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Stolt-Nielsen v. Animalfeeds International Corp.

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.

Background

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.
 

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