Part IV
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
Tags: Arbitrability, Arbitral Power, Class Arbitration, Consolidated Arbitration, Federal Arbitration Act, Green Tree Financial Corp. v. Bazzle, Practice and Procedure, Reinsurance Arbitration, Section 10(b), Stolt Nielsen S.A. v. Animalfeeds Int'l Corp., United States Supreme Court
