U.S. Law Week is a subscription only publication, but I received permission from the Bureau of National Affairs (”BNA”) to post a copy of the article on my LinkedIn profile.  So, if you are a member of Linkedin, you can access a copy of the article here (it does not appear in my “public” LinkedIn profile).

We would like to take this opportunity to thank Tom P. Taylor for conducting a very professional interview and following up with a very professional article.  We would also like to thank Bernard J. Pazanowski, who co-authored the article with Tom.

We will find out whether the Court intends to continue down the same path when it decides AT&T Mobility v. Concepcion next term, a case that raises the question whether California’s Discover Bank  unconscionability rule is pre-empted by the Federal Arbitration Act.  That rule deems unconscionable under California law class-action or class-arbitration waivers where:  (a) “the waiver is found in a consumer contract of adhesion in a setting in which the disputes between the contracting parties predictably involve small amounts of damages”; and (b) “it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.  .  .  .”  Discover Bank v. Superior Court, 36 Cal. 4th 148, 162-63 (2005) (citing Cal. Civ. Code § 1668). 

The Discover Bank rule is grounded in a California-law principle – embodied in Cal. Civ. Code § 1668 – that “contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud.  .  .  are against the policy of the law.”   See Cal. Civ. Code § 1668.  If a company is allegedly engaging in fraudulent acts designed to cheat numerous consumers out of small amounts of money, a class action or class arbitration waiver may, if enforced, effectively act as an exculpatory provision that insulates the company from the consequences of its small scale, but widespread fraud, because the individual, allegedly defrauded consumers have little incentive to pursue separate actions or arbitrations to recoup trivial amounts of damages.  See Discover Bank, 36 Cal. 4th at 162-63.  Any contract that had that effect – whether it is a class action waiver in an arbitration clause, an exculpatory agreement or a contract that simply forbids class actions  – would be unconscionable under the rule.  

In Fensterstock v. Education Finance Partners, No. 09-1562-cv, slip op. (2d Cir. July 12, 2010), the United States Court of Appeals for the Second Circuit suggested one path that the United States Supreme Court might take on Discover Bank preemption.  In an interesting opinion, Senior Circuit Judge Amalya Lyle Kearse, joined by Circuit Judges José A. Cabranes and Chester J. Straub, held that the Discover Bank rule was not preempted by the Federal Arbitration Act.  According to the Second Circuit, California’s  Discover Bank rule “’places arbitration agreements on the exact same footing as contracts that bar class action litigation outside the context of arbitration,’” and for that reason the rule is not preempted by the Act.  Slip op. at 16-17 (quoting Shroyer v. New Cingular Wireless Serv., Inc., 498 F.3d 976, 990 (9^th Cir. 2007) (emphasis in original)). 

On first blush the Second Circuit’s decision seems reasonable.  But there are some important issues lurking beneath the surface that the Supreme Court will need to address when it decides AT&T Mobility. 

In Stolt-Nielsen the Supreme Court, among other things, established certain Federal Arbitration Act “rules of fundamental importance,” which trump inconsistent state law.  (Blogged here.)   One of these is that parties may “specify with whom they chose to arbitrate.”  Stolt-Nielsen, slip op. at 19 (emphasis in original).   And another – the one that controlled the outcome of Stolt-Nielsen – is that  “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”  Slip op. at 20 (emphasis in original).  The Court admonished that it “falls to courts and arbitrators to give effect to these [and other enumerated] 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.”  Slip op. at 20. 

Application of these rules to an arbitration agreement containing a class-arbitration or class-action waiver would presumably result in enforcement of that waiver as a matter of federal law.  The rule that the parties can choose with whom they arbitrate necessarily preempts any state law or policy that would declare void or unenforceable such an express choice made by the parties to limit the universe of persons with whom they agreed to arbitrate.  And the Discover Bank  rule – for all its reasonableness and good intentions – is just such a rule.

Alternatively, the Stolt-Nielsen rule that affirmative consent — not mere silence – is required for a court or arbitration panel to compel class arbitration strongly suggests that class-arbitration or class-action waivers are irrelevant.  Even if one is excised from the arbitration clause, what is left is usually an arbitration clause that is silent on class arbitration.  But under Stolt-Nielsen courts and arbitrators cannot compel class arbitration in the face of silence.   So the net effect of including such a waiver in a contract that is otherwise silent on class arbitration is zero, which hardly makes the waiver a candidate for nonenforcement under the Discover Bank rule.  

The Supreme Court’s disposition of the American Express Merchants’ Litigation matter suggests that it believes Stolt-Nielsen is relevant to the question whether class arbitration waivers are enforceable or simply irrelevant.  Readers may recall that in May 2009 American Express filed a cert petition in the American Express Merchants’ Litigation.  The Second Circuit had held that an arbitration agreement provision forbidding class-action arbitration was invalid and unenforceable on federal public policy grounds under the circumstances of that case, which involved federal antitrust claims.  See Re American Express Merchants’ Litigation, 554 F.3d 300 (2d Cir. 2009), vacated and remanded sub nom., American Express Co. v. Italian Colors Restaurant, No. 08-1473 (May 3, 2010). 

On May 3, 2010 the Court issued a summary order in American Express Co. v. Italian Colors Restaurant, granting certiorari, summarily vacating the Second Circuit judgment, and remanding it “for further consideration in light of” Stolt-Nielsen.   Justice Sotomayor “took no part in the consideration or decision” of the petition.   See Italian Colors, No. 08-1473 (May 3, 2010) (summary disposition).  It is unclear whether the Court vacated the judgment because it believed the waiver was enforceable or irrelevant, or whether there was some other Stolt-Nielsen-related reason.  

In Fensterstock the Second Circuit apparently did not figure Stolt-Nielsen or Italian Colors into its preemption analysis.  Oddly enough it relied on Stolt-Nielsen for the proposition that the class-arbitration waiver could not be severed from the remainder of the arbitration agreement, because if the class arbitration waiver were removed, the arbitration clause would be silent on class arbitration, which in turn meant that the court could not compel class arbitration.  While that conclusion probably should have led the court to rethink its preemption analysis, instead it led the court to conclude further (and implausibly) that the entire arbitration clause could not be enforced, and that the claimant could pursue a class action in court.  But that reasoning makes little sense because it suggests that an arbitration clause that contains no class-arbitration waiver, and  is simply silent on class arbitration,  would violate the Discover Bank rule.        

The question that will likely arise in AT&T Mobility is whether Stolt-Nielsen’s “rules of fundamental importance” require enforcement of the waiver despite contrary state law governing contracts generally.  If the Court decides to follow the same path it was on this past term, then it might well find that the Stolt-Nielsen rules of “fundamental importance” trump the Discover Bank rule, or render irrelevant both the class waiver and the Discover Bank rule.  But if at least one member of the Stolt-Nielsen/Rent-A-Center majority decides to break ranks, then it could be that the Court adopts an analysis similar to that used in Fensterstock. 

The narrow nature of the Discover Bank rule, coupled with strong public policy considerations against allowing parties to effectively insulate themselves from liability for fraud, could cause such a break in the ranks.  If that turns out to be the case, perhaps the Court will say that the “rules of fundamental importance” are subject to state law defenses applicable to ordinary contracts, and that the Discover Bank  rule constitutes such a defense.  Or the Court might say that the “rules of fundamental importance” are different – or are to be applied differently – in cases involving adhesive contracts.   

Whatever position a majority of the Court may take, the stakes are fairly high.  There has already been a good deal of political fallout resulting from the Court’s arbitration decisions this term, and the practical implications of that fall-out are not entirely clear in terms of whether the Arbitration Fairness Act of 2009 is likely to be passed.  But even if Rent-A-Center does not precipitate legislative action on the Arbitration Fairness Act, a reversal in AT&T Mobility could well be the proverbial straw that broke the camel’s back.  On the other hand, an affirmance in AT&T Mobility — coupled with an adjustment of the “rules of fundamental importance” in the adhesive contract context — might well shift public attention from anti-arbitration legislation on to something more – for lack of a better phrase — fundamentally important.

A.     Introduction 

Shortly before the United States Supreme Court decided Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., ___ U.S. ___, slip op. (April 27, 2010), we wrote about the implications the case might have on reinsurance arbitration practice.  (See our post here.)  But since then, you have not heard much from us, other than our brief report (here) about the Supreme Court vacating and remanding to the United States Court of Appeals for the Second Circuit the American Express Merchants’ Litigation judgment for further consideration in light of Stolt-Nielsen.   One — but by no means the only — reason is that after Stolt-Nielsen was decided, we wrote a comprehensive article on it, which will be published in a subscription-only publication in June. 

But that article – while comprehensive in scope – is directed at folks interested in the Federal Arbitration Act in general, not necessarily those interested in reinsurance arbitration in particular.  And that’s what we want to cover in this multi-part series:  Stolt-Nielsen’s implications on reinsurance arbitration practice. 

Stolt-Nielsen affects reinsurance arbitration in two very important ways.   First, it has set a fairly liberal standard of review that now applies to commercial arbitration awards in cases where a party asserts that the arbitrators exceeded their powers under Federal Arbitration Act Section 10(a)(4) because of the award’s outcome.  That, as we shall see, has all sorts of implications for persons involved in reinsurance arbitrations.

Second, it has changed the rules applicable to consolidated-reinsurance-arbitration practice – or at least it requires a wholesale reevaluation of those rules.  That, too, has a number of important implications for reinsurance-arbitration practice.   

This Part I of the series explains 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, it explains how Stolt-Nielsen has established for the lower courts a fairly searching standard of review.  Part II (here) will delve into what the implications of that standard of review will likely be. 

Part III (here) will provide the background necessary to understand how Stolt-Nielsen affects the law applicable to consolidated reinsurance arbitration.  Part IV (here) will delve into the details of how Stolt-Nielsen changes – or at least requires reconsideration of – the legal status quo in this area.  And Part V will discuss the implications of all of this.   

We do not set out to discuss the background of Stolt-Nielsen in any detail or to provide a play-by-play of how the Court decided the case.  If you are a regular reader you probably already know the background in detail, and our upcoming article does a pretty good job of mapping out the Court’s reasoning.  Instead, we focus our attention on the aspects of the decision that are relevant to the two key subjects of discussion. 

But before we delve into what Stolt-Nielsen has to say about the standard of review, we pause briefly to address why the standard of review applicable to an outcome-based challenge is so important in reinsurance and other forms of commercial arbitration. 

B.     Why is the Outcome-Based Standard of Review under Section 10(a)(4) Important to Reinsurance Arbitration Practice? 

Those involved in, or who have responsibility for, reinsurance arbitrations have good reason to be concerned about the extent to which a Court can vacate an award based on its outcome.  For the standard of review is not merely legal “mumbo jumbo,” but delineates the degree of discretion that a judge has to vacate an arbitration award.  That degree of discretion effectively acts as a check on arbitral power and determines how final a final arbitration award really is. 

Reinsurance arbitrators should be (and usually are) interested in the standard of review because it bears on how much discretion they have to decide a case in a particular manner.  Since arbitrators have institutional, reputational and economic interests in ensuring that their awards will be confirmed, they need to know how much discretion a judge has to second-guess their decisions. 

Parties likewise have good reason to be concerned about the standard of review.  The end product of arbitration will (or, at least, should) determine their rights and obligations, making one or both parties winners or losers.  Winners want that determination to be final; losers do not – and the scope of the standard of review determines (however loosely) the odds that the loser might get another bite at the proverbial apple. 

Parties also have institutional interests in the standard of review because it factors into the risk-benefit calculus that informs their decision whether to arbitrate in the first place.  The less discretion a judge has to vacate an award, the greater the risk that a party who agrees to arbitrate might be saddled with an arbitration award that bears little or no resemblance to what one would expect given the clear and unambiguous language of the contract and applicable law, custom and practice.  The more discretion a judge has to overturn an award, the more likely it is that arbitration will be followed by litigation, thereby increasing costs. 

The risk of high expense is inversely proportional to the risk of a wacky but unreviewable outcome.  If reinsurers and cedents are going to make informed choices about arbitration, they need to know where along the continuum of standard-of-review choices the law has attempted to strike the balance between these risks.

Attorney interests are aligned with those of their clients.  But to advance their client’s interests attorneys need to know the contours of the standard of review so that they can tailor strategy to maximize the chances that the client will reap whatever benefits the standard of review may have to offer.  For example, if the standard of review provides the court with some discretion to vacate an award that conflicts with the clear and unambiguous terms of the reinsurance contract, and those terms support the client’s position, then the attorney must not only forcefully argue those terms are controlling, but also make clear (diplomatically, of course) that an award inconsistent with those terms will likely be vacated. 

C.     The Legal Landscape:  The Section 10(a)(4) Standard of Review Prior to Stolt-Nielsen

To better understand how Stolt-Nielsen changed the standard of review applicable to outcome challenges, it is helpful to review briefly the somewhat confused, pre-Stolt-Nielsen law on outcome-based standards of review. 

Section 10(a)(4) of the Federal Arbitration Act authorizes courts to vacate an arbitration award “where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.”  Prior to Hall Street Assoc. v. Mattel, Inc., 552 U.S. ___ (2008), courts interpreted Section 10(a)(4) in at least two different ways.  Some courts interpreted Section 10(a)(4) as limited to challenges based on whether the matter decided fell within the scope of the parties’ arbitration agreement or submission.  That begged the question whether, and, if so, to what extent, the outcome of a commercial arbitration award on an issue within the parties’ submission was subject to any review at all. 

The Supreme Court had provided only indirect guidance on the subject.   The Steel Workers’ Trilogy cases, and their progeny, had ruled that, in labor arbitration cases governed by Section 301 of the Labor Management Relations Act (“LMRA”), the outcome of an award was subject to review to determine whether it drew “its essence from” the parties’ agreement, and was not based on the arbitrators’ “own notions of industrial justice.”  United Paperworkers Int’l Union v. Misco,  484 U.S. 29, 38 (1987);  United Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593, 597 (1960).   And, as respects commercial arbitration awards, the Court suggested in dicta in Wilko v. Swan, 346 U.S. 427 (1953), overruled on other grounds, Rodriguez De Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989),  that an award could be vacated if it was in “manifest disregard of the law.”  This dicta was referred to with approval in First Options of Chicago v. Kaplan, 514 U.S. 938, 942 (1995).

Based on this somewhat obscure guidance, a number of courts that had interpreted Section 10(a)(4) of the Federal Arbitration Act as limited to challenges to arbitral authority developed independent grounds to review the outcomes of awards, whether for “manifest disregard of the law,” or failure of the award to draw its essence from the parties’ agreement, a standard that we shall refer to as “manifest disregard of the agreement.”  Some courts adopted both standards, some only one. 

But some other courts held that one or both of these “manifest disregard” standards were impliedly incorporated within Section 10(a)(4) and that vacatur under Section 10(a)(4) was not limited to situations where arbitrators ruled on an issue that was outside the scope of their authority.  These courts held that arbitrators exceeded their powers by manifestly disregarding the law, the agreement or both.   

Whether or not a court adopted one or both standards of review, and whether or not they deemed those standards of review to be within or without Section 10(a)(4), courts often articulated the standards of review differently, and applied them with varying degrees of strictness or laxity.  But for the most part, all courts were reluctant to grant relief based on them save in fairly unusual circumstances. 

In 2008 the Court decided Hall Street, which held that the Section 10 of the Federal Arbitration Act stated the exclusive grounds available to challenge a commercial arbitration award.  In dicta the Court discussed whether “manifest disregard of the law” might be encompassed within Section 10(a)(4), but did not decide whether that was so. 

Courts that had ruled that “manifest disregard of the law,” “manifest disregard of the agreement,” or both, were independent grounds for vacatur were forced to reconsider whether those standards were, in fact, independent, or whether they were subsumed within Section 10(a)(4).  This led to some conflicting authority, with some courts holding that one or both of those standards were subsumed within Section 10(a)(4) and others concluding that one or both of these outcome-based standards of review did not survive Hall Street .     

D.     What did Stolt-Nielsen Have to Say About the Outcome-Based Standard of Review? 

On June 15, 2009 the Supreme Court granted certiorari in Stolt-Nielsen to consider “[w]hether imposing class arbitration on parties whose arbitration clauses are silent on that issue is consistent with the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq.”  As readers will recall, the parties had submitted to an arbitration panel the question whether the arbitration clauses contained in a series of charter-party agreements permitted or precluded class arbitration.  The Second Circuit held that the arbitration panel had not manifestly disregarded the law by imposing class arbitration on the parties even though their arbitration agreements were concededly silent on that score. 

On April 27, 2010, in a 5-3 decision authored by Associate Justice Samuel A. Alito, Jr., and joined in by Chief Justice John G. Roberts Jr. and Associate Justices Antonin Scalia, Anthony M. Kennedy and Clarence Thomas, the Court held that:  (a) the arbitration panel exceeded its powers under FAA Section 10(a)(4) by imposing class arbitration on the parties, because the panel’s decision was based solely on the arbitrators’ own notions of public policy rather than on the FAA, federal maritime, or New York State law; and (b) it was inconsistent with the FAA to impose class arbitration on the parties because it was undisputed that the parties had never consented to class arbitration, and implying such an agreement in the circumstances would drastically alter the nature of the parties’ agreement to arbitrate on a bilateral basis.

Although the Court could probably have decided the matter as one of arbitrability – the Stolt-Nielsen parties appeared to have reserved their rights to de novo review of the question whether the arbitrators had the power to render a binding decision on whether class arbitration was permitted in the face of silence – the Court initially addressed the question from the standpoint whether the award should be vacated based on the outcome.  And that determination required the Court to state the applicable standard of review for an outcome-based challenge to a commercial arbitration award. 

 The Court imported into the commercial context the labor-arbitration “manifest disregard of the agreement,” standard and found that it was subsumed within Section 10(a)(4).  It said that it was not deciding whether the “manifest disregard of the law” standard survived Hall Street (i.e., whether it was also part and parcel of Section 10(a)(4)), but declared that if it did, then it was satisfied here. 

Borrowing from the Steelworkers’ Trilogy line of labor arbitration cases decided about 50 years ago, and more recent labor-arbitration cases, the Court declared, “’It is only when [an] arbitrator strays from interpretation and application of the agreement and effectively ‘dispense[s] his own brand of industrial justice’ that his decision may be unenforceable.” Slip op. at 7 (quoting Major League Baseball Players Assoc. v. Garvey, 532 U.S. 504, 509 (2001) (per curiam)(quoting Enterprise Wheel & Car Corp., 363 U.S. at 597 (1960))).  

“In that situation,” said the Court, “an arbitration decision may be vacated under § 10(a)(4) of the FAA on the ground that the arbitrator ‘exceeded [his] powers,’ for the task of an arbitrator is to interpret and enforce a contract, not to make public policy.”  Applying that standard to the facts, the Court “conclude[d] that what the arbitration panel did was simply to impose its own view of sound policy regarding class arbitration.”  Slip op. at 7.

The Court explained that AnimalFeeds had made three arguments, one of which was that “the clause should be construed to permit class arbitration as a matter of public policy.”  Slip op. at 8 (quotation omitted).  Of the remaining two arguments, the panel had rejected one and said nothing about the other.  This led the Court to conclude that the arbitrators had accepted AnimalFeeds’ invitation to base its decision on public policy grounds.

The Court found further evidence that the panel based its decision on public policy in that the panel looked to previous arbitral decisions by other panels that had addressed the question and:  (a) “[p]erceiv[ed] .  .  . consensus among arbitrators that class arbitration is beneficial in ‘a wide variety of settings;’” and (b) considered “only whether there was any good reason not to follow that consensus .   .  .  .”  Slip op. at 9 (quotations omitted). 

The Court also found it relevant that the panel was not persuaded by Stolt-Nielsen’s unrebutted expert testimony — including testimony that there had never been a class arbitration under the form of charter party agreement used — or by pre-Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003) decisions holding that courts could not compel class or consolidated arbitration where the parties’ agreements were silent on that score.    Slip op. at 9; see, e.g., Glencore Ltd. v. Schnitzer Steel Products, 189 F.2d 264 (2d Cir. 1999); United Kingdom v. Boeing Co., 998 F.2d 68 (2d Cir. 1993); and Champ v. Siegal Trading Co., 55 F.3d 269 (7th Cir. 1995).

The Court said that because the parties had stipulated that they had reached no agreement on class arbitration, the arbitrators should have inquired whether the  FAA, maritime law, or New York Law contained a “default rule” that applied.  But instead, “the panel proceeded as if it had the authority of a common-law court to develop what it viewed as the best rule to be applied in such a situation.”

The Court was not persuaded by the “references to intent” in the panel decision, including a reference to the parties’ broad arbitration clause.  The Court pointed out that the parties stipulated, and the arbitration panel acknowledged, that the charter party agreement was silent on permitting or precluding class arbitration, and “that the charter party was ‘not ambiguous so as to call for parol evidence.’”  Slip op. at 11 (quoting panel decision).  The stipulation “left no room for an inquiry regarding the parties’ intent, and any inquiry into that settled question would have been outside the panel’s assigned task.”   Slip op. at 11.

The implications of the Court’s ruling on the standard of review are many, and shall be discussed in Part II (here).

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

On May 3, 2010 the United States Supreme Court issued a summary order in American Express Co. v. Italian Colors Restaurant, No. 08-1473 granting certiorari, summarily vacating the judgment of the United States Court of Appeals for the Second Circuit, and remanding it “for further consideration in light of” Stolt-Nielsen.   Justice Sonia M. Sotomayor “took no part in the consideration or decision” of the petition.   Italian Colors, No. 08-1473 (May 3, 2010) (summary disposition). 

It will be interesting to see what the Second Circuit does with the case on remand.

On November 2, 2009 Kyriaki Karadelis of the U.K.-based trade publication Global Arbitration Review (”GAR”)  (website here) wrote what I thought was a concise and insightful article on the case.  And we would have said that even if she had not quoted some of our comments in her article!  But she did, and we’re flattered by that. 

With Global Arbitration Review’s permission, and with the required copyright disclaimer, we have posted the article as a “Slide Share Presentation” in my LinkedIn profile, which you can view by clicking here.  Also posted there (again with GAR’s permission and the required disclaimer) is a Global Arbitration Review Article on the United States Court of Appeals for the Second Circuit’s decision in  ReliaStar Life Ins. Co. v. EMC National Life Co., ___ F.3d ___, ___ (2009) (Raggi, J.) (blogged here and here), in which the United States Court of Appeals for the Second Circuit held that an arbitration panel was authorized to award under the bad faith exception to the American Rule attorney and arbitrator fees to a ceding company in a case where the parties had agreed that “[e]ach party shall bear the expense of its own arbitrator.  .  .  and related outside attorneys’ fees, and shall jointly and equally bear with the other party the expenses of the third arbitrator.”  We reported on GAR’s article concerning ReliaStar case here, which also quotes some of our comments on that case. 

We ask our readership to remember that GAR is a subscription-only publication and that it has copyrights in these posted materials.  GAR has authorized us to post them online and distribute them for marketing purposes, but that authorization does not extend to others not similarly situated.  Please do the right thing and respect GAR’s copyrights – GAR has to make a living just like the rest of us!     

Today, Disputing published Part IVB of our guest post (here) in which we consider how the Supreme Court might rule on the merits of the question.  We believe that at least five Justices will rule that the arbitrators should not, in the face of the agreements’ silence, have imposed class arbitration where, as here, there is no basis in the Federal Arbitration Act, New York state law or federal maritime law for implying consent to class arbitration.    

The Supreme Court’s decision in Stolt-Nielsen may have some important ramifications for both commercial and consumer arbitration.  So for advance coverage, tune into Disputing….

Today Disputing published Part IVA (here), in which we consider the first issue:  Who decides whether class arbitration can be imposed on the parties when their arbitration agreements are silent on that point?  Put differently, is the question one of arbitrability for the court or one of procedural arbitrability or contract interpretation for the arbitrators?    

Resolution of the question defines the standard of review.  Questions of arbitrability are reviewed de novo on the law and for clear error on the facts.  But if the question is one of procedural arbitrability or contract interpretation, the standard is the deferential one provided by Federal Arbitration Act Section 10, the one applied by both the District Court and the United States Court of Appeals for the Second Circuit. 

The arbitrators in Stolt-Nielsen decided that class arbitration was authorized by the parties’ arbitration agreements even though the agreements said nothing about class arbitration.  We believe that at least five Justices will conclude that this question was one of arbitrability for the Court to decide, and will either decide the issue de novo or remand it to the lower courts to decide. 

The Supreme Court’s decision in Stolt-Nielsen may have some important ramifications for both commercial and consumer arbitration.  So for advance coverage, tune into Disputing….

The Supreme Court’s decision in Stolt-Nielsen may have some important ramifications for both commercial and consumer arbitration.  And soon-to-be Justice Sotomayor may provide the swing vote in the case.  So for advance coverage, tune into Disputing….

Writing shortly after the appeal court’s decision, Philip Loree Jr of New York firm Loree & Loree, said the court had “violated New York contract interpretation rules.” He said that, according to New York law, “to ascertain whether a contract is ambiguous, courts are required to focus on what is said, not what is omitted.” “Given that the pre-eminent purpose of the Federal Arbitration Act is to enforce the parties’ arbitration agreement as written, this case may be one of those rare Second Circuit decisions that warrant rehearing and reversal en banc,” he added.

You can find the article (subscription only) here:  ‘Bad Faith’ Costs Decision Upheld, Global Arbitration Review, July 13, 2009, our summary of the decision here, our critical analysis here, and further commentary here.  Disputing’s coverage of the case can be found here and here.

As readers may already know, the issue before the United States Supreme Court is whether it is consistent with the Federal Arbitration Act to impose class arbitration on parties whose arbitration agreement is silent on that point.  This is the same issue that the Supreme Court set out to decide in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), but ultimately never did because a plurality of the Court ruled that there was a disputed issue of contract interpretation as to whether the agreements in that case were, in fact, silent on class arbitration, which resulted in a remand to the arbitrator.  But in Stolt-Nielsen the panel ruled, and the parties agreed, that the contracts are silent on this key point, so the Supreme Court will presumably confront the issue head on. 

The Supreme Court’s decision next Term may have some important ramifications for both commercial and consumer arbitration.  And soon-to-be Justice Sotomayor may provide the swing vote in the case.  So for some advance coverage, tune into Disputing….