The Sounds of Silence: Class Arbitration After Stolt-Nielsen, Contributed by Allan Dinkoff, Weil, Gotshal & Manges LLP
The U.S. Supreme Court keeps writing about class arbitration, but uncertainty continues to reign. Many thought Stolt-Nielsen S.A. v. AnimalFeeds International Corp.1 gave clear guidance about how to interpret arbitration agreements that said nothing about class arbitrations: if the arbitration agreement is silent on whether the parties agreed to arbitrate on a class basis, then class arbitrations are not authorized.2 But this begs the question of how to define silence. A few district courts have gone with the conventional reading of Stolt-Nielsen, holding that silence means the failure to address the subject of class arbitration at all in the written arbitration agreement. Under these circumstances, class arbitration is not authorized.3 A number of other district courts, however, have interpreted silence differently, holding that class arbitrations can be authorized after Stolt-Nielsen even when the written agreement never mentions the topic.4 As one court put it, “the failure to mention class arbitration in the arbitration clause itself does not necessarily equate with the ‘silence’ discussed in Stolt-Nielsen.”5
The more limited reading of Stolt-Nielsen recently was adopted by the U.S. Court of Appeals for the Second Circuit in Jock v. Sterling Jewelers Inc.6 According to the Second Circuit, parties are not necessarily silent about class arbitration even if their written arbitration agreement never mentions the topic. Actual silence is more nuanced. The court interpreted Stolt-Nielsen as holding only that the parties’ failure to preclude class arbitrations while agreeing to arbitrate “all claims” is not an agreement to arbitrate claims on a class-wide basis. However, the mere failure to mention class arbitration in the written arbitration agreement does not necessarily mean that there is no agreement to arbitrate.7
Therefore, significant questions remain post-Stolt-Nielsen around silence, including who decides whether a contract is silent and the meaning of silence. I start by parsing the question of who decides whether the parties agreed to arbitrate class claims; in other words, who decides whether a contract is silent. Conventional wisdom holds that Green Tree Fininancial Corp. v. Bazzle8 requires courts to defer to arbitrators on this question, but the Supreme Court in Stolt-Nielson made it clear that the issue remains unresolved. I then turn to the meaning courts have given to a contract’s silence.
Who Decides Whether Class Arbitrations Are Authorized?
One of the first Supreme Court discussions of silence in the arbitration context is First Options of Chicago, Inc. v. Kaplan,9 which addressed who decides arbitrability when the parties have not expressly addressed the issue. The Court found that silence means different things depending on the question at hand. When the question is whether a party agreed to arbitrate (arbitrability), the court should not assume the parties agreed to arbitrate arbitrability, and the parties’ agreement to arbitrate arbitrability must be “clea[r] and unmistakabl[e].”10 The presumption is reversed when there is no question that the parties agreed to arbitrate at least some issues and the only question is “whether a particular merits-related dispute is arbitrable because it is within the scope of a valid arbitration agreement.”11
This distinction was of little use, since the Court gave no guidance on how to draw the line between “arbitrability” and “merits based disputes” that are “within the scope” of the parties’ agreement to arbitrate. The Court attempted to add some level of clarity when it decided Howsam v. Dean Witter Reynolds, Inc.12 At issue in Howsam was a National Association of Securities Dealers (NASD) rule providing that only claims brought within six years of their accrual were eligible for arbitration. The lower courts were split on whether this was a question of arbitrability (resolved by the courts) or the merits of the dispute (resolved by the arbitrators). The Court acknowledged that “any potentially dispositive gateway question [could be called] a ‘question of arbitrability,’” but that “arbitrability” is limited to “the kind of narrow circumstance where contracting parties would likely have expected a court to decided the gateway matter, where they are not likely to have thought that they had agreed that an arbitrator would do so, and, consequently, where reference of the gateway dispute to the court avoids the risk of forcing parties to arbitrate a matter that they may well not have agreed to arbitrate.”13
The Court attempted to elucidate this principle by drawing a distinction between whether “a particular type of controversy” is arbitrable, which is for the court, and “‘procedural’ questions which grow out of the dispute and bear on its final disposition,” which are “presumptively not for the judge, but for the arbitrator, to decide.”14 The Court held that the six-year eligibility rule was akin to a statute of limitations and thus was procedural and committed to the arbitrators, not the judiciary.
Against this backdrop, the Supreme Court was called upon in Bazzle to resolve who decides whether the parties agreed to class arbitration. At issue was a decision of the Supreme Court of South Carolina holding that, as a matter of South Carolina contract law, (1) the contract was silent on the question of class arbitration and (2) in those circumstances, South Carolina law interprets the contract as permitting class arbitration.15 The Court reversed, with a plurality finding that the question of whether the contract was “in fact silent or [whether it] forbid[s] class arbitration” was for the arbitrator, not the court, to decide.16 The plurality based its decision on the language of the agreement, which provided that the arbitrator would decide “all disputes, claims, or controversies arising from or relating to this contract or the relationships which result from this contract.”17 Whether the contract authorized class arbitration was a dispute, the plurality found, “‘relating to this contract’ and the resulting ‘relationships.’ Hence the parties seem to have agreed that an arbitrator, not a judge, would answer the relevant question.”18 This was indisputably correct, the plurality believed, because the Court had previously held that if “there is doubt about . . . the ‘scope of arbitrable issues’ . . . we should resolve that doubt ‘in favor of arbitration.’”19
The principal dissent in Bazzle (Chief Justice William D. Rehnquist and Justices Sandra Day O’Connor and Anthony M. Kennedy) believed that whether the parties had agreed to arbitrate class actions was a question for the courts, not the arbitrators, thus disagreeing with the plurality. The dissenters would have reversed because the decision of the Supreme Court of South Carolina was contrary to the terms of the contract and thus preempted by the Federal Arbitration Act (FAA).
Justice John Paul Stevens concurred in the Court’s judgment, but only so there could be an opinion of the Court and because the plurality opinion “expresses a view of the case close to my own.”20 He believed that the FAA did not preempt either determination made by the Supreme Court of South Carolina (that the contract was silent on the question of class arbitration and that therefore class arbitration was appropriate), and thus would have affirmed, because “the decision to conduct a class-action arbitration was correct as a matter of law.”21 Justice Stevens refused to decide the question of whether the arbitrators, rather than the courts, were the appropriate forum for determining the scope of the agreement to arbitrate, saying only that “[a]rguably the interpretation of the parties’ agreement should have been made in the first instance by the arbitrator, rather than the court,” but since petitioner had not challenged the ruling on that basis “there [was] no need to remand the case to correct that possible error.”22
The Supreme Court subsequently discussed Bazzle at length in Stolt-Nielsen. The Court said that three questions were at issue in Bazzle: (1) who decides whether the contract is silent on the question of class arbitration; (2) what standard should the appropriate decision maker use in determining whether a contract allows class arbitration; and (3) whether class certification is appropriate in the case at hand. According to Stolt-Nielsen, the Bazzle plurality decided only the first question (who decides whether the contract is silent on class arbitrations), and never addressed the other two questions.23 Justice Stevens did not address the first question, but answered the second and third questions. “Thus, Bazzle did not yield a majority decision on any of the three questions.”24
The Supreme Court in Stolt-Nielsen also seemingly weighed in on whether the parties’ agreement to class arbitration is a procedural or substantive question. One can read Stolt-Nielsen as holding that this issue is not procedural given the significant differences between class arbitrations and individual adjudications; “the shift from bilateral arbitration to class-action arbitration” is “fundamental.”25 Indeed, the Court criticized the dissent for “minimiz[ing the] crucial differences [between individual and class arbitrations] by characterizing the question before the arbitrators as being merely what ‘procedural mode’ was available to present AnimalFeeds’ claims.”26 “But the FAA requires more. . . . [W]e see the question as being whether the parties agreed to authorize class arbitration.”27 Therefore, it would appear that under Stolt-Nielsen, whether the parties have agreed to class arbitration is a question of arbitrability for the court, not a question implicitly committed to the arbitrator.
However, a number of courts have refused to take the Supreme Court at its word on this point. One judge in the Eastern District of New York, for example, dismissed the language quoted above concerning the substantive nature of the class action question as “simply emphasizing the importance of not reading class arbitration into an agreement lightly.”28 It thus held that whether the parties had agreed to class arbitration was for the arbitrator, not the court.29 A number of other courts, including the U.S. Court of Appeals for the Third Circuit, agree that arbitrators, not courts, will continue to decide whether a contract is silent and what that silence means even after Stolt-Nielsen.30 But there is a minority view to the contrary.31
Did the Parties Agree to Class Arbitration?
Prior to the Supreme Court’s decision in Bazzle, most courts held that class arbitrations were not authorized if the arbitration agreement was silent on the question.32 After Bazzle, courts more routinely affirmed arbitration decisions finding that the agreement to arbitrate “all disputes” was consent to class arbitrations.33 Stolt-Nielsen potentially changes the equation. As the Third Circuit put it, “[a]lthough contractual silence in the post-Bazzle era has often been treated by arbitrators as authorizing class arbitration, Stolt-Nielsen suggests a return to the pre-Bazzle line of reasoning on contractual silence.”34
In Stolt-Nielsen, the contract required the parties to arbitrate “any dispute arising from the making, performance or termination of” the agreement. The parties did not dispute that AnimalFeeds’ antitrust claims were arbitrable, and they stipulated that the contract was silent on whether class arbitration was permitted (or prohibited). And, according to the majority in Stolt-Nielsen, the parties also stipulated that the silence meant the parties had not come to any agreement on the question of class arbitration.35 Both parties stipulated that the arbitrators would decide whether the contract permitted class arbitrations. The arbitrators found in a lengthy opinion that the parties were required under the agreement to arbitrate class as well as individual claims. The district court vacated the award, and the Second Circuit reversed.
The Supreme Court issued a writ of certiorari “to decide whether imposing class arbitration on parties whose arbitration clauses are ‘silent’ on that issue is consistent with the Federal Arbitration Act.”36 The Court held that class arbitrations are appropriate only where the parties affirmatively agree to arbitrate on a class basis; agreement to class arbitration cannot be inferred “solely from the fact of the parties’ agreement to arbitrate” all disputes without expressly prohibiting class arbitrations.37 “[M]ere silence” on the issue of class arbitrations does not constitute the parties’ “consent to resolve . . . disputes in class proceedings.”38 However, the parties’ agreement can be implicit.39
The bottom line would seem to be that who decides whether the contract is in fact silent on class arbitrations has not been resolved by the Supreme Court. Only the plurality addressed that issue in Bazzle, which Stolt-Nielsen made clear is not binding, and in Stolt-Nielsen the parties stipulated to the contract’s silence and the meaning of that silence. The Court has definitively decided only the consequences of an agreement’s silence; silence does not equal an agreement to arbitrate on a class basis.40 But what is silence?
Jock v. Sterling Jewelers
The Second Circuit waded into this fray in Jock v. Sterling Jewelers.41 Both parties urged the arbitrators to resolve the question of whether they had agreed to class arbitrations. Over a rigorous dissent by Judge Ralph K. Winter, the Second Circuit held that (1) an agreement that says nothing about class arbitrations can in fact still support class arbitration, and (2) the district court was wrong to vacate the arbitrator’s decision that she had jurisdiction to arbitrate a class action, rejecting the district court’s interpretation of Stolt-Nielsen.42
Like the arbitration agreement in Stolt-Nielsen, Sterling Jewelers’ arbitration agreement did not say anything about class arbitrations one way or the other, and both contracts provided that “any dispute” with respect to the controversy at issue was subject to arbitration. The only difference of potential relevance between the two agreements was that the Sterling agreement said the arbitrator “‘shall have the power to award any types of legal or equitable relief that would be available in a court of competent jurisdiction including, but not limited to, the costs of arbitration, attorney fees and punitive damages for causes of action when such damages are available under law.’”43 The Stolt-Nielsen contract did not contain similar language.
The arbitrator issued her award after the Second Circuit’s decision in Stolt-Nielsen, but before the Supreme Court’s reversal. The Second Circuit had held in Stolt-Nielsen that class arbitration was permitted if the parties did not expressly preclude it in their arbitration agreement.44 Based on the Second Circuit’s decision, the arbitrator held that class arbitration was permitted in the case before her because the agreement “‘cannot be construed to prohibit class arbitration.’”45 As summarized by the majority in Jock,
The arbitrator noted that there was no express prohibition on the pursuit of class claims and that “indeed, there is no mention of class claims.” The arbitrator stated that “[u]nder Ohio law, contracts are to be interpreted so as to carry out the intent of the parties, as that intent is evidenced by the contractual language.” . . . [T]he arbitrator determined she would not read into the agreement an intent to prohibit class claims because “the law will not insert by construction for the benefit of one of the parties an exception or condition which the parties either by design or neglect have omitted from their own contract.”46
Sterling sought to vacate this decision, and the district court initially declined to do so. Thereafter, the Supreme Court reversed the Second Circuit’s Stolt-Nielsen decision. Sterling went back to the district court, which reversed itself. The district court found that the Supreme Court’s decision precluded arbitration of class actions based merely on the parties’ failure to prohibit class arbitration. Since that had been the basis of the arbitrator’s decision, the district court held that she had exceeded her powers.47
The Second Circuit reversed. It started with the meaning of “silence.” In Stolt-Nielsen, the parties stipulated that the agreement was silent, not only in the sense that the contract made no reference to class arbitration, but also, according to the Stolt-Nielsen majority, that the silence meant the parties had reached no agreement on the issue of class arbitration.48 In Jock, the arbitration agreement concededly made no mention of class arbitration, but the parties had no agreement on the second question of whether there was any agreement on the topic. The parties thus agreed that there was no explicit agreement to permit class arbitrations, but Stolt-Nielsen acknowledged that parties could agree implicitly to arbitrate class claims,49 and plaintiffs argued that Sterling had manifested such implicit consent. Therefore, the arbitrator was free to find such an implicit agreement, and the courts could not disturb that finding even if they disagreed with it.
The Second Circuit then parsed the language of the Sterling agreement in a way that may have even more far reaching implications. The Sterling agreement, unlike the Stolt-Nielsen agreement, explicitly gave the employee the right to “seek relief through any government agency or court” and granted the arbitrator the “power to award any types of legal or equitable relief that would be available in a court of competent jurisdiction.”50 Therefore, the Second Circuit reasoned,
It is clear from the terms of the arbitration agreement that Sterling required its employees to sign that the parties intended to make available in arbitration all remedies and rights that would otherwise be available in court or before a government agency. It was not unreasonable, and clearly not manifestly wrong, for the arbitrator to construe this to mean that the parties also intended to include the right to proceed as a class and seek class remedies.51
The bottom line is that Stolt-Nielsen appears to be only incremental progress in answering critical questions on class arbitrations—who decides whether an agreement is “silent” on class arbitrations, and what is the meaning of “silence.” Unfortunately, both questions appear to remain fair grounds for litigation.
Allan Dinkoff is counsel at Weil, Gothsal & Manges LLP and represents employers in complex employment matters.
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