The U.S. Supreme Court likely ignited an intense battle in state and federal courts with its decision Tuesday that class arbitration may not be imposed on parties who have not agreed to it.
"The sword of Damocles is hanging over class arbitration now," said F. Paul Bland of Public Justice, a Washington-based public interest law firm. "I think you are about to see a huge battle begin for what the implications of the case are. Consumer and employee advocates are going to take a view very, very different from what you're going to see from the defense bar."
Bland predicted that "within a week" defendants in more than 100 class action arbitration cases will seek supplemental briefing to argue that all state laws that have been used to strike down bans on class arbitrations are now pre-empted by the high court's ruling in Stolt-Nielsen S.A. v. AnimalFeeds International Corp.
"We have already received notice in one of our cases that the defendant wants supplemental briefing to make that argument," said Bland, who filed an amicus brief on behalf of Public Justice and Public Good in the high court case, supporting AnimalFeeds.
Seth Waxman, a Washington partner at Wilmer Cutler Pickering Hale and Dorr, argued the case on behalf of Stolt-Nielsen and other shipping companies. Nina Pillard of Georgetown University Law Center represented AnimalFeeds before the justices.
Hugh Verrier, the White & Case chairman whose firm represented Stolt-Nielsen, said the ruling's impact will be felt in future antitrust arbitration cases as well as in other areas of the law.
"Class arbitration is one of the most hotly contested legal issues of the new decade," said Verrier in a statement. "This decision is another cutting-edge legal victory by our antitrust group."
A number of potential class arbitrations are now under way and could be affected by the decision, said Archis Parasharami, co-chairman of Mayer Brown's consumer litigation and class action practice. "In an amicus brief we filed with the Court, we pointed out that, in most of those cases, the defendant was referred to a potential class arbitration despite the fact that the arbitration agreement did not expressly authorize, or in some cases expressly precluded, class arbitration," said Parasharami, whose firm's amicus brief on behalf of CTIA-The Wireless Association supported Stolt-Nielsen. "Defendants in those cases now have a compelling argument that the class arbitrations to which they have been subjected are ultra vires."
The Stolt-Nielsen case stemmed from an antitrust class action brought by AnimalFeeds against Stolt-Nielsen and other shipping companies for price-fixing. The 2nd U.S. Circuit Court of Appeals found (pdf) that the antitrust claims were arbitrable. The parties subsequently stipulated that the arbitration agreement was silent on whether class arbitration was allowed and they agreed to submit the question to a panel of arbitrators.
The arbitration panel unanimously concluded that the agreement allowed class arbitration. However, a district court ruled that the panel had exceeded its powers. The 2nd Circuit reversed, finding no maritime or New York law against class arbitration.
In a 5-3 ruling by Justice Samuel Alito Jr., the Supreme Court disagreed with the 2nd Circuit. (Justice Sonia Sotomayor, a former judge on the 2nd Circuit, did not participate in the case.)
"In this case, we must conclude that what the arbitration panel did was simply to impose its own view of sound policy regarding class arbitration," Alito wrote.
The majority said that rather than asking whether the Federal Arbitration Act, maritime law or New York law contained a "default rule" under which a silent arbitration clause could be interpreted as allowing class arbitration, "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."
To impose class arbitration on parties who had not consented to it, Alito wrote, is "fundamentally at war" with the FAA's foundational principle that arbitration is a matter of consent. Class arbitration, he said, changes the nature of arbitration to such a degree that it cannot be presumed that parties agreed to it by simply agreeing to submit their disputes to an arbitrator.
Justice Ruth Bader Ginsburg, joined by Justices John Paul Stevens and Stephen Breyer, dissented. "The parties' supplemental agreement, referring the class-arbitration issue to an arbitration panel, undoubtedly empowered the arbitrators to render their clause-construction decision," Ginsburg wrote. "That scarcely debatable point should resolve this case."
Ginsburg said she saw some "stopping points" in the majority's decision. The majority did not insist on express consent to class arbitration, she wrote. Class arbitration could be ordered where there is a contractual basis for concluding that the parties agreed to it, she said. And, the majority's point that the parties in this case were "sophisticated business entities," she added, "apparently spares from its affirmative-authorization requirement contracts of adhesion presented on a take-it-or-leave-it basis."
Public Justice's Bland said he was not ready to say the defense bar has won and all class arbitrations will be "wiped away." But, he added, "I think it is going to be a very fiercely fought-out issue. If this opinion means what [the defense bar] says, there won't be any consumer class actions in any case in which the parties have an arbitration clause."