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U.S. Supreme Court Sidesteps Opportunity for Clear Ruling on Arbitration

The U.S. Supreme Court ruled that silence can speak louder than words when it ruled that a contract that is silent about whether class relief is available in arbitration can be read to mean class actions are banned. But the ruling's narrow holding may limit the effects of this ruling to areas of law where class actions are rarely used, and to parties with sophisticated business experience — not the arenas in which AARP's brief had focused.  

Many consumer, employment and lending contracts now have arbitration clauses that limit class actions; therefore, the effects of this ruling on those agreements may be negligible.


An increasing number of contracts include mandatory arbitration clauses. Originally designed to bring in experts to help resolve business-to-business disputes quickly, outside the court system, arbitration has become ubiquitous in contracts between businesses and people. Arbitration does not provide the same protection as court proceedings and can be prohibitively expensive; arbitration clauses often include subtle waivers of important legal rights. Most people do not know that they may be waiving remedies and important legal rights when they sign contracts containing arbitration clauses for everyday purchases, employment and professional services.

State and federal laws allow people to bring class actions to ensure that consumer and other claims can be heard and that businesses do not have a profit incentive to cheat customers. Many arbitration clauses are designed to prevent class actions specifically to limit claims by consumers. Businesses know that preventing claims from being brought as a class action means most people will never seek redress for their injuries and corporate practices will never be challenged. For example, a business with millions of customers can make huge profits by overcharging each customer a few dollars a month. Many people will never notice they are being overcharged, and others will not seek redress through legal action. Who would sue over a few hundred dollars when the legal fees would cost thousands? Even people with large claims, including negligence in nursing homes leading to death, defects in home construction and employment discrimination practices are prevented from seeking redress if they must arbitrate their claims because the high cost and unfair practices in arbitration favor business interests.

Seeking to avoid liability for any number of wrongs, and to keep their wrongdoing secret, more and more businesses have arbitration clauses with class action bans. Arbitration clauses now routinely appear in consumer contracts and agreements, including for banking, lending, credit cards, employment, cell phones, Internet access, home construction, medical services and nursing home admissions. Unlike businesses that have lawyers to negotiate contracts, people in the marketplace do not have access to legal advice and are presented with standard form contracts that they have no opportunity to negotiate.

Many state courts have held that a class action ban is unconscionable and may not be enforced. Others allow these contractual bans to stand. Contracts are traditionally governed by state (rather than federal) law and arbitrators should apply state law when deciding whether a class action is permitted in an arbitration. The question the Supreme Court addressed in Stolt-Nielsen v. Animalfeeds International Corp. is whether the Federal Arbitration Act (FAA) prohibits class actions when the arbitration clause is silent as to class actions, or whether an arbitrator can apply state law to decide whether a class action is permitted.

The Dispute

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's Brief

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.

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