Publication: London Court of International Arbitration: Young International Arbitration Group, August 2011
Author: M. Paula Aguila

The Federal Arbitration Act, with its policy of arbitration as a mechanism founded on the consent of the parties, forms the basis for two recent United States Supreme Court decisions that limit the discretion of both individual arbitral tribunals and the states to green light class arbitrations absent an express agreement by the parties.  In the first of these cases, the 2010 Stolt-Nielsen S.A. v. Animalfeeds International Corp.[1] decision, the Supreme Court overturned a decision by an arbitration panel which had allowed class arbitration to go forward despite a stipulation by the parties that there was no agreement between them expressly allowing class arbitration. 

Taking a similarly restrictive view toward class arbitration, in the 2011 AT&T Mobility LLC v. Concepcion[2] case, the Supreme Court overturned the ruling of a California federal district court, affirmed by the Ninth Circuit, holding that, in accordance with California law, agreements expressly foreclosing class arbitration are unconscionable.  In so holding, the AT&T Mobility Court reasoned that California law on the issue was preempted by the FAA, which has a strong policy favoring the right of parties to formulate contractual terms that streamline the dispute resolution process.  While these cases are consistent in their reliance on the FAA’s policy toward permitting efficient, consent-based dispute resolution, they may be problematic to consumer rights advocates who will be forced to work with an arbitration agreement negotiated by a consumer with little bargaining power to demand a class arbitration consent.  Because of the potential implications of these recent cases, the decisions bear a closer look.

The Stolt-Nielsen case arose from a dispute between Stolt-Nielsen, a commercial shipping company, and Animalfeeds, a Stolt-Nielsen customer.  The contract between these parties required arbitration but was silent as to whether it permitted class arbitration.   The parties submitted the issue of whether class arbitration was permissible to the arbitral panel, which had ruled that, despite the absence of an express agreement, class arbitration was permissible.  The Supreme Court, taking the relatively extreme measure of overturning an arbitral award on the grounds that the panel had exceeded its powers, found in a 5-3 decision (with Justice Sotomayor abstaining) that whether class arbitration was permitted was not merely a procedural matter within the discretion of the tribunal.  Instead, the Court found that “because class-action 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,”[3] the arbitral panel had exceeded its authority by drawing such an inference.  The Court further explained that while arbitration decidedly confers procedural advantages in bilateral arbitration, the benefits to a class arbitration are less clear.[4] As just one example of the potential disadvantages to class arbitration, the Court noted the problems with confidentiality inherent in arbitrating against a class.[5] Thus, according to the majority, “the differences between bilateral and class-action arbitration are too great for arbitrators to presume, consistent with their limited powers under the FAA, that the parties’ mere silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings.”[6]

In 2011, the Supreme Court would again rely on the limiting, preemptive powers of the FAA to strike another blow to class arbitrations in AT&T Mobility LLC v. Concepcion.  In AT&T Mobility, the Concepcions had entered into a consumer phone contract with AT&T. The contract required arbitration of disputes, but expressly foreclosed the possibility of class arbitration. Following a contractual dispute with AT&T Mobility over fees, the Concepcions joined a putative class action lawsuit that alleged, inter alia, that AT&T had engaged in false advertising and fraud. AT&T moved to compel arbitration, citing the arbitration clause in its agreement with the Concepcions.   While the California federal district court viewed the arbitration clause favorably, it struck down the arbitration clause, citing California law which provided that agreements prohibiting class determinations were unconscionable.  The Ninth Circuit, affirming the lower court’s decision, held that the FAA did not preempt the California holding.

In another narrow majority opinion by the same five justices in the Stolt-Nielsen majority, the AT&T Mobility Court overturned the Ninth Circuit, finding that the Federal Arbitration Act preempted California law, because the California unconscionability rule “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,” as stated in the FAA.[7] The Court gave three reasons why California’s policies favoring class arbitration contravened the intentions of the FAA.  First, the majority stated that class arbitration would eliminate the primary advantage of arbitration, its efficiency, finding that “the switch from bilateral to class arbitration sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.”[8] Second, the Court held that because class arbitration requires procedural formality, it was highly unlikely that Congress intended to leave these procedures to the discretion of an arbitrator.[9] Finally, the majority reasoned that state law policies favoring class arbitrations went against the spirit of the FAA, because class arbitration greatly increased the risks to defendants because of the lack of meaningful review mechanisms.[10] In so holding, the majority stated what was likely the policy underlying both the Stolt-Nielsen and AT&T Mobility decisions:

Arbitration is poorly suited to the higher stakes of class litigation… We find it hard to believe that defendants would bet the company with no effective means of review, and even harder to believe that Congress would have intended to allow state courts to force such a decision.[11]

It goes without saying that the Federal Arbitration Act has played a large part in encouraging the use of arbitration, which has had the positive effect of streamlining dispute resolution.  Although the Stolt-Nielsen and AT&T Mobility decisions are couched in terms resounding in the favorable policies of the FAA, some of the effects of these decisions may be less salutary to parties with less bargaining power, particularly consumers. What’s more, the Supreme Court in each of these cases seems to be creating a jurisprudential culture which favors federal review over the discretion of arbitral panels or state legislatures.  These actions by the Supreme Court have arguably reshaped the availability of class arbitration, and by extension, the relationship between consumers and businesses. As the state and lower federal courts grapple with the implications of these decisions, the full effects on consumers’ ability to challenge businesses through the class action vehicle will be seen. In the shorter term, there is no doubt now that for (an apparently disfavored) class arbitration to occur, the parties have to expressly agree to it. Silence alone will never amount to consent.

[1] 130 S.Ct. 1758 (2010).

[2] 131 S.Ct. 1740 (2011).

[3] 130 S.Ct. at 1775.

[4] Id. at 1775-76.

[5] Id. at 1776.

[6] Id.

[7] 131 S.Ct. at 1753.

[8] Id. at 1751.

[9] Id. at 1752.

[10] Id.

[11] Id.