In an effort to control litigation expenses, some employers have entered into arbitration agreements with their employees. These agreements, however, are not always as effective at limiting costs as many employers believe. Some courts have found, for example, that these agreements permit an individual employee to arbitrate claims on behalf of a class of similarly situated employees – the arbitral equivalent of a class-action lawsuit. The availability of class arbitration is likely to be substantially curtailed, however, by a new ruling from the U.S. Supreme Court.

 

The Supreme Court’s Decision in Stolt-Nielsen S. A. v. AnimalFeeds International Corp.

In Stolt-Nielsen S. A. v. AnimalFeeds International Corp., issued on April 27, 2010, the Supreme Court found that imposing class arbitration on parties whose arbitration clauses are “silent” on that issue is inconsistent with the Federal Arbitration Act (“FAA”). In so holding, the Supreme Court overturned a Second Circuit Court of Appeals decision holding that when the parties agreed that the contract was silent as to whether class arbitration was permissible, the arbitration panel could decide to impose class arbitration. In overturning this ruling, Justice Alito, writing for a majority of five justices, found that the arbitration panel had “exceeded its powers” and had “simply. . . impose[d] its own view of sound policy regarding class arbitration” instead of interpreting and enforcing the arbitration agreement.   

While the facts of the case involve an antitrust matter and the enforcement of a contract regarding the shipment of raw ingredients, such as fish oil, to animal-feed producers around the world, the ruling could have significant implications for employers that currently require employees to agree to arbitration clauses as a term of employment. Like the arbitration provision in the commercial contract at issue in Stolt-Nielsen, most employment arbitration provisions are governed by the FAA.

In the Stolt-Nielsen decision, the Supreme Court held 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.”  The mere fact that the parties agreed to arbitration is not enough to support such a finding. According to the Court, “[t]his is so 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.”  Thus, under the ruling in Stolt-Nielsen, an employment contract containing an arbitration provision that is silent as to class arbitration may be found to preclude class arbitration. Although the Court stops short of requiring express agreement for class arbitration, based on the Court’s holding, it is difficult to know what, other than express agreement, would support a finding that the parties agreed to authorize class-action arbitration.   

Also of note, the Court’s opinion appears to narrow the reading that some courts (and the arbitration panel here) have been giving to the Court’s somewhat disjointed opinion in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), often cited when allowing class arbitration to proceed. In Stolt-Nielson, the Court emphasized that the Bazzle opinion found only that the arbitrator (and not a court) should determine whether a contract is silent on the issue of class arbitration. The Court distinguished that question from the one at issue in Stolt-Nielsen, noting that the parties in the present case agreed that the contract was silent on the issue of class arbitration. As a result, when the parties agree that the issue of class arbitration was not contemplated and no agreement, explicit or implicit, about class arbitration has been reached, the Stolt-Nielsen holding, not Bazzle, will control.

Practical Implications

Employers should take this opportunity to review any employee contracts or agreements that contain arbitration clauses and make certain that their intent is clear. If employers do not wish for class arbitration to be imposed, then the agreement should be reviewed to make sure there is no evidence of any implicit agreement. Employers should also consider adding a provision specifically excluding class arbitration from the agreement for clarity. If employers, on the other hand, desire for class arbitration to be available in certain circumstances, that intent should be clear in the agreement. Further, now is a good time for employers to revisit the decision to require or not to require arbitration provisions in employment or other contracts. If you have questions regarding the use of arbitration or class arbitration clauses or have questions regarding the enforceability of your arbitration clauses, consult with an attorney.