Class Action Arbitration Questioned in High Court

WASHINGTON (CN) - The Supreme Court heard arguments Wednesday over whether an arbitrator, appointed by two clashing companies, can hear a class action brought by one of them even though the arbitration contract is silent on that issue. "The question was whether that silence should be interpreted as a preclusion or a permission," Justice John Paul Stevens said.

A second question raised in the hearing was whether the arbitration panel made the right decision in finding that the plaintiff can proceed on a class basis.

Animalfeeds, a corporation that sells animal feed internationally, tried to file a class action against a tanker company that it uses to ship its feed, Stolt-Nielsen. It filed in federal court on behalf of all companies that use tankers, but the 2nd Circuit ultimately decided that the matter should be sent to arbitration.

But the terms of the arbitration contract did not discuss the question of whether an arbitrator could include other companies in the arbitration process. When the companies asked the mediating panel to determine whether a class action was permitted or precluded, the panel decided that the contract permits a class action.

"If you ask whether something permits it, and if it doesn't prohibit it, doesn't it for sure permit it?" Stevens asked of the shipping company's lawyer, implying that a class arbitration would be allowed.

Justice Antonin Scalia expressed some agreement. "If the contract is silent, it's up to the court or the arbitrator to decide what that silence means," he said.

Justice Ruth Bader Ginsburg noted that Animalfeed had originally intended to bring a class action in court and was diverted by the court to an arbitration. Appearing concerned, she told the shipping company's lawyer that a failure to allow a class action in the arbitration, "is shrinking drastically the dimensions of Animalfeeds' claim."

But Chief Justice John Roberts approached from a different angle, noting that the shipping company had not agreed to go into arbitration with other members who join as a class. "I understood the fundamental question before getting arbitration is whether the parties have agreed to arbitrate this dispute with this party," he said.

Scalia read from the arbitrator's decision. "The panel is struck by the fact that respondents have been unable to cite any post-Bazzle panels or arbitrators that construed their clauses as prohibiting the class action, he read, then noted, "That's not what they have to find. They must find positively that it permits a class action."

Seth Waxman from WilmerHale represented tanker company Stolt-Nielsen and argued that the contract's silence should be interpreted to mean that a class action had not been part of the agreement. "There's no consent," he said.

While the case falls under the jurisdiction of maritime law, references to any differences between the law governing this contract and non-maritime contracts were rare. Waxman argued that maritime law relies heavily on "custom and practice," and said that maritime contracts have long been bilateral, suggesting that both parties would have to expressly agree to the terms of the arbitration contract.

Animalfeeds counsel Cornelia Pillard, from Georgetown University Law Center, argued that the arbitration panel was correct in deciding that silence should be interpreted to mean that a class action wasn't prohibited from the agreement, adding that if there is doubt, the question is usually handed to the arbitrator.

Pillard said judicial review can only correct "gross defects" in the arbitration process, and that the arbitrators simply interpreted the contract, as they were asked.

Before the skirmish over class arbitration, Animalfeeds had pointed to what it considered Stolt-Nielsen's unreasonable shipping prices and argued that the company is conspiring to dampen tanker shipping competition in violation of federal anti-trust laws.

After the arbitration panel decided to allow the class action, a district court had decided that the arbitrators had neglected the law in allowing the class action. The 2nd Circuit, which had originally sent the case to an arbitrator, reversed the district court, allowing the class action to continue.

Justice Sonia Sotomayor was absent from the arguments, with plans to speak in Puerto Rico next week.

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