Introduction
On December 9, 2009 the United States Supreme Court held oral argument in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 548 F.3d 85 (2d Cir. 2009), petition for cert. granted June 15, 2009 (No. 08-1198) (oral argument transcript here). Stolt-Nielsen concerns whether class or consolidated arbitration may be imposed on parties whose contracts are silent on that point, and we have written extensively on it, including a series of guest-post articles for the Disputing blog. (Posts available here, here, here, here, here, here, here, here and here.)
Former Solicitor General Seth Waxman, a partner of the prestigious law firm of Wilmer Cutler Pickering Hale & Dorr LLP, and Chair of the firm’s Appellate and Supreme Court Litigation Practice Group, represented the Stolt-Nielsen petitioners before the Court (Mr. Waxman’s bio is here). Georgetown University Law Center Professor Cornelia T.L. Pillard represented respondent AnimalFeeds. (Professor Pillard also represented the Bazzle respondents in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003)). Both attorneys did a very admirable job of presenting their cases on behalf of their clients.
On December 13, 2009 we posted Part I of our analysis of the oral argument (Part I here). In this Part II we focus on what transpired with respect to the first of the four key, interrelated issues raised by the Justices and identified in Part I: The scope of the submission and the corresponding scope of the arbitrators’ authority. We shall address the remaining three in one or more future posts.
Scope of the Submission and Corresponding Scope of Authority
The United States Supreme Court granted certiorari on the issue whether imposing class arbitration on parties whose contracts are silent on that point is consistent with the Federal Arbitration Act. But there is an important threshold – and potentially dispositive – question in Stolt-Nielsen: Did the Stolt-Nielsen entities submit to arbitration the very question that they now ask the Court to decide?
The answer depends in large part on the scope of the parties’ submission to arbitration: What did the parties empower the arbitrators to decide when they entered into their agreement requesting the arbitrators to determine whether the arbitration agreements permitted or precluded class arbitration? As we explained in a recent Nuts & Bolts feature, “[t]he scope of the agreement to arbitrate tells us only what must be submitted to arbitration. It is the submission itself that ‘serves not only to define, but to circumscribe the authority of the arbitrators.’ Ottley v. Schwartzberg, 819 F.2d 373, 376 (2d Cir. 1987) (here).” (A copy of our Nuts & Bolts post is here.)
The parties agree that the submission was made under Rule 3 of the American Arbitration Association’s Supplementary Rules for Class Arbitrations (the “Class Arbitration Rules”) (copy here). Those rules were promulgated by the American Arbitration Association in response to the Court’s 2003 plurality decision in Bazzle. Rule 3 says that “Upon appointment, the arbitrator shall determine, as a threshold matter, in a reasoned, partial, final award on the construction of the arbitration clause, whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class.”
Not surprisingly there is a significant dispute between the parties concerning the scope of the submission. Stolt-Nielsen’s argument is that the parties submitted to the arbitrators only the question whether the contract objectively revealed intent to permit class arbitration or whether it was “truly silent”:
. . . . [T]he agreement. . . to proceed to arbitration under the auspices of Rules 3 through 7 of the AAA [Class Arbitration] rules, and Rule 3 itself — contemplated precisely, submitting precisely the contract issue that the Bazzle plurality said should go to the arbitrators. That is, looking at the arbitration clause itself, does it objectively reveal an agreement among the two parties to permit or prohibit class or consolidated treatment, or is it truly silent?
That is a question of contract interpretation. That is the question that was submitted to the arbitrators.
There is a separate statutory question that arises if the answer to the contract question is Number 3 [:] There is no meeting of the minds. It is truly silent[.]
(Tr. at 4-5)
In response to a question by Justice Samuel Alito, Jr., Stolt-Nielsen explained that the submission was motivated by Bazzle:
This case arose immediately in the wake of Bazzle. . . . They sued in court; we obtained an order affirmed by the Second Circuit sending them to arbitration. Bazzle’s decided, and we are all looking at Bazzle, and we decide — like the AAA, which has filed an amicus brief in this case, and said it drafted these rules in order to provide a procedure to answer the Bazzle contract interpretation question; the AAA says, we don’t have any view about the statutory question that arises from silence — so we drafted a supplemental agreement that, in paragraph 7, incorporates the AAA [Class Arbitration] Rules 3 through 7.
And the AAA [Class Arbitration] Rule 3, which is included on page 56 of the joint appendix, is headed ‘construction of the arbitration clause.’ And it requires the arbitrators in this arbitration to determine, quote, ‘On construction of the arbitration clause, whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class.’ The, quote, ‘clause construction award.’
(Tr. at 13)
When Justice Alito asked what issue the arbitrators were supposed to decide, Stolt-Nielsen replied:
[AnimalFeeds]. . . said the contract is completely silent, and. . . there’s no meeting of the minds on this issue at all. That was their position about [the construction of the contract].
Our position about the construction of the contract was that, in fact, although there is no express provision one way or the other, this is a maritime contract, and the — and maritime law is ascertained by custom and practice. And we introduced [custom and practice] evidence in the form of affidavits that were unrefuted….
(Tr. at 15)
. . . .
It [the class arbitration issue] was submitted for purpose of determining whether — if you look at the contract and look at background rules and look at parole evidence and look at custom and practice, can you discern whether, as — as you put it in — in the opinion in Howsam, Justice Breyer, whether the contract, quote, “objectively reveals an agreement” by the two parties.
(Tr. at 17)
. . . . [W]e said the contract was not truly silent. Essentially, we argued what Judge Rakoff concluded [i.e., that there has never before been a maritime class arbitration]. They said: No, no, no; it is truly silent, but you should rule for us on other grounds.
(Tr. at 20)
Quoting Class Arbitration Rule 3, AnimalFeeds argued that the parties unconditionally submitted the question whether class arbitration was “permitted” by the arbitration agreement:
‘Upon appointment, the arbitrator shall determine, as a threshold matter, in a reasoned, partial, final word on the construction of the arbitration clause, whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class.’
So the question put to them is: Is [class arbitration] permissible. . . ?
(Tr. at 52 (quoting Class Arbitration Rule 3))
Justice Antonin Scalia questioned AnimalFeeds on what it meant to “permit” class arbitration:
JUSTICE SCALIA: May I — you know, that doesn’t help me a lot. What does it mean, if it permits it? I mean, I guess you could say, if there’s a background rule, that — whether the parties agree to it or not, it’s okay.
Does permits it mean authorizes it? Does -does that mean whether the parties have agreed to it? Is that what permits mean there?
(Tr. at 51)
AnimalFeeds contended that whether an arbitration agreement “permits” class arbitration “means it authorizes the arbitrators to choose”:
We are talking here about a question of arbitration procedure, as this Court correctly characterized it in Bazzle.
And, typically, what you have is an arbitration clause that says, you arbitrate any disputes, as this one does, it doesn’t incorporate any arbitration providers’ rules, and therefore, what you have is the arbitrators have to select the procedures.
(Tr. at 52-53)
Whether the parties submitted to arbitration the question whether arbitration could proceed when the agreement was silent on class arbitration – assuming it was silent; more on that in a later post — is a question for the Court. As we have said before, one of the key tenets of the both commercial and labor arbitration law is that “arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” See United Steelworkers of Am. v. Warrier & Gulf Nav. Co., 363 U.S. 574, 582 (1960). So the question of the scope of the submission itself is one of arbitrability.
In determining the scope of an agreement to arbitrate or submission to arbitration, the Court ordinarily resolves ambiguities in favor of arbitration. But when the question is whether the parties agreed to arbitrate an issue of arbitrability, the presumption is reversed: the Court requires clear and unmistakable evidence that the parties intended to submit the question of arbitrability to arbitration. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 945-46 (1995).
Assuming that what the arbitrators did here was find that class arbitration was permissible in the face of the contracts’ silence, and that they did not find objective evidence of intent to permit class arbitration, then the question the arbitrators decided was one of arbitrability – whether the Federal Arbitration Act authorizes class arbitration without some affirmative indicia in each arbitration agreement that the parties agreed to arbitrate on a class basis. Under First Options, the Court would have to find on the part of the parties a clear and unmistakable intent to submit that question to arbitration.
We do not believe that the parties clearly and unmistakably submitted the question to arbitration. Stolt-Nielsen’s argument about the scope of the submission is, at a bare minimum, plausible, and a finding that it clearly and unmistakably submitted the issue would require a conclusion that Stolt-Nielsen’s position was implausible.
And although the point was not discussed at oral argument, it appears to us that the Stolt-Nielsen entities reserved their rights to have a court determine whether imposing class arbitration in the face of the parties’ silence was consistent with the Federal Arbitration Act. The parties’ agreement concerning class arbitration contained the following proviso:
[N]either the fact of this Agreement [which included the parties’ submission to arbitration] nor any of its terms may be used to support or oppose any argument in favor of a class action arbitration . . . and may not be relied upon by the [p]arties, any arbitration panel, any court, or any other tribunal for such purposes.
(Stolt-Nielsen’s Petition for Certiorari filed March 26, 2009, at 6 n.2.)
But there is a counterargument based on the plurality decision in Bazzle. (This post assumes familiarity with the various opinions in the Bazzle case. If you are not familiar with the case, or require a refresher on the subject, we urge you to read Part II of our Disputing guest post on Stolt-Nielsen here.)
The Bazzle plurality said that the contract interpretation issue of whether or not the arbitration agreements forbade class arbitration was not one of arbitrability. It was one of procedural arbitrability, which is ordinarily for the arbitrators to decide under a broad arbitration agreement. While “courts assume that the parties intended courts, not arbitrators” to decide certain “gateway matters, such as whether the parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy,” the Court found that the issue did not fall into “this narrow exception.” 539 U.S. at 452 (citations omitted). According to the Court, “the relevant question . . . is what kind of arbitration proceeding the parties agreed to:”
That question does not concern a state statute or judicial procedures. It concerns contract interpretation and arbitration procedures. Arbitrators are well situated to answer that question. Given these considerations, along with the arbitration contracts’ sweeping language concerning the scope of the questions committed to arbitration, this matter of contract interpretation should be for the arbitrator, not the courts, to decide.
539 U.S. at 452-53 (citations omitted).
If the Court concludes that what the arbitrators did was merely interpret the contract as authorizing class arbitration, then the Court could conclude, as the four-Justice plurality did in Bazzle, that the question decided was not one of arbitrability, and that to the extent the submission was ambiguous, that ambiguity must be resolved in favor of arbitration. Such a finding would result – in all likelihood – in the Court affirming the Second Circuit Court of Appeals’ decision, or perhaps in a ruling that Stolt-Nielsen did not establish the predicate on which certiorari was granted – that the arbitration agreement was silent on class arbitration.
As is evident from this discussion, much depends on the interrelated issue of what the arbitrators actually decided. And that is a topic to be discussed in Part III of this series.
Tags: American Arbitration Association Supplementary Rules for Class Arbitrations, Class Action Arbitration, Class Arbitration, Consolidated Arbitration, First Options of Chicago v. Kaplan, Green Tree Financial Corp. v. Bazzle, Justice Antonin Scalia, Justice Samuel Alito Jr., Ottley v. Schwartzberg, Procedural Arbitrability, Professor Cornelia T.L. Pillard, Seth Waxman, Stolt Nielsen S.A. v. Animalfeeds Int'l Corp., submission, United States Supreme Court, United Steelworkers of Am. v. Warrier & Gulf Nav. Co.
Phil,
You continue to do a marvelous job covering this case, the only arbitration case before the Court this term.
Many thanks for your insightful and very thorough analysis — from cert petition, to argument, and certainly the opinion when it comes down.
Don
Don,
Thank you very much for your kind words and support. And congratulations on your well-deserved election as a Fellow of the American College of Civil Trial Mediators (http://www.acctm.org/index.cfm).
I think Stolt-Nielsen epitomizes the type of case whose outcome might be influenced by possible concern on the part of the Court about the Arbitration Fairness Act, a point you discussed in your recent article for the International Institute on Conflict Prevention and Resolution (CPR) (http://www.cpradr.org) about the Court’s reluctance to hear cases involving state law challenges based on unconscionability. It may be that certain members of the Court may be concerned that Congress will be more inclined to enact the Arbitration Fairness Act in the event the Court rules that the Stolt-Nielsen arbitrators acted outside the scope of their authority in finding that class arbitration was appropriate. It remains to be seen whether that concern will carry the day, but its presumed existence is an important consideration in trying to divine the outcome here.
I hope you enjoy the remainder of this series!
Phil
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