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US Supreme Court: Bazzle Decision Was Not So Important as Everyone Treats it (but Stolt-Nielsen Hardly Clears Up the Topic)

By Christopher B. Hopkins, Esq.

The U.S. Supreme Court's 5-3 majority opinion sent a clear message that practitioners were far more impressed by the 2003 opinion in Green Tree v. Bazzle than the Court was.

The new decision, Stolt-Nielsen, appears to essentially gut the significance of Bazzle but Stolt-Nielsen itself is a weak replacement -- further hobbled by the narrow majority with Justice Sotomayor, who ideologically might have joined the dissent, not participating. What is clear, however, is that lawyers may need to clean up their clients' arbitration agreements.

The Stolt-Nielsen opinion is dense with maritime facts and repeated attacks on the arbitration panel's decision making steps. We'll set that aside. Here are the nuts-and-bolts of the opinion:

Facts: two parties had an agreement which contained an arbitration provision which referenced the FAA but was silent about class action arbitration. Importantly, the parties stipulated to the "silence" as to whether class action arbitration was permitted.

Procedural History: A dispute arose and the arbitration panel was given the question of whether class action arbitration was permissible. They said it was, relying on other arbitration outcomes post-Bazzle. The District Court vacated on the grounds that the panel acted with "manifest disregard of the law." The Second Circuit reversed. Now, the US Supreme Court reversed, asserting its own grounds why class action arbitration was not appropriate.

Key Issues:
1. There was a question of whether the panel should have followed New York or maritime law. The procedural failure to first address the choice-of-law question was error by the panel (error to the point of exceeding its powers).

2. Private arbitration can be reasonably structured however the parties wish however courts and arbitrators must give effect to the parties' intent. The "task of an arbitrator is to interpret and enforce a contract, not to make public policy" decisions.

3. In this case, with the parties stipulating that the contract was silent on class action arbitration, the Court held that the arbitrators had no way to interpret intent since silence presumes there is no agreement and thus the panel's decision was in error.

4. Bazzle involved three class action questions (court or arbitrator; which standard applies; whether class action properly ordered) but no majority answered those questions -- only a plurality arrived at an answer to the first question (arbitrator). In the Court's words: "Bazzle did not yield a majority decision on any of these questions" and "Bazzle did not establish the rule to be applied in deciding whether class arbitration is permitted."

5. Procedural disputes which arise out of the dispute itself and bear on its final disposition shall be decided by arbitrator. Class action arbitration should not be inferred by the arbitration agreement alone. This appears to suggest that the Court maintains that procedural issues are for the arbitrator and the interpretation of the contract as to whether it includes class arbitration is one of them.

6. Class action is different than bilateral arbitration because the relative benefits of class action arbitration are much less assured; there is no longer a single dispute to be resolved but presumably hundreds; presumption of privacy and confidentiality is different in class arbitration; class arbitration adjudicates rights of absent parties; and the commercial stakes are different. These differences are too big for a presumption based upon silence.

Practice Points Post-Stolt:

1. Don't read much of anything into Bazzle relative to whether or not class action applies ("Bazzle did not establish the rule to be applied in deciding whether class arbitration is permitted").

2. Parties to an arbitration agreement implicitly authorize the arbitrator (and therefore NOT the court) to determine procedure. This appears to include class action status. But arbitrators are to interpret the agreement and intent, not make public policy decisions.

3. The court hints that "manifest disregard" may, or many not, be grounds for vacating arbitration awards post-Hall Street v. Mattel. Nonetheless, the court then notes that, if such a standard did exist, it was satisfied here. THAT SAID, section II(A) of the opinion seems to indicate the reversal here was based upon the panel "exceeding its powers."

4. Drafters of contracts should note that the Court claimed, "parties may specify with whom they choose to arbitrate their disputes." It is not "shall" and, indeed, there are mechanisms in the FAA and FAC for how to resolve a dispute over who should arbitrate.

5. Drafters should approach their agreements with the notion that a failure to mention class arbitration likely indicates it is not allowed (unless there is some parole evidence or post-dispute agreement). An arbitration agreement should expressly address class action if you want to include it.

We'll address the dissent and review other commentator's assessments in subsequent posts.

Full post as published by Florida Arbitration Law on April 28, 2010 (boomark / email).