Case Summary: Stolt-Nielsen SA v. AnimalFeeds Int’l Corp.*

Introduction

In 2003, the United States Supreme Court set out to determine whether the Federal Arbitration Act permits class arbitration when the parties’ agreement is silent regarding the subject in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003).  This important question remained unanswered by Bazzle, however, because the plurality determined that the arbitrator had the authority to address the factual question of whether the agreement was in fact “silent.”  Thus, under Bazzle, the availability of class arbitration under a contract is largely within the discretion of the individual arbitrator if the contract is silent on the issue of class arbitrability.[1]

The Court recently decided to address the issues left unanswered in the Bazzle decision by granting certiorari in Stolt-Nielsen SA v. AnimalFeeds Int’l Corp., 129 S. Ct. 2793.  The question for the Court to resolve in Stolt-Nielsen is essentially the same as that in Bazzle:  “whether imposing class arbitration on parties whose arbitration clauses are silent on that issue is consistent with the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq.”  The following summary details the Second Circuit Court of Appeals decision from which this appeal comes. 

Issue
Whether an arbitrator may impose class arbitration on parties whose arbitration clauses are silent on the issue is consistent with the Federal Arbitration Act.  

Rule
The Second Circuit determined that interpreting a silent arbitration clause to permit class arbitration does not “manifestly disregard the law” and thus is not a proper reason to vacate an arbitration award.

Facts
The parties in this case are also parties to international maritime contracts that contain arbitration clauses.  AnimalFeeds International alleges that the enterprises known collectively as Stolt-Nielsen are restraining competition within the parcel tanker shipping services industry in violation of federal antitrust laws.  AnimalFeeds seeks to proceed on behalf of a class that includes various purchasers of parcel tanker transportation services from 1998-2002. AnimalFeeds initially filed suit in district court, where Stolt-Nielsen moved to compel arbitration.  The district court denied the motion to compel arbitration, but the Second Circuit reversed, holding that the contracts between the parties constituted enforceable agreements to arbitrate the issue. 

The agreements entered into between Stolt-Nielson and AnimalFeeds contained broadly-worded arbitration clauses which unambiguously mandate arbitration but are silent as to whether arbitration may proceed on behalf of a class.  Rule 3 of the parties’ agreement gave the arbitrators the authority to decide the whether class arbitration was permissible:  “[T]he arbitrator shall determine…whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class.” 

During the arbitration, Animal Feeds argued that the agreements’ silence meant that arbitration on behalf of a class could proceed.  Stolt-Nielsen argued that because the clauses were silent, the parties intended not to permit class arbitration.  In support of its position, Stolt-Nielsen cited several federal cases and arbitrations decisions denying consolidation and class treatment of claims where the arbitration agreements were silent.  Ultimately, the arbitration panel decided that the agreements permitted class arbitration.   The arbitration panel relied on the fact that in all twenty-one published awards issued under Rule 3, the arbitrators had permitted class arbitrations where the arbitration clauses were silent on the permissibility of allowing arbitration as a class.   

Stolt-Nielsen petitioned the district court to vacate the arbitration panel’s ruling based on the fact that it was made in manifest disregard of the law.  The district court granted the motion to vacate on the basis that the arbitration panel failed to recognize that the dispute was governed by federal maritime law, that federal maritime law requires that the interpretation of charter parties be dictated by custom and usage, and that Stolt-Nielsen had demonstrated that maritime arbitration clauses are never subject to class arbitration.  Following the district court’s decision, AnimalFeeds appealed to the Second District Court of Appeals.   

Discussion

The Second Circuit determined that interpreting such an arbitration clause to permit class arbitration does not “manifestly disregard the law.”  The court reasoned that the parties’ contracts provided that the scope of the arbitration clause was for the arbitrators to decide.

First the Court discussed the manifest disregard standard for vacating arbitration awards.  The Court considered whether the manifest disregard ground even exists after the United States Supreme Court decision in Hall Street, which held that the four grounds for vacatur enunciated in the FAA are “exclusive.”  This decision highlighted the circuit split on the viability of manifest disregard, with some circuits viewing the standard as dead and others finding that the standard still exists “as a judicial gloss” on the permissible grounds laid out in the FAA and in Hall Street. The Second Circuit adopted the approach that manifest disregard survived Hall Street because “the term ‘manifest disregard…merely referred to [FAA] grounds collectively, rather than adding to them.”   

The manifest disregard standard requires a clear and plainly applicable law that was in fact improperly applied by the arbitrator, leading to an erroneous outcome.  In addition, the arbitrator must have known of the law’s existence and its applicability to the problem before him. 

The Second Circuit held that the arbitration panel in this case did not manifestly disregard the law when interpreting the silent arbitration clause to permit class arbitration.  The Court rejected the district court’s determination that the panel manifestly disregarded the law by not engaging in a meaningful choice-of-law analysis.  Though the arbitration decision did not specifically state the term “choice-of-law,” the panel did discuss New York law and federal maritime law in the opinion, which plausibly leads to the conclusion that the panel intended to interpret the agreement according to both New York state law and federal maritime law. 

The panel did not manifestly disregard either federal maritime law or New York state law when not following rules for contract interpretation, because such rules were guides rather than clear rules.  The district court claimed that the panel manifestly disregarded the law by failing to respect the established “rule” of federal maritime law that maritime contracts be interpreted according to custom and usage.   This was not a rule at all, but merely a guide in interpreting maritime contracts.  Ignoring such a guide does not rise to the level of manifest disregard in the second circuit: the Court stated that “the misapplication…of…rules of contract interpretation does not rise to the stature of a ‘manifest disregard’ of the law.”  
Similarly, the Court rejected the district court’s claim that the panel manifestly disregarded New York state law, which requires that an ambiguous contract be interpreted by reference to industry custom and practice. For the panel to have manifestly disregarded the law in this case, Stolt-Nielsen would have been required to cite “…federal maritime law or New York state law establishing a rule of construction prohibiting class arbitration where the arbitration clause is silent on that issue.” 

Because the panel did not manifestly disregard the law, the Second Circuit ultimately reversed the district court’s decision and remanded the case with instruction to deny Stolt-Nielsen’s petition to vacate the arbitration award.