitrate, regardless of the final result through arbitration or judicial review, unalterably deprives the party of its right to select the forum in which it wishes to resolve disputes, causing irreparable harm. This is a harm faced uniquely by Trustmark if it is denied relief and such harm tips the scale in favor of granting injunction. This irreparable harm, coupled with Trustmark’s success on the merits, militates in favor of granting an injunction in this case.’

Slip op. at 4 (quoting 680 F. Supp. 2d at 949; other quotations and citations omitted).

First, said the Court, “Trustmark did agree to arbitrate the question whether the contracts provide reinsurance for certain risks[,]” but “the district court blocked, rather than enforced that contractual understanding.”  Slip op. at 5 (emphasis in original).  Second, a party seeking injunctive relief is not “’unalterably’” denied of its right to select the forum.  Federal Arbitration Act Section 10(a)(4) expressly authorizes courts to vacate awards where arbitrators have “exceeded their powers,” so in cases where arbitrators purport to decide issues outside the scope of their authority, the problem can be addressed when the arbitrators issue a final award.  That, in turn, allows the litigation to proceed in the proper forum.  See slip op. at 5.

The Court said the only “injury” Trustmark might suffer (assuming it was correct that the confidentiality issue was not arbitrable) was “the delay and.  .  . out-of-pocket cost of paying the arbitrators and legal counsel.”  Slip op. at 5.  But the United States Supreme Court has “held that the delay and expense of adjudication are not ‘irreparable injury’.  .  .  . [,]” and the Seventh Circuit has held that Trustmark’s argument to the contrary is “frivolous.”  Slip op. at 5 (citing Petroleum Exploration, Inc. v. Public Service Commission, 304 U.S. 209, 222 (1938); Renegotiation Board v. Bannercraft Clothing Co., 415 U.S. 1, 24 (1974);  FTC v. Standard Oil Co., 449 U.S. 232, 244 (1980); PaineWebber Inc. v. Farnam, 843 F.2d 1050 (7th Cir. 1988); and Graphic Communications Union v. Chicago Tribune Co., 779 F.2d 13 (7th Cir. 1985)).

Having held that the district court improperly granted injunctive relief, the Court acknowledged it could dispose of the case without more.  But the Court explained that “the district court’s decision leaves a cloud over this arbitration and the reputation of [Hancock’s] arbitrator.  .  .  , a reputation that Trustmark seems determined to tarnish.”  Slip op. at 6.  The Court decided to remove the cloud, and ruled “that the district court erred on the merits in addition to mistakenly believing that Trustmark has established irreparable injury.”  Slip op. at 6.

Turning to whether Hancock’s arbitrator was “disinterested” within the meaning of the arbitrator qualification provisions of the agreements, the Court said “disinterested” means “lacking a financial or other personal stake in the outcome.”  Slip op. at 6 (citing by way of general example  Caperton v. A.T. Massey Coal Co., 129 S. Ct. 2252 (2009)).  Citing ARIAS•U.S., Practical Guide to Reinsurance Arbitration Procedure §2.3 (rev. ed. 2004), the Court said “[n]orms of insurance industry arbitration track this understanding.”  Slip op. at 6.

The Court concluded that Hancock’s arbitrator had no “stake in the outcome of this arbitration.”  Slip op. at 6.  The Court acknowledged that he has “a reputational interest:  if his decision disappoints the person who put him on the panel, he is less likely to be selected as an arbitrator in the future.”  Slip op. at 6.  But, according to the Court, such reputational interests are “endemic to arbitration that permits parties to choose who will decide.”  Slip op. at 6 (citing  Sphere Drake Ins. Co. v. All American Life Ins. Co., 307 F.3d 617, 622 (7th Cir. 2002) (Easterbrook, J.), reh’g denied, Nov. 4, 2002, cert. denied, 538 U.S. 961 (2004).  Noting that parties sometimes agree that arbitration-providers select the arbitrators, here “Trustmark and Hancock reserved the power of appointment.”  Slip op. at 6-7.  The Court concluded that “[a] court cannot properly deem the interest in reemployment created by this arrangement a disqualifying event.”  Slip op. at 7.

The Court rejected the district court’s conclusion that Hancock’s arbitrator was not “disinterested” because “he had knowledge of the dispute,” something the district court viewed as “a form of prohibited interest.”  Slip op. at 7.  The Court explained that “private parties often select arbitrators precisely because they know something about the controversy.”  Slip op. at 7 (citing Sphere Drake, 307 F.3d at 620):

Arbitration need not follow the pattern of jury trials, in which a factfinder’s ignorance is a prime desideratum. Nothing in the parties’ contract requires arbitrators to arrive with empty heads.

Slip op. at 7.

Gently rebuking the district court, the Court said “[f]ederal judges, of all people, should not confuse knowledge with disqualifying ‘interest[:]’”

For judges regularly hear multiple suits arising from the same controversy. The district judge who resolved this very dispute also entered the order enforcing the 2004 award. If knowing about what happened in 2004 is an impermissible “interest,” or makes the person a ‘fact witness’ about what had occurred in 2004, then the district judge should have stepped aside from the current suit.

Slip op. at 7.

But ethical rules applicable to federal judges did not require recusal, because “[k]nowledge acquired in a judicial capacity does not require disqualification.”  Slip op. at 7 (citing Liteky v. United States, 510 U.S. 540 (1994)).  And that, said the Court, is also true of “knowledge acquired in arbitration.”  Slip op. at 7.

The Court concluded that Hancock’s arbitrator was as “disinterested” as “the district judge himself, and just as entitled to participate.”  Slip op. at 8.  And, to the extent there was “any difference between the two adjudicators, [Hancock’s arbitrator] has the stronger entitlement to participate in the second round, because, as [the Court] stressed in Sphere Drake, it takes more to disqualify an arbitrator than to disqualify a judge.”  Slip op. at 8 (citing Sphere Drake, 307 F.3d at 621; and Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673 (7th Cir.), cert. denied, 464 U.S. 1009 (1983) (Posner, J.):

No party in federal court is entitled to pick his judge, but contracts allowing parties to choose their arbitrators are common; these parties’ arrangement instantiates the practice. When one party is entitled to choose its own arbitrator, and in doing so follows all contractual requirements, a court ought not to abet the other side’s strategy to eject its opponent’s choice.

Slip op. at 8.

The Court also rejected the district court’s conclusion that Hancock’s arbitrator was not “disinterested” because he had allegedly breached the confidentiality agreement.  Hancock’s arbitrator had executed the agreement “as an adjudicator,” and was therefore similarly situated to the district court judge, who “himself implemented the confidentiality agreement, in a similar adjudicatory capacity, when confirming the first panel’s award.”  Slip op. at 8.

As to whether the panel had authority to interpret the confidentiality agreement, the Court invoked the procedural arbitrability doctrine.  While the Court acknowledged that the confidentiality agreement did not contain an arbitration agreement, it pointed out that “the parties did agree to arbitrate their disputes about reinsurance.”  Slip op. at 8.  Citing Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002), the Court said “[a]rbitrators who have been appointed to resolve a commercial dispute are entitled to resolve ancillary questions that affect their task.”  Slip op. at 8.  The confidentiality agreement, which was executed when the first arbitration was underway, “is closely related to the substance of the first arbitration and presumptively within the scope of the reinsurance contracts’ comprehensive arbitration clauses, which cover all disputes arising out of the original dispute.”  Slip op. at 8-9.   The arbitrators were therefore “entitled to decide for themselves those procedural questions that arise on the way to a final disposition,” including disputes concerning the confidentiality agreement, and “the preclusive effect (if any) of an arbitration award.”  Slip op. at 9-10.

The Court went out of its way to inform the arbitrators that, in addition to having the power to resolve the confidentiality agreement issue, they had a great deal of discretion to decide how to resolve those issues.  Acknowledging that the district court could review those determinations under Section 10(a)(4)’s “excess-of-powers” provision, the Court reminded the arbitrators and parties that the district court’s standard of review would be exceedingly deferential:

[a]mong the powers of an arbitrator is the power to interpret the written word, and this implies the power to err; an award need not be correct to be enforceable. See, e.g., Major League Baseball Players Ass’n v. Garvey, 532 U.S. 504 (2001). It is enough if the arbitrators honestly try to carry out the governing agreements. “[T]he question for decision by a federal court asked to set aside an arbitration award . . . is not whether the arbitrator or arbitrators erred in interpreting the contract; it is not whether they clearly erred in interpreting the contract; it is not whether they grossly erred in interpreting the contract; it is whether they interpreted the contract.” Hill v. Norfolk & Western Ry., 814 F.2d 1192, 1194–95 (7th Cir. 1987) [(Posner, J.)]. See also, e.g., Operating Engineers Local 139 v. J.H. Findorff & Son, Inc., 393 F.3d 742 (7th Cir. 2004) [(Easterbrook, J.)].

Slip op. at 10.

And lest there be any lingering doubt, the Court – apparently speaking principally for the panel’s benefit – said “[w]hen this arbitration resumes, the panel is entitled to follow its own view about the meaning of the confidentiality agreement; it need not knuckle under to the district court’s prematurely announced understanding.”  Slip op. at 10.

Keep your eyes out for the upcoming discussion in Part III of Trustmark’s implications on Scandinavian Re and Dealer Computer.

[Editor’s Note:  We have published a materially identical version of this post on the Disputing blog (you can find Part I here and Part II here).]

The Chief Judge’s latest contribution to Federal Arbitration Act jurisprudence is Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.) , No. 09-3682, slip op. (7^th Cir. Jan. 31, 2011), and it is a welcome one.  In a characteristically terse and well-written ten-page opinion, the Chief Judge articulated at least eight Federal Arbitration Act rules pertinent to reinsurance and other forms of commercial and industry arbitration.  A few of these have been set forth before, while others are new:  

1. For the purposes of enjoining an  arbitration proceeding, a party does not suffer “irreparable harm”  simply because it must await the arbitration’s outcome  before obtaining judicial resolution of arbitrability or arbitrator-qualification  questions, see slip op. at 5-6; 
2. An arbitration agreement requiring arbitrators to be “disinterested” means the arbitrators must lack a “financial or other personal stake in [the arbitration’s] outcome,” see slip op. at 6;
3. An “arbitrator’s interest in reemployment created” by an arbitration clause that allows parties to choose their own arbitrators is not a “personal stake in the outcome” disqualifying an arbitrator, see slip op. at 6-7;
4. An arbitrator’s “knowledge about the dispute” is not a “disqualifying interest” in the arbitration’s outcome, see slip op. at 7-8;
5. Courts should not “abet [a party’s] .  .  .  strategy to eject the other party’s chosen arbitrator when that party is entitled to choose its own arbitrator, and in doing so follows all contractual requirements.  .  .  .,” see slip op. at 8;
6. Under the procedural-arbitrability doctrine, an arbitration panel in a subsequent arbitration has the authority to interpret and apply the terms of a confidentiality agreement reached during a prior arbitration proceeding, even if the confidentiality agreement does not contain an arbitration clause, see slip op. at 8-10;
7. Arbitrators have the authority to determine “the preclusive effect (if any) of an earlier [arbitration award,” see slip op. at 9-10; and
8. The question whether arbitrators exceeded their powers based on the outcome of an award is not whether they interpreted the contract correctly, but whether they interpreted it at all.  See slip op. at 10.  

Senior Circuit Judge Richard D. Cudahy and Circuit Judge Ilana Diamond Rovner joined in the Chief Judge’s opinion. 

Trustmark’s implications are many, particularly on the often interrelated topics of arbitrator qualifications and evident-partiality standards.  The author believes the Chief Judge’s opinion should influence the outcome of  pending appeals of two district court decisions vacating awards on the ground one or more arbitrators allegedly did not disclose (or fully disclose) service on a prior arbitration panel involving similar issues and contracts, or the same witness.   One of these is the appeal of the controversial decision in Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co, No. 09 Civ. 9531(SAS), 2010 WL 653481 (S.D.N.Y. Feb. 23, 2010), which is pending in the United States Court of Appeals for the Second Circuit, and which was fully briefed and argued before Trustmark was decided.  The other is the recently-filed appeal of Dealer Computer Svcs., Inc. v. Michael Motor Co., No. H-10-2132, slip op. (S.D. Tex. December 29, 2010), which is pending in the United States Court of Appeals for the Fifth Circuit. 

Trustmark strongly suggests that the Second and Fifth Circuits should reverse the district court decisions in both Scandinavian Re and Dealer Computer.   In each of those cases the district court vacated an award because one or more arbitrators, through their service in other cases, had access to information or ruled on issues that were allegedly relevant to the proceedings that led to the challenged award. 

Trustmark undermines the district courts’ reasoning in Scandinavian Re and Dealer Computer because it demonstrates that even had the arbitrators in those cases been federal judges -- and therefore subject to more onerous neutrality requirements than those applicable to arbitrators --  the knowledge and experience they obtained from hearing cases involving the same or similar issues or a common witness would not have rendered them “interested” in the outcome, partial to one of the parties, or otherwise unfit to serve.   And if they could have served as federal judges in those matters, then the district courts unquestionably erred by holding that they lacked the requisite neutrality to serve as arbitrators. 

Scandinavian Re and Dealer Computer involved alleged non- or incomplete disclosure of arbitrator service on arguably similar or related matters, while Trustmark did not.    But the disclosure issue is a red herring.  Trustmark, construed in conjunction with Sphere Drake Insurance Ltd. v. All American Life Insurance Co., 307 F.3d 617, 622 (7th Cir. 2002) (Easterbrook, J.) – a case which the Chief Judge relied heavily on in Trustmark – demonstrates that the arbitrators in Scandinavian Re and Dealer Computer  were not required to disclose their service in other arbitrations allegedly involving similar issues or a common witness. 

To fully understand the implications of Trustmark on other cases, one must first understand the background of, and rationale for, the decision. Part II of this post will therefore discuss in some detail what transpired in Trustmark, and Part III will explain in more detail why, in light of Trustmark, the Second and Fifth Circuits should reverse the district court judgments in Scandinavian Re and Dealer Computer.     

[Editor’s Note:  The author is also publishing a materially identical version of this post in the Disputing blog.] 

The article discusses Rent-A-Center in detail, explores its implications and argues, among other things, that:

There are divergent opinions on Rent-A-Center‘s significance.  Some apparently believe that it heralds the end of alternative dispute resolution as we know it, and others, including Supreme Court guru, Carter G. Phillips — a partner in the Washington, D.C., office of Sidley Austin who was a member of the employer’s Supreme Court legal team — suggest that the opinon is so narrow that it will have little or no meaningful influence on future cases.

Both views have some merit, but neither is 100% on the mark.

28 Alternatives at 168 (citation omitted). 

The article is the first of a two-part series.  The second part will discuss and critically analyze the Supreme Court’s decision in Granite Rock Co. v. International Brotherhood of Teamsters, No. 08–1214 (June 24, 2010), and will be published in the October 2010 edition of Alternatives. 

Alternatives also recently published two other articles I wrote earlier this year, both of which were featured as cover stories:  “Stolt-Nielsen Delivers a New FAA Rule — And then Federalizes the Law of Contracts,” 28 Alternatives 121 (June 2010), and “It’s Time for Doctrines:  The Supreme Court Wrestles with ‘Severablility’ and the ‘Clear and Unmistakable Standard,” 28 Alternatives 73 (March 2010).  (See Loree Reinsurance and Arbitration Law Forum posts here and here.)

Alternatives is a subscription-only publication. Subscription information is available at this page, as well as at the publisher’s, John Wiley & Sons’s,  website here.

I would like once again to take this opportunity to thank CPR, and Russ Bleemer, Editor of Alternatives, for their kind assistance and support in featuring my article.   CPR is one of the most prestigious ADR organizations in the United States, and, as I have said before, Russ is a very intelligent, dedicated and professional editor with whom it is a pleasure to work.

A.   Introduction

In Part V.A of our Stolt-Nielsen reinsurance-arbitration practice series (here), we said that after Stolt-Nielsen courts will likely get to decide in the first instance whether the parties consented to consolidated arbitration.  If we are correct, that will be a fundamental change because courts will presumably construe the terms of the parties’ contracts more strictly than many arbitrators might, and those constructions will be subject to appellate review. 

In this Part V.B we consider what a party will likely need to show to persuade a court to consolidate arbitrations, and explain why we believe that courts will not frequently order consolidation.  In Part V.C. we shall explain the strategic and practical implications of the changes that Stolt-Nielsen will likely bring about in consolidated reinsurance-arbitration practice.         

 B.   What Will One Have to Show to Establish Consent to Consolidated Arbitration?

What a party must show to establish consent to consolidated arbitration will depend  on whether the dispute involves (a) multiple, bilateral contracts between the same parties; (b) multiple, bilateral contracts between a cedent and different reinsurers; (c) one or more multilateral contracts between a cedent and the same group of multiple reinsurers; (d) multiple, multilateral contracts between a cedent and different groups of reinsurers; or (e) some combination of (a) or (b) and (c), or (d).  While a party may show consent to consolidated arbitration in Scenario (a) by demonstrating that at least one of the arbitration clauses is broad enough to encompass the multi-contract dispute (see Part V.A, here), the party seeking consolidation must show more to establish consent in Scenarios (b) through (e).   Our focus here will be establishing consent in those Scenarios.   

1.      Scenario (b):  Multiple, Bilateral contracts Between a Cedent and Different Reinsurers

Scenario (b) may arise where a cedent seeks consolidated arbitration of a dispute arising out of a group of separate, bilateral facultative or treaty reinsurance contracts between the cedent and different reinsurers.  Suppose that Cedent C entered into a series of three consecutive, one-year bilateral facultative reinsurance agreements, Contracts 1, 2 and 3, with three different reinsurers, Reinsurers 1, 2 and 3.  Cedent C has billed each reinsurer for a portion of the settlement of an environmental claim that it has allocated to the three-year period covered by the contracts. 

Cedent C can easily demonstrate that it agreed to separate, bilateral arbitrations with R1, R2 and R3 and vice-versa, and that the dispute over each reinsurer’s share of the settlement falls within the scope of its arbitration agreement with that reinsurer.  But Stolt-Nielsen requires more. 

Cedent C must somehow demonstrate that each of the reinsurers consented to arbitrate in a single proceeding to which each of the other reinsurers are parties.  And since most reinsurance arbitration agreements provide for tri-partite arbitration — with each of the parties appointing an arbitrator, who in turn appoint a neutral  umpire — the reinsurers must agree to act as a single party for the purposes of arbitrator selection. 

If the reinsurers had contemplated consolidated arbitration involving nonparties to their contracts each presumably would have included a provision in their arbitration agreement that allowed for that.  Consider, for example, the relevant terms of Brokers and Reinsurance Markets Association standard arbitration clause 6K:

As a condition precedent to any right of action hereunder, any dispute arising out of this Contract, whether arising before or after termination, shall be submitted to the decision of a board of arbitration composed of two arbitrators and an umpire,  meeting in (City, State), unless otherwise agreed. 

.  .  .  .

If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article, and communications shall be made by the Company to each of the reinsurers constituting the one party, provided that nothing therein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the Reinsurer under the terms of this Contract from several to joint. 

(A compilation of BRMA standard contract provisions can be found here.) 

This clause, of course, was designed for use in multilateral reinsurance treaties – not bilateral facultative certificates — otherwise the phrase “provided that nothing .  .  .  shall.  .  .  be construed as changing the liability of the Reinsurer under the terms of this Contract from several to joint[,]” would be unnecessary.  But if this provision, or something very much like it, was included in each of the arbitration agreements in our hypothetical, then it would least arguably establish consent to consolidated arbitration on the part of R1, R2 and R3. 

Note that the last paragraph uses “reinsurer” and “reinsurers” in the lower case in the first part of the provision, but uses “Reinsurer” in the upper case in the last part:  “nor be construed as changing the liability of the Reinsurer under the terms of this Contract from several to joint.”  If “Reinsurer” in the upper case is defined elsewhere as denoting a reinsurer that is a party to the contract, then “reinsurer” or “reinsurers” in the lower case could – and perhaps should – be construed to refer to any reinsurer, irrespective of whether it is a party to the contract containing an arbitration clause.  A court could therefore construe the provision as consent to consolidated arbitration involving nonparties to the contract.  Or a court might conclude that the provision was ambiguous, and direct an arbitration panel to determine whether “reinsurer” and “reinsurers” in the lower case includes reinsurers that are not parties to the contract (an issue could arise whether that should be determined by three separate arbitration panels or a court).   

But suppose our hypothetical agreements did not expressly authorize consolidated arbitration.  Unless all three reinsurers unreservedly appointed the same arbitrator in response to the arbitration demand, there would be nothing to suggest the parties agreed to consolidation.  

Indeed, a persuasive argument might be made that the agreements prohibited arbitration, because many arbitrator selection provisions expressly say each party gets to appoint its own arbitrator.  Consider BRMA clause 6l: 

 Should an irreconcilable difference of opinion arise between the parties to this Contract as to the interpretation of this Contract or transactions with respect to this Contract, such difference will be submitted to arbitration upon the request of one of the parties, one arbiter to be chosen by the Company and one by the Reinsurer and an umpire to be chosen by the two arbiters before they enter into arbitration. 

.  .  .  . 

Assuming “Company” is defined as the cedent and ”Reinsurer” is defined only as a reinsurer that is a party to the contract, this provision entitles each of two parties to appoint their own arbitrator.  It is not susceptible of an interpretation that would require a reinsurer that is a party to the contract to appoint an arbitrator with the advice and consent of any non-parties, let alone one that would act on behalf of the reinsurer and those non-parties.   

So if our hypothetical arbitration agreements contained arbitrator selection provisions like this one, then R1 would be entitled to appoint arbitrator A under Contract 1, R2 would be entitled to appoint arbitrator B under Contract 2, and so on.  The provision would therefore effectively prohibit consolidated arbitration, which would require R1, R2 and R3 to appoint a single arbitrator to act on their collective behalf, all in derogation of the arbitration agreements.        

The provision may also effectively prohibit consolidation because the arbitration clause expressly applies to “irreconcilable difference[s] of opinion.  .  . between the parties to this Contract.  .  .  .”  (Emphasis added)  That strongly suggests that the parties did not agree to arbitrate disputes between the parties to the contracts and parties to other contracts.  While a semantic argument may be made that “between the parties to this Contract” is not the same as “between the parties to this Contract  and no others,” requiring the parties to affirmatively exclude the existence of an agreement to arbitrate with third parties when the agreement to arbitrate does not provide for arbitration with them in the first place would contradict the letter and spirit of Stolt-Nielsen and its “FAA rules of fundamental importance.”  As discussed in Part IV, here, those rules require affirmative consent to class or consolidated arbitration, not intent to exclude class or consolidated arbitration. 

Let’s assume that our hypothetical agreements are silent on consolidated arbitration in the sense that they neither authorize nor prohibit it.    The question before the court would then be whether it could imply consent to consolidation.    

As discussed in Part IV, here, the Stolt-Nielsen Court considered whether consent to class arbitration might be implied as a matter of law.  The Court did so from the standpoint of the procedural arbitrability doctrine, explaining that “in certain contexts, it is appropriate to presume that parties that enter into an arbitration agreement implicitly authorize the arbitrator to adopt such procedures as are necessary to give effect to the parties’ agreement.”  Stolt-Nielsen, slip op. at 20-21 (citations omitted; emphasis added).  The Court said that such a presumption was grounded “in the background principle that ‘[w]hen the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.’”  Slip op. at 21 (quoting Restatement Second of Contracts § 204 (1979)).

While the Court could and should have concluded its analysis at that point — the parties’ agreements were undisputedly bilateral, and could be given effect by ordering bilateral arbitration, rendering it unnecessary to imply consent to class arbitration – the Court went on to explain that 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.”  Slip op. at 21.  For, in what the Court termed “bilateral arbitration,” the “parties forgo the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution:  lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.”  Slip op. at 21 (citations omitted).

In reaching that conclusion the Court said that “the relative benefits of class-action arbitration are much less assured, giving reason to doubt the parties’ mutual consent to resolve disputes” in that manner.  Slip op. at 21-22.  The Court emphasized “just some of the fundamental changes brought on” by class arbitration:

1.  “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[;]”

2.  Under the AAA Class Arbitration Rules the “presumption of privacy and confidentiality” that ordinarily applies in bilateral arbitration does not apply in class arbitration, “thus frustrating the parties’ assumptions when they agreed to arbitrate[;]”

3.  A class arbitration award does not simply purport to bind the parties to a single arbitration agreement, but “adjudicates the rights of absent parties as well[;]” and

4. “[T]he 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.” 

Slip op. at 22-23.  

These considerations are not fully applicable to consolidated arbitration: 

1.  As in class arbitration, in consolidated 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 .  Unlike class arbitration, however, consolidated arbitration generally involves disputes ranging from a few to perhaps tens of parties, not “hundreds or perhaps even thousands of parties.” 

2. Unlike class arbitration governed by the AAA Class Arbitration Rules, the presumption of confidentiality can be maintained in consolidated reinsurance arbitrations.  But reinsurers forced to participate in consolidated arbitration must sacrifice some of that confidentiality vis-à-vis their fellow reinsurers. 

3.   A consolidated arbitration award does not simply bind parties to a single arbitration agreement, but, unlike a class arbitration award, it does not purport to “adjudicate[] the rights of absent parties.  .  .  .”   

4.  Like those of class arbitration, the commercial stakes of consolidated arbitration are comparable to those of consolidated litigation, even though the scope of judicial review is much more limited.  But generally those commercial stakes are not as high as those of class arbitration. 

Even though the considerations the Court cited are not fully applicable to consolidated arbitration, there are a number of significant reasons why implying consent to consolidated arbitration may materially alter the nature of what would otherwise be bilateral arbitration, thereby frustrating the parties’ expectations.  A non-exhaustive list of these would include:    

1.  In consolidated arbitration, the reinsurers are forced to agree collectively on a single, party-appointed arbitrator to resolve multiple disputes even though most arbitrator selection provisions would allow each reinsurer to choose what it –  and no one else – concludes to be the most suitable party-appointed arbitrator for a given dispute.   Most arbitrator selection provisions also allow the parties considerable input in selecting the most suitable umpire candidates for a particular dispute.  These arbitrator-selection rights are considerably watered down – if not eliminated — when a group of reinsurers is required to select collectively a single party-appointed arbitrator and to agree collectively on a list of suitable umpire candidates.       

2.  Consolidated proceedings are an incident of litigation that the parties could have taken advantage of had they not agreed to arbitrate.  Parties who agree to arbitration typically sacrifice the procedural niceties of court adjudication for the informality, efficiency, speed and confidentiality of bilateral arbitration.    

3.   Consolidated proceedings may be more efficient from the standpoint of the institution or persons hearing the matter, that is, the court or the arbitration panel.  Judicial efficiency is important from a public policy standpoint because it is publicly funded.  But arbitration is privately funded, and multiple, private arbitration proceedings do not usually impose a significant extra burden on the public fisc (other than the relatively modest increased cost associated with multiple summary-enforcement proceedings, which may or may not be necessary, or which may not be contested). 

4.  To the extent that consolidated arbitration promotes efficiency it does so principally for the benefit of the cedent, which is spared the expense of multiple proceedings.  But each individual reinsurer may incur more time and monetary costs in a multi-party, consolidated proceeding than it might incur in bilateral arbitration. 

5.  Consolidated arbitration tends to tactically benefit the cedent at the expense of the reinsurer for the reasons to be set forth in Part V.C.  To the extent cedents may be tactically disadvantaged by having to commence multiple, bilateral proceedings, they may avoid that disadvantage by not agreeing to arbitrate or insisting on a provision authorizing consolidation. 

These and other considerations may convince courts not to imply consent to consolidated arbitration in the face of silence. 

2.      Scenarios (c) through (e)  

Scenarios (c) through (e) arise where there are:

1. One or more multilateral contracts between a cedent and the same  group of multiple reinsurers (Scenario (c));
2. Multiple, multilateral contracts between a cedent and different groups of reinsurers (Scenario (d)); or
3. Some combination of Scenarios (a), (b), (c) or (d) (Scenario (e)). 

As in Scenario (b), to establish consent to consolidated arbitration in any of these scenarios a cedent would have to show that all of the reinsurers consented to consolidation.  For essentially the same reasons discussed in Section B.1., above, cedents will likely have difficulty doing so in the absence of a provision authorizing consolidation.    

C.   How Frequently will Courts Consolidate Arbitrations or Direct Arbitrators to Determine Whether the Parties Consented to Consolidation? 

The answer is probably “not very.”  If courts decide whether the parties consented to consolidated arbitration, they are likely to apply state law principles of contract construction fairly strictly – at least more strictly than many arbitrators have.  Their decisions will also be subject to appellate review, which will presumably make it more likely that any decision imposing consolidation will have a sound basis in applicable law and the parties’ agreement. 

For the reasons discussed in Section B.1., above, there will probably be a number of cases where the agreements are not susceptible to an interpretation permitting consolidated arbitration or where they effectively prohibit it.  Where the agreements are silent, many courts may conclude that there is no sound basis for implying consent to consolidation.  

That does not mean that courts will never find consent to consolidated arbitration.  In Scenario (a) cases – where there are multiple, bilateral contracts between the same parties – courts may find that the parties’ arbitration clauses are broad enough to encompass a consolidated proceeding.  There may also be cases where state arbitration law permits courts or arbitrators to impose consolidated arbitration where the agreements are silent on that score.  If the parties clearly and unambiguously agreed that state arbitration law governs, then courts may find that the parties consented to the application of that state law.  And certain agreements provide for consolidated arbitration of one form or another or have language that is ambiguous as to whether consolidated arbitration is permitted.  In those cases, courts will likely either compel consolidated arbitration or submit the construction question to arbitrators, who may in turn order consolidation.    

But Stolt-Nielsen has changed the legal landscape on consolidated arbitration fairly dramatically, and on balance we think that courts will not readily consolidate arbitrations in the way that arbitrators have under the Bazzle regime.  In Part V.C, we explore the practical and strategic implications of this change.

Editor’s Note:  Here’s a list of links for Parts I through V of our Stolt-Nielsen reinsurance-arbitration series: 

Part I, Part II, Part III, Part IV, Part V.A, Part V.B, and Part V.C

Jay debunks the media hype surrounding the United States Supreme Court’s recent decision in Rent-A-Center v. Jackson, ___ U.S. ___, slip op. (June 21, 2010), and argues (persuasively) that the case is a reasonable, natural and modest interpretation of the Court’s prior Federal Arbitration Act jurisprudence.  With one minor caveat we agree wholeheartedly with his insightful and pragmatic view of the case.

Our view of the decision may differ very slightly in that we believe that its scope is broader than the holding might suggest.  Jay is absolutely correct when he says that the decision permits parties to challenge delegation agreements (agreements to arbitrate arbitrability) on unconscionability grounds.  He says that there may be “dozens” of grounds on which to make such a challenge, and we think he is right about that, too. 

But we think that it will be very difficult to mount a successful challenge specifically directed at a delegation agreement.  And if we are right about that, then the practical effect of the decision will be that delegation agreements will usually be enforced, enabling arbitrators to decide most unconscionability challenges.  The scope of the decision is, in our view, therefore quite broad. 

We nevertheless agree with Jay that the decision makes perfect sense in light of the Court’s prior Federal Arbitration Act jurisprudence, and apart from our caveat about the decision’s scope, we are otherwise on the same page as Jay.  Of course, it may turn out that challenges to delegation agreements prove more successful than we think they will.

Jay is an American-Arbitration-Association certified arbitrator and mediator, and serves on the AAA’s Large Complex Case Panel.  He is a Fellow of the College of Commercial Arbitrators and a Distinguished Fellow of the International Academy of Mediators.   He offers arbitrator and mediator services through Judicate West and Professional Mediation Associates. 

Jay also serves as an adjunct professor of arbitration law at Pepperdine Law School, the University of Missouri-Kansas City Law School and the Werner Institute of Creighton Law School.  An AV-rated attorney, he is a member of the California bar and is admitted to practice before the United States Supreme Court.  He is listed in “Best Lawyers in America” for ADR, and in “Southern California Super Lawyers,” also for ADR.  You can visit his website here.

We hope you enjoy Jay’s article.

Despite all the alarmist reaction already showing up in the press, the holding in Rent-A-Center v. Jackson, ___ U.S. ___, slip op. (June 21, 2010) is both modest and predictable.   Arbitration agreements always do one thing:  take decisions from judges and give them to arbitrators.  Ever since 1925, such agreements have always been enforced to exactly the same extent as any other agreement is enforced.   Not less so, but also not more so.  Are they enforced even when the decision in question is the “gateway” decision of whether the parties must arbitrate their dispute?  Yes, as long as the agreement delegating even that decision to the arbitrator is explicit and unmistakeable.  Is that news? No. See, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) (dictum).

Should it matter that this delegation language is physically located within the challenged arbitration agreement itself?  No.  (If the answer were “Yes,” any contract drafter could “solve” the problem by plucking out the delegation provision and pasting it onto another sheet of paper to be separately executed as the “delegation agreement.”)  What does matter is whether the challenge brought against the arbitration agreement is the kind that goes to the enforceability of the delegation provision itself.  Are there such challenges in theory?  Sure, dozens of them.  Does that fact put severe brakes on the implications of the Rent-a-Center holding for other cases?  Yes, that’s the point.  Were there any such challenges in the Rent-a-Center case?  No.  None whatsoever.  As the Court noted, the party challenging arbitration in this particular case did not even attempt to raise one.  Would the Court have been open to listening to such a challenge?  Yes.  Not just by implication.  It expressly said it would.

Some of the alarmist commentary stands on the cynical premise that law is pure politics, such that the statement “the outcome of this case is pro-business” is thought to serve as a principled basis the court should have used to distinguish the precedent it is required to honor.  Some of these commentaries, remarkably enough, even come from lawyers.

The more sophisticated of the alarmist commentaries made a more sophisticated mistake.  They took the way Justice Scalia framed the issue in the first sentence of the decision, and leaped to the conclusion that that sentence could serve as the entire holding.

Justice Scalia said:  “We consider whether.  .  .  a district court may decide a claim that an arbitration agreement is unconscionable, where the agreement explicitly assigns that decision to the arbitrator.”

His answer (the holding) was not exactly “It may not.”  His answer was really, “It may not, unless, of course, the provision assigning the decision to the arbitrator is itself subject to any challenge whatsoever  (including unconscionability) recognizable to anyone familiar with the common law of contracts.

To which I would only add the not very dramatic commentary:  “Nothing very remarkable about that.”

EDITOR’S NOTE: John (Jay) McCauley is an American-Arbitration-Association certified arbitrator and mediator, and serves on the AAA’s Large Complex Case Panel.  He is a Fellow of the College of Commercial Arbitrators and a Distinguished Fellow of the International Academy of Mediators.   He offers arbitrator and mediator services through Judicate West and Professional Mediation Associates. 

Jay also serves as an adjunct professor of arbitration law at Pepperdine Law School, the University of Missouri-Kansas City Law School and the Werner Institute of Creighton Law School.  An AV-rated attorney, he is a member of the California bar and is admitted to practice before the United States Supreme Court.  He is listed in “Best Lawyers in America” for ADR, and in “Southern California Super Lawyers,” also for ADR.  You can visit his website here.

Our post introducing Jay is here.

In a 5-4 opinion by Associate Justice Antonin Scalia, joined in by Chief Justice John G. Roberts, Jr. and Associate Justices Anthony M. Kennedy, Clarence Thomas and Samuel A. Alito, Jr , the Court held that the employee had to arbitrate its claim that certain provisions of an arbitration agreement were allegedly unconscionable because the parties clearly and unmistakably agreed to arbitrate arbitrability questions, and the employee did not specifically claim that that agreement was unconscionable.  The Court said that the parties’ clear and unmistakable agreement to arbitrate arbitrability was, as a matter of federal law, severable from the other provisions of the arbitration agreement, including the ones the employee said were unconscionable.  

Prior to the decision we had advocated in the Forum (here and here), and in our cover story published in the March 2010 issue of Alternatives to the High Cost of  Litigation (blogged here), that the Court should resolve the case in favor of Rent-A-Center using a severability analysis of sorts derived from Buckeye Check Cashing v. Cardegna, 546 U.S. ___ (2006) and Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967).   And that’s exactly what happened, even though neither side advocated or addressed the severability argument before the Court, a point made by Associate Justice Stevens’ dissenting opinion, which was  joined in by Associate Justices Ruth Bader Ginsburg, Stephen G. Breyer and Sonia Sotomayor.  See Dissenting Op. at 1.  (The district court’s analysis, however, which was reversed by the Ninth Circuit, was, according to the Court, consistent with the Buckeye Check Cashing and Prima Paint severability principle.  See Slip op. at 9.) 

Readers may recall that before certiorari was granted in Rent-a-Center  we argued: 

There is logic to the rule adopted by the [Court of Appeals for the Ninth Circuit].  .  .  in that unconscionability is a state law defense that goes to the enforceability of an agreement.  When a party challenges the enforceability of an arbitration agreement, the court ordinarily decides it – unless the parties clearly and unmistakably agree otherwise.  And while the parties clearly and unmistakably agreed to arbitrate arbitrability,  that agreement was – as is often the case – simply a component of the rest of the arbitration agreement.  If the entire arbitration agreement is unenforceable because of unconscionability, then so too must be the agreement to arbitrate arbitrability. 

The problem with the majority’s logic is that it does not distinguish between the enforceability of the clear and unmistakable agreement to arbitrate arbitrability and the enforceability of the parties’ agreement to arbitrate all other disputes.  The Rent-A-Center parties envisioned that a dispute concerning the enforceability of their agreement to arbitrate all other disputes would be decided by the arbitrators.  That is what the parties’ agreement said, and the United States Supreme Court has said that parties can enter into such agreements, provided they are clear and unmistakable. 

We think courts would better advance the purposes of the Federal Arbitration Act by engaging in a severability analysis of sorts when confronting questions like the one in Rent-A-Center.   When parties agree not only to arbitrate the merits of controversies unrelated to the arbitration clause, but also clearly and unmistakably agree to arbitrate arbitrability, the latter agreement is tantamount to an arbitration agreement within an arbitration agreement.  One agreement concerns who decides disputes concerning the existence, formation or enforceability of the other agreement.  And the other agreement concerns the parties’ obligation to arbitrate all other disputes.  Each should be analyzed separately under Federal Arbitration Act Section 2. 

What the court did in Rent-A-Center was assume that, if any part of the arbitration agreement was unenforceable for any reason, then the entire arbitration agreement – including the clear and unmistakable agreement to arbitrate arbitrability – must fail.  Perhaps ironically, the Court found support for this analysis in the Prima Paint/Buckeye Check Cashing line of cases that hold that an enforceability challenge directed at the contract as a whole – as opposed to the arbitration agreement specifically – must be decided by the arbitrators rather than the court.  Because the challenge here was to a stand-alone arbitration agreement that included a clear and unmistakable agreement to arbitrate arbitrability, the Court simply assumed that Federal Arbitration Act Section 2 required the Court to decide it.  But doing so was inconsistent with the parties’ clearly expressed intent that the arbitrators would decide arbitrability questions, at least arbitrability questions that did not concern the enforceability of the parties’ agreement to arbitrate arbitrability. 

The Court should have limited its inquiry to whether the parties’ agreement to arbitrate arbitrability was substantively unconscionable.  If not, then the Court should have directed that the arbitrators decide the question whether the remainder of the arbitration clause was substantively unconscionable.  Had the Court looked at the problem from that perspective, we believe it would have concluded that the unconscionability defense did not apply to the parties’ clear and unmistakable agreement to arbitrate, and that, accordingly, the arbitrators had to decide whether the challenge to the remainder of the arbitration clause had merit.  

.  .  .  . 

So we think the Court should have enforced the agreement to arbitrate arbitrability by committing to the arbitrators the question whether the parties’ agreement to arbitrate all other claims was unconscionable because it was allegedly one-sided.  Had it done so, it would have given full force and effect to the parties’ clearly expressed intentions, the pro-enforcement policies of Federal Arbitration Act Section 2, and the letter and spirit of First Options.

(See Jackson v. Rent-A-Center West, Inc.: Who Gets to Decide Whether an Arbitration Agreement is Unconscionable when the Parties Clearly and Unmistakably Say the Arbitrators Decide Arbitrability?, Loree Reinsurance and Arbitration Law Forum (Sept. 23, 2009) (emphasis added)). 

In a similar vein, the Supreme Court explained:  

The Agreement here contains multiple “written provision[s]” to “settle by arbitration a controversy.”  Two are relevant to our discussion.  First, the section titled “Claims Covered By The Agreement” provides for arbitration of all “past, present or future” disputes arising out of Jackson’s employment with Rent-A-Center.  Second, the section titled “Arbitration Procedures” provides that “[t]he Arbitrator . . . shall have exclusive authority to resolve any dispute relating to the . . . enforceability . . . of this Agreement including, but not limited to any claim that all or any part of this Agreement is void or voidable.”  The current “controversy” between the parties is whether the Agreement is unconscionable.  It is the second provision, which delegates resolution of that controversy to the arbitrator, that Rent-A-Center seeks to enforce.  .  .  . 

The delegation provision is an agreement to arbitrate threshold issues concerning the arbitration agreement.  .  .  . 

An agreement to arbitrate a gateway issue is simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce, and the FAA operates on this additional arbitration agreement  just as it does on any other.  The additional agreement is valid under §2 “save upon such grounds as exist in law or in equity for the revocation of any contract,” and federal courts can enforce the agreement by staying federal litigation under §3 and compelling arbitration under §4.  The question before us, then is whether the delegation provision is valid under §2. 

.  .  .  . 

Here, the “written provision.  .  . to settle by arbitration a controversy,” 9 U.S.C. §2, that Rent-a-Center asks us to enforce is the delegation provision — the provision that gave the arbitrator “exclusive authority to resolve any dispute relating to the .  .  .  enforceability .  .  .  of this Agreement[.]“.  .  .  The “remainder of the contract[]” [as that term was used in Buckeye Check Cashing,] is the rest of the agreement to arbitrate claims arising out of Jackson’s employment with Rent-A-Center.  To be sure this case differs from Prima Paint, Buckeye, and [Preston v. Ferrer, 552 U.S. 346 (2008)] in that the arbitration provisions sought to be enforced in those cases were contained in contracts unrelated to arbitration — contracts for consulting services, check cashing services, and “personal management” or “talent agent” services.  In this case the underlying contract itself is an arbitration agreement.  But that makes no difference.  Application of the severability rule does not depend on the substance of the remainder of the contract.  Section 2 operates on the specific “written provision” to “settle by arbitration a controversy” that the party seeks to enforce.  Accordingly, unless Jackson challenged the delegation provision specifically, we must treat it as valid under §2 and must enforce it under §§3 and 4, leaving any challenge to the validity of the Agreement as a whole for the arbitrator. 

Slip op. at 4-6 & 8 (citations and footnote omitted).  The Court concluded that the District Court correctly found that Jackson had challenged only the arbitration agreement as a whole, not the delegation provision specifically, and accordingly reversed the Ninth Circuit’s judgment.  See Slip op. at 9 & 12. 

The Supreme Court has now decided two arbitration cases this term – this one and Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., ___ U.S. ___, slip op. (April 27, 2010) – in favor of the party-autonomy principle inherent in the Federal Arbitration Act, even though the effect of those decisions may not necessarily lead to the fairest result for parties of limited bargaining power.  Both cases were decided 5-4 along ideological lines (with Justice Kennedy supplying the swing vote).  These decisions may provide  fodder for those in Congress that favor anti-arbitration legislation designed to protect consumers, employees and other claimants.  

 And, as most readers are aware, the United States Supreme Court recently granted certiorari in another Ninth Circuit case,  AT&T Mobility v. Concepcion, No. 09-893 (see report in our good friend Karl Bayer’s Disputing Blog here), a case that will test whether Stolt-Nielsen’s reasoning that consent to class arbitration cannot be implied applies in the adhesive context, and, if so, whether the FAA rules of “fundamental importance” discussed in Stolt-Nielsen supercede a state law invalidating class arbitration waivers on unconscionability grounds.   That will surely be a closely-watched case next term, and one you will hear more about in the future here at the Forum.

A.   Introduction

In this Part V.A of our consolidated-reinsurance-arbitration series, we delve into Stolt-Nielsen’s legal implications on consolidated reinsurance-arbitration practice, focusing on how courts are likely to decide the allocation-of-power question:  Who gets to decide whether the parties consented to consolidated arbitration?  In Part V.B we shall examine Stolt-Nielsen’s other specific legal and practical implications, focusing on what a party will likely need to show to obtain consolidated arbitration and how frequently consolidated arbitration is likely to be granted after Stolt-Nielsen.    

B.   Who Gets to Decide Whether the Parties Consented to Consolidated Arbitration?

Readers will recall from Part III (here) that courts interpreted Bazzle  as governing the allocation-of-power issue.  Now that the Court has said Bazzle never commanded a majority on that issue, and that it remains open, courts must reconsider it not only in the class-, but in the consolidated-arbitration context.   

Consolidated arbitrations, like class arbitrations, raise two types of questions:  Common-dispute and party-consent questions.  We think that courts will likely conclude that both are questions of arbitrability for the court to decide in the first instance, unless the parties clearly and unmistakably agree otherwise.   Arbitrators may play a role in resolving contractual ambiguities identified by the court.  

1.      Who Gets to Decide Common-Dispute Questions?

All consolidated-arbitration questions concern whether at least one arbitration agreement encompasses not only disputes concerning one, but all other contracts at issue.  We call this the “common-dispute” question.    

In some consolidated-arbitration disputes the “common dispute” question is the only one presented.  Suppose reinsurer R  enters into two treaties with cedent C, Contracts A and B, each of which incept on the same date and are in force for one year.  Contract A’s limits are $1 million per occurrence excess a $500,000 retention.  Contract B has per occurrence limits of $2 million excess of $1.5 million.  Both contain broad arbitration clauses under which the parties agreed to arbitrate “any dispute arising out of or relating to this contract.”

C pays a $3 million claim and seeks $1,000,000 from Contract A and $1.5 million from Contract B.  R says the claim should have been horizontally allocated over a six-year period.  R is not a party to any of C’s contracts covering the five-year period subsequent to the inception of contracts A and B. 

C demands a consolidated arbitration under Contracts A and B, seeking $2.5 million.  R opposes consolidation, forcing C to bring a motion to compel consolidated arbitration. 

The consolidated-arbitration decision maker in this hypothetical need only resolve whether the claim “arises out of or is related to” Contracts A, B, or both.   There is no issue concerning the parties with whom R agreed to arbitrate because R agreed to arbitrate with C under both contracts.     

Under the Supreme Court’s Federal Arbitration Act jurisprudence the court would ordinarily decide this type of question.  Questions concerning the scope of an arbitration agreement itself are ordinarily for the court, including whether “an arbitration clause in a concededly binding contract applies to a particular type of controversy. . . .”  Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002).  When a court decides that type of question, it – not the arbitration panel – applies state law rules of contract interpretation to the scope provision of the arbitration agreement (and sometimes other provisions, as well) to determine what the parties agreed to submit to arbitration.  See, generally,  Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 58-63 (1995). 

To the extent there is ambiguity as to whether the  disputes are encompassed by at least one of the arbitration clauses, the court would be aided by the presumption of arbitrability, under which any ambiguities as to the scope of the arbitration clauses themselves would be resolved in favor of arbitration.  See, e.g., 514 U.S. at 62.  That would presumably mean a finding that one or both of the arbitration clauses covered the disputes. 

While common-dispute issues will typically raise scope questions, depending on the facts, there may be other, interrelated issues concerning contract interpretation that are ordinarily for the arbitrators to decide.  Suppose a dispute arises over a horizontal, even, pro-rata allocation of a continuing occurrence to a continuous, excess-of-loss treaty that was in effect for five years, but which was also subject to annual resigning.  Depending on the facts, a question might arise as to whether the dispute arose under one contract or five.  Resolution of that question might require interpretation of the treaty language, the slips, the placing information and other matters, all in light of reinsurance custom and practice. 

Whether or not the number of contracts question is one of arbitrability or simply contract interpretation and construction is not necessarily clear.  But a court might well conclude that it is one for the arbitrators. 

The arbitrators – as experts in reinsurance custom and practice – are presumably better equipped to resolve the dispute than most judges, and the parties probably expected that the arbitrators would decide the question if it arose.  It might also be intertwined with the merits (e.g., the number of per occurrence limits and retentions that apply).  Were the court to decide the issue, the court might be deciding a matter the parties agreed to arbitrate.  And, depending on how the arbitrators rule on the matter, they might moot the controversy over consolidation, saving the court valuable time and resources. 

2.      Who Gets to Decide Party-Consent Questions?

Not all putative consolidated arbitrations involve simply multiple contracts between the same parties.   Additional parties may be involved that are not parties to all other agreements.  One or more parties to one contract may be parties to all or none of the other contracts.  Or there may be one treaty under which the cedent is seeking consolidated arbitration against all participating reinsurers.  Consolidated-arbitration disputes of this variety raise “party-consent” questions. 

Party-consent questions make consolidated-arbitration disputes look much more like class-arbitration disputes.  For what typically distinguishes class from bilateral arbitration is the presence of not only multiple, bilateral contracts involving the same parties, but multiple bilateral contracts involving multiple parties. 

What principally motivated the Stolt-Nielsen Court to hold that class arbitration cannot be imposed without a contractual basis other than a broad arbitration clause was the Federal Arbitration Act rule of “fundamental importance” that parties may “specify with whom they chose to arbitrate.”  See Stolt-Nielsen, slip op. at 19-20 (emphasis in original).   A reasonable corollary is that a party may not be compelled under the FAA to submit to a consolidated arbitration presenting party-consent issues absent a contractual basis other than the parties’ broad arbitration clause. 

Suppose that R and C are parties to Contracts A, B and C, a consecutive series of one-year “First Excess of Loss Treaties,” each with per occurrence limits of $1,000,000 excess of $500,000.  While R and C are the only parties to Contract A, R and R1 are the reinsurers participating in Contract B, and R1 and R2 are the reinsurers participating in Contract C.  The contracts contain identical, tri-partite arbitration clauses providing, among other things, that the parties agree to arbitrate any dispute “arising out of or relating to” the contract. 

C bills R, R1 and R2 for their respective shares of a $3 million claim it has allocated on an even, pro-rata basis over the three contract years.  The reinsurers object, arguing that the loss should have been allocated over a six-year period.   

C demands a consolidated arbitration against R, R1 and R2 under Contracts A, B and C.  The reinsurers object and C moves to compel arbitration. 

To decide whether the parties consented to consolidated arbitration, the decision maker must not only resolve the common-dispute question, but also find some contractual basis under at least one of the arbitration agreements to conclude that:  (a) R agreed not only to arbitrate with C in a bilateral arbitration, but in a consolidated arbitration involving R1 and R2; and (b) both R1 and R2 agreed to arbitrate with C in a consolidated proceeding to which R and they are all parties.  Under Stolt-Nielsen the contractual basis must be something other than the contracts’ broad arbitration clauses.    

Courts considering the allocation-of-power question after Stolt-Nielsen will likely conclude that these party-consent issues should be decided by the court in the first instance.  A classic arbitrability question is whether “the parties are bound by a given arbitration clause.  .  .  .”  See Howsam v. Dean Witter Reynolds, Inc.,, 537 U.S. 79, 83 (2002).

Party-consent issues concern whether all of the parties are “bound by a given arbitration clause” to arbitrate together in a single, consolidated proceeding.  R was bound to arbitrate with C under Contracts A and B, but not Contract C; R1 was bound to arbitrate with the C under Contract B and C, but not A; and R2 was bound to arbitrate with C under Contract C, but not Contracts A and B.  Furthermore, R is not a party to Contract C, or any other contract with R2; and R1 was a party to only one contract with R (Contract B) and one contract with R2 (Contract C).   Even assuming that the arbitration clause of each contract encompasses disputes arising out of each of the others (the common-dispute question), nothing indicates that R, R1, and R2 agreed to arbitrate together in a single arbitration with C.  

The party-consent question is also a question for the court under Section 4 of the Federal Arbitration Act.  Section 4, though a procedural statute technically applicable only in federal court, reflects an allocation of power between courts and arbitrators that is derived from the substantive enforceability command of Section 2 (which is applicable in both state and federal courts).  See Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 447 (2006); Prima Paint v. Conklin Mfg. Corp., 388 U.S. 395, 403-04 (1967).  Section 4 provides that “A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction.  .  .  of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.”  9 U.S.C § 4 (emphasis added).  On hearing a motion to compel, the court must “make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement” if “the making of the agreement for arbitration or the failure to comply therewith is not in issue. . . .” Id. (emphasis added)

When one party demands consolidated arbitration involving party-consent issues and another objects because it contends it never agreed to arbitrate in a single proceeding with all of the parties, a question arises whether there has been a failure, neglect or refusal to perform one or more arbitration agreements.   And that question implicates whether the resisting party is bound by an arbitration agreement requiring it to arbitrate with all of the parties, or whether certain parties to the proposed consolidated arbitration may invoke the benefit of one or more arbitration clauses to which they are not parties.  

Faced with that question, the court must resolve it and ensure that arbitration proceeds in the manner provided by the parties’ agreements and in accordance with their terms.  That necessarily requires the court to determine whether the agreements permit, forbid or are silent on consolidated arbitration involving party-consent issues, or whether they are ambiguous on that score. 

Outside of the class or consolidated arbitration context, when a party contends on a Federal Arbitration Act Section 4 or 3 motion that a nonsignatory is subject to the arbitration clause, or cannot invoke the clause, the court determines whether there is a state law basis for requiring the nonsignatory to arbitrate or allowing it to invoke the arbitration clause.   If there is such a state law basis, the court enforces the arbitration agreement accordingly.   But it does not refer the question to the arbitrators.  See Arthur Andersen LLP v. Carlisle, 129 S. Ct. 1896, 1901-02 (2009); Ross v. American Express Co., 547 F.3d 137, 143 & n.3 (2d Cir. 2008); Ross v. American Express Co., 478 F.3d 96, 99 (2d Cir. 2007); Astra Oil Co. v. Rover Navigation, Ltd., 344 F.3d 276, 279-80 & n.2 (2d Cir. 2003); Thomson-CSF, S.A. v. American Arbitration Assoc., 64 F.3d 773, 776-80 (2d Cir. 1995). 

When the question arises under Section 9 of the Federal Arbitration Act whether a third-party is bound by an arbitration award or is entitled to a benefit under it, then the court likewise decides the question.  Courts do not hesitate to vacate awards that purport to bind or confer a benefit in favor of a non-party to an arbitration agreement.  See, e.g.,  Nationwide Mutual Ins. Co. v. Home Ins. Co., 330 F.3d 843, 846-47 (6^th Cir. 2003); Orion Shipping & Trading Co., Inc. v. Eastern States Petroleum Corporation Of Panama, S.A., 312 F.2d 299, 300-01 (2d Cir. 1963).  But courts do not remand such cases back to the arbitrators to determine whether the non-party really was a party, or was otherwise bound by or entitled to invoke the arbitration clause. 

We do not perceive a meaningful distinction between the party-consent questions presented by the motion to compel a consolidated arbitration in our party-consent hypothetical and those presented in the cases cited above.  The questions are essentially the same and the key, underlying purpose of the Federal Arbitration Act that the cases serve is the same – to enforce the parties’ arbitration agreements as written. 

We therefore think that courts that consider the party-consent issue in a dispute over consolidated arbitration will likely conclude that it presents an issue of arbitrability for courts – not arbitrators to decide.  But there is another important consideration that augurs in favor of allocating the power to the court. 

Party-consent questions raise important issues arising out of the parties’ arbitrator-selection provisions.  One of Stolt-Nielsen’s Federal Arbitration Act rules of “fundamental importance” is that parties may “choose who will resolve specific disputes.”  Slip op. at 19 (emphasis in original).  Assuming there is otherwise a contractual basis for imposing consolidated arbitration in a multi-party dispute, there must also be contractual basis for the arbitrator-selection method that the decision maker imposes.   So the decision maker in our party-consent hypothetical would have to find a contractual basis under at least one of the arbitration clauses under which R, R1 and R2 collectively agreed to appoint on their behalf only one party-appointed arbitrator, who, along with C’s party-appointed arbitrator, would select a single umpire to preside over a consolidated proceeding.  Otherwise, the decision maker would be imposing on the parties a method of arbitrator selection to which they never agreed. 

Just as courts make the call on arbitrator-selection questions in other contexts, so too should they make them in consolidated-arbitration disputes presenting party-consent issues.   The parties’ rights to choose what decision makers will resolve what disputes is a vitally important issue that has, by statute and treaty, been committed to the courts to decide.  As Circuit Judge Richard A. Posner wrote, “Selection of the decision maker by or with the consent of the parties is the cornerstone of the arbitral process.”  Lefkovitz v. Wagner, 395 F.3d 773, 780 (7^th Cir.), cert. denied, 546 U.S. 812 (2005).  Federal Arbitration Act § 5 provides that, “[i]f in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed.  .  .  .”  Article V(1)(d) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ( here) provides a defense to recognition and enforcement of an award where “[t]he composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties.”  And courts will not hesitate to vacate domestic or non-domestic awards if arbitrator selection procedures were not followed.  See, e.g.,  Encyclopaedia Universalis S.A. v. Encyclopaedia Brittanica, Inc., 403 F.3d 85, 91-92 (2d Cir. 2005); Cargill Rice, Inc. v. Empresa Nicaraguense Dealimentos Basicos, 25 F.3d 223, 226 (4^th Cir. 1994); Avis Rent A Car Sys., Inc. v. Garage Employees Union, 791 F.2d 22, 25 (2d Cir. 1986).

As we shall discuss in more detail in Part V.B, we think that in many cases courts will find that there is no express or implied contractual basis for imposing consolidated arbitration on the parties in cases involving party-consent questions.  But there are many variants on how consolidated-arbitration disputes may arise and some arbitration clauses expressly provide for some form or another of consolidated arbitration.  Ambiguities may arise, as they did in Bazzle. 

We think that, at least in certain cases, those ambiguities might be for the arbitrators to resolve, assuming the issues they raise fall within the scope of the parties’ arbitration agreements.  But the court should, at a minimum, determine whether the contract unambiguously forbids or permits consolidated arbitration or is ambiguous or silent on that score.    

Stay tuned for more….

Editor’s Note:  Here’s a list of links for Parts I through V of our Stolt-Nielsen reinsurance-arbitration series: 

Part I, Part II, Part III, Part IV, Part V.A, Part V. B, and Part V. C

A.   Introduction

In Part I (here) we explained why the standard for challenging an award based on its outcome is important in reinsurance arbitration practice.  And, after briefly reviewing pre-Stolt-Nielsen law on outcome-based standards of review, we explained how the Court has established for itself and the lower courts a fairly searching standard of review.  Part II (here) explored the legal and practical implications of that standard of review.    

Part III (here) turned to the other key area that will likely change because of Stolt-Nielsen — consolidated reinsurance-arbitration practice — and discussed the state of consolidation law pre-Stolt-Nielsen.  This Part IV discusses Stolt-Nielsen’s rationale for finding that imposing class arbitration on parties whose agreements are silent on that point is inconsistent with the Federal Arbitration Act, and explores how the Court’s ruling may affect consolidated reinsurance-arbitration practice in general. 

B.   The Supreme Court’s Decides that Imposing Class Arbitration on Parties whose Contracts are Silent on that Score is Inconsistent with the Federal Arbitration Act

When we last left Stolt-Nielsen, the Court had determined  that the arbitrators exceeded their authority by issuing an award that was based on their own notions of public policy gleaned from other arbitral decisions imposing class arbitration in the face of silence.  When a court vacates an award it has to decide whether to remand the matter to the arbitrators, for Section 10(b) of the Federal Arbitration Act authorizes a court to “direct a rehearing by the arbitrators.”  The Court decided not to remand, because “there can be only one possible outcome on the facts,” that is, where the parties’ contracts are undisputedly silent on class arbitration, save for the parties’ agreement to a broad arbitration clause.   The Court then set about to explain why that was so. 

1.      The Supreme Court Says Bazzle did not Control the Outcome, But Leaves the Allocation-of-Power Question for Another Day

Before enunciating what it believed to be the rule of decision, the Court first addressed the extent to which, if at all, Bazzle dictated the outcome of the case.  The Court believed it appropriate to do so since the Bazzle opinions “apparently baffled” the parties, and were misunderstood by the panel. 

The arbitrators believed that Bazzle set forth a contract interpretation rule — specifically that “‘arbitrators must look to the language of the parties’ agreement to ascertain the parties’ intention whether they intended to permit or preclude class action.’”  Slip op. at 16 (quoting panel’s decision).   At least early in the proceedings the parties, too, apparently believed that Bazzle established a rule of contract interpretation. 

The Stolt-Nielsen entities thought the rule was that the arbitrators must find evidence that the parties consented to class arbitration.  AnimalFeeds believed that the rule was that class arbitration was permitted so long as the arbitrators found no evidence that the parties intended to preclude it.  And both parties apparently believed that Bazzle established an allocation-of-power rule under which arbitrators get to decide whether the parties agreed to class arbitration.  

But the Court declared that the panel and the parties were wrong on all counts as far as Bazzle was concerned.  The various Bazzle opinions, said the Court, “collectively addressed” three issues: 

1.  “[W]hich decision maker (court or arbitrator) should decide whether the contracts in question were ‘silent’ on the issue of class arbitration[];”

2.  “[W]hat standard the appropriate decision maker should apply in determining whether a contract allows class arbitration[];” and

3.  “[W]hether, under whatever standard is appropriate, class arbitration had been properly ordered in the case at hand.”

Bazzle, however, “did not yield a majority decision on any of the three questions.”  The Bazzle plurality addressed issue No. 1 — the allocation-of-power question — but Justice Stevens’ concurring opinion, which provided the necessary fifth vote for the Court’s judgment, did not endorse that, or any other aspect of the plurality’s rationale.  Justice Stevens’ concurring opinion said the matter was “arguably” for the arbitrators, but his preferred disposition was not to disturb the Supreme Court of South Carolina’s judgment, since Green Tree did not raise the allocation-of-power question before that court.  According to Stolt-Nielsen, Stevens therefore “bypassed” the allocation-of-power question, and “rested .  .  . on his resolution of the second and third questions,” stating that he would have affirmed the state court judgment because it was “correct as a matter of law.” 

The Court concluded that it need not decide the allocation-of-power question because the parties had submitted the class arbitrability question to arbitration and no one argued that doing so was “impermissible.”  And having determined that “Bazzle did not establish the rule to be applied in deciding whether class arbitration was permitted[,]” the Court proceeded to decide on a de novo basis what that rule was.  Slip op. at 16-17.

2.       The Supreme Court Rules that there are “FAA Rules of Fundamental Importance,” and that one of those Rules is that Parties Get to Choose with Whom they Must Arbitrate

By this time the Court had come full circle.  It started out by suggesting that the question before the panel was not one of arbitrability, and that it would therefore review the arbitration award under a Steelworker’s-Trilogy-type, outcome-based standard of review.  It ended up deciding the matter de novo as a matter of law, enunciating for the first time the standard the arbitrators should have applied. 

And that standard was not simply a restatement of the pre-Bazzle general rule that courts cannot compel class or consolidated arbitration unless the parties consent.  It was a federal substantive-law standard that will presumably displace inconsistent state law on contracts in general, and on arbitration agreements in particular.   

The Court acknowledged that “interpretation of an arbitration agreement is generally a matter of state law.”  Slip op. at 17 (citations omitted).   Yet in the next sentence it declared that “the FAA imposes certain rules of fundamental importance, including the basic precept that ‘arbitration is a matter of consent, not coercion.’”  Slip op. at 17 (citations omitted). 

The Court provided specific examples of these FAA rules of “fundamental importance”:  

1.  “parties are ‘generally free to structure their arbitration agreements as they see fit[;]‘”

2.  parties may “agree to limit the issues they choose to arbitrate[;]”

3.  parties may “agree on the rules under which any arbitration will proceed[;]“

4.  parties may “choose who will resolve specific disputes[;]” and

5.  parties may “specify with whom they chose to arbitrate.”

Slip op. at 19 (citations omitted; emphasis in original).

While these rules of party autonomy were derived from prior Court decisions, Stolt- Nielsen added a new one:  “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.”  Slip op. at 20 (emphasis in original). 

And the Court admonished that it “falls to courts and arbitrators to give effect to these contractual limitations, and when doing so, courts and arbitrators must not lose sight of the purpose of the exercise:  to give effect to the intent of the parties.”

3.      The Supreme Court Rules that it was Undisputed that the Parties Did Not Agree to Class Arbitration and there was no Basis for Implying Such an Agreement 

Having set forth the governing principle, the Court considered whether the arbitrators’ decision complied with it.  The panel, stated the Court, based its conclusion on the parties’ broad arbitration clause and the absence of any intent “to preclude class arbitration,” even though the parties had stipulated “that they had reached ‘no agreement’ on class arbitration.”  Slip op. at 20.  The panel found that the agreements’ silence was “dispositive” even though “the parties are sophisticated business entities, even though there was no tradition of class arbitration under maritime law, and even though AnimalFeeds does not dispute that it is customary for the shipper to choose the charter party that is used for a particular shipment.   .  .  .”  The panel’s conclusion, the Court stated, was “fundamentally at war with the foundational FAA principle that arbitration is a matter of consent.”  Slip op. at 20.

The Court could have ended its analysis here, but did not.  It considered whether consent to class arbitration should be implied.  The Court considered the question from the standpoint of the procedural arbitrability doctrine, explaining that “in certain contexts, it is appropriate to presume that parties that enter into an arbitration agreement implicitly authorize the arbitrator to adopt such procedures as are necessary to give effect to the parties’ agreement.”  Slip op. at 20-21 (citations omitted; emphasis added). 

The Court explained that such a presumption was grounded “in the background principle that ‘[w]hen the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.’”  Slip op. at 21 (quoting Restatement Second of Contracts § 204 (1979)).

Again, the Court could and should have concluded its analysis at this point by simply stating that, since the parties’ contracts were indisputably bilateral, and could be given effect by ordering bilateral arbitration, it was unnecessary to adopt class-arbitration procedures “to give effect to the parties’ agreement.”  The Court might have added that implying consent to class arbitration would override the FAA rules of  “fundamental importance” discussed above, under which the parties may choose with whom they arbitrate, who the decision makers should be for a “specific dispute,” and whether class arbitration should proceed in the first place.    

But instead the Court went on to explain that 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.”  For, in “bilateral arbitration,” the “parties forgo the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution:  lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.”  Slip op. at 21 (citations omitted).

By contrast, “the relative benefits of class-action arbitration are much less assured, giving reason to doubt the parties’ mutual consent to resolve disputes” in that manner.  Slip op. at 21-22.  The Court cited “just some of the fundamental changes brought on” by class arbitration:

1.  “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[;]”

2.  Under the American Arbitration Association’s Class Arbitration Rules the “presumption of privacy and confidentiality” that ordinarily applies in bilateral arbitration does not apply in class arbitration, “thus frustrating the parties’ assumptions when they agreed to arbitrate[;]”

3.  A class arbitration award does not simply purport to bind the parties to a single arbitration agreement, but “adjudicates the rights of absent parties as well[;]” and

4. “[T]he 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.” 

The opinion notes that the dissent “minimized these crucial differences” by contending that the question before the arbitrators was merely a procedural one, and said that if the matter “were that simple, there would be no need to consider the parties’ intent with regard to class arbitration.”  Slip op. at 23 (citations omitted).  (The dissent is briefly discussed in the cover article we recently published in the June 2010 issue of Alternatives to the High Cost of Litigation, blogged here.)

Concluding that the “FAA required more,” the Court stated that it sees “the question as being whether the parties agreed to authorize class arbitration,” and where, as here, “the parties stipulated that there was ‘no agreement’ on this question, it follows that the parties cannot be compelled to submit their dispute to class arbitration.”

4.      The Supreme Court Expresses no Opinion on what a Party Must Show to Establish Consent to Class Arbitration

Because the Court found the parties had stipulated that there was “no agreement” on class arbitration, there was no reason for the Court to discuss what a party must show to establish such an agreement.  The Court expressly acknowledged that fact, stating that it had “no occasion to decide what contractual basis may support a finding that the parties agreed to authorize class-action arbitration.”  Slip op. at 23 n.10.   

C.   How Does the Supreme Court’s Ruling Affect Consolidated Reinsurance-Arbitration Practice?

As we pointed out in Part III, Bazzle — a class arbitration case – drastically changed consolidated reinsurance arbitration practice.  So it would be unreasonable to assume that Stolt-Nielsen will not change the practice that evolved under Bazzle. 

Far from providing much meaningful guidance on how courts or arbitrators should handle consolidated arbitration practice, Stolt-Nielsen reopens consolidation-related questions that had – for better or worse – been resolved by post-Bazzle courts.  These questions must now be re-examined by courts – and perhaps by arbitrators as well. 

First, Stolt-Nielsen leaves undecided the crucial threshold allocation-of-power issue:  Who gets to decide whether the parties consented to consolidated arbitration?   As discussed in Part III, courts have presumed that five Justices of the Supreme Court had ruled in Bazzle that the question of whether class arbitration is appropriate is a question of procedural arbitrability.  But Stolt-Nielsen has undermined the reasoning of these courts by declaring that Bazzle did not command a majority of the Court on the allocation-of-power question or any other issue addressed by the various Bazzle opinions.   Stolt-Nielsen did not decide whether the question whether the parties consented to class arbitration was one for the courts or the arbitrators, leaving it to the lower courts to determine the allocation-of-power question insofar as it relates to both class and consolidated arbitration.   And Stolt-Nielsen – by eschewing the notion that class arbitration is a mere matter of procedure – has cast into serious doubt the related question whether consolidated arbitration is a procedural matter. 

Second, the Court has left open the question of what a party must show to establish consent to class or consolidated arbitration.  Where there is concededly no agreement on consolidated arbitration, presumably courts and arbitrators should not order it because doing so would  negate the consolidated-arbitration corollary of the Stolt-Nielsen class-arbitration FAA rule of fundamental importance:  a party may not be compelled under the FAA to submit to consolidated arbitration unless there is a contractual basis for concluding that the party agreed to do so.   

But the Court’s discussion of whether class arbitration could be implied in the face of silence, suggests that other courts may need to engage in a similar analysis of whether imposing consolidated arbitration would fundamentally alter the terms of the parties’ agreement.   And that analysis might or might not lead to the conclusion that imposing consolidated arbitration in the face of silence would be inconsistent with the FAA. 

In Part V we shall discuss the implications of the decision on consolidated reinsurance-arbitration practice, with a particular focus on how lower courts may reshape that practice in light of Stolt-Nielsen, and what the practical implications of that changed practice may be.

Editor’s Note:  Here’s a list of links for Parts I through V of our Stolt-Nielsen reinsurance-arbitration series: 

Part I, Part II, Part III, Part IV, Part V.A, Part V. B, and Part V. C

In it I argue that the Stolt-Nielsen decision is both inexplicably broad and inexplicably narrow in scope, and may provide fodder for those who assert that Congress should enact the Fairness in Arbitration Act of 2009.  I also deconstruct the reasoning of the decision and explore some of its other practical and legal implications.   

Alternatives to the High Cost of Litigation is a subscription-only publication. Subscription information is available at this page, as well as at the publisher’s, John Wiley & Sons’s,  website here.

I would like once again to take this opportunity to thank CPR, and Russ Bleemer, Editor of Alternatives, for their kind assistance and support in featuring my article.   As I have said before, Russ is a keen,  intelligent and professional editor with whom it is a pleasure to work.