A number of owners of cargo tankers sued two of their customers in a class action to resolve a commercial dispute. The contract between the parties sent all disputes to arbitration, but was silent as to whether class arbitration was allowed.
The arbitration panel allowed the dispute to proceed as a class action and awarded plaintiffs damages. The loser appealed to federal district court, which vacated the award on the grounds that federal law favoring arbitration pre-empts state law and prohibits class action arbitration. A federal appeals court reversed, holding that because the contract was silent on whether the law permits class actions in arbitration, and neither the state nor federal law compelled individual arbitration, it was within the arbitrator's discretion to decide. Because judicial review of arbitration decisions is extremely limited, the appeals court would not second-guess the arbitrator's decision.
Stolt-Nielsen came before the U.S. Supreme Court to decide if the arbitrator in fact has the discretion to conduct a class arbitration when the contract is silent as to the availability of class actions, and whether any decision maker — arbitrator or judge — could preclude class action proceedings if the arbitration agreement is silent as to class actions.
AARP, which is concerned about the proliferation of arbitration clauses in an increasing number of individual contracts, filed a brief in support of plaintiffs' position that the FAA does not prohibit class action relief in arbitration. The brief argues that contracts are traditionally interpreted under state law, and that the federal law favoring arbitration does not pre-empt state laws. The brief also argues that the FAA does not require individual arbitration where the contract is silent on that issue.
Many of the laws preventing fraud and unfair, abusive and deceptive practices in the marketplace are designed to be enforced primarily through private lawsuits, not by a state or federal attorney paid with taxpayer dollars. But such laws typically are not enforced unless claims can be brought as a class action, because legal fees make litigation prohibitive for individual claims. Many businesses use arbitration clauses with class action bans to attempt to exculpate themselves from liability for wrongdoing by limiting enforcement of important legal protections. Numerous state courts refuse to enforce class action bans because it prevents any relief for wrongdoing.
The Court's Ruling
The Supreme Court ruled 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." In other words, the court ruled that unless the arbitration agreement expressly contains a provision that allows class action proceedings, those proceedings will be deemed not to have been agreed to — regardless of what state contract law says.
However, the court noted that in this case the parties were sophisticated business entities and the case was brought under maritime law (which has its own procedures) where there is no tradition of class action. Thus, the ruling may be limited in its applicability to arenas of law where there is a tradition of class action litigation, where parties are not sophisticated business entities and where other authorities (such as state contract statutes or case law) recognize class action proceedings.