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Class actions in arbitration are inconsistent with the Federal Arbitration Act unless the parties expressly agree to consent to a class action in the arbitration agreement, the U.S. Supreme Court has ruled.

The plaintiff, an animal feed company, filed a class action against a coalition of international shippers alleging price fixing. A trial court compelled arbitration under an arbitration provision in the contract.

The arbitration panel then allowed the arbitration to proceed as a class after a hearing regarding arbitration customs in the maritime trade.

The parties stipulated that the arbitration provision was silent on the issue of class arbitration.

The 2nd Circuit upheld the panel’s decision, and the Supreme Court agreed to hear the case.

In a 5-3 decision, the Court concluded that the panel exceeded its authority. (Justice Sonia Sotomayor did not take part in the decision.)

“[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. In this case, however, the arbitration panel imposed class arbitration even though the parties concurred that they had reached ‘no agreement’ on that issue. … The panel’s conclusion is fundamentally at war with the foundational FAA principle that arbitration is a matter or consent. …

“[C]lass-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. … We think that the differences between bilateral and class-action arbitration are too great for arbitrators to presume, consistent with their limited powers under the FAA, that the parties’ mere silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings,” Justice Samuel Alito wrote for the majority.

Three dissenting Justices criticized the majority for “indulging in de novo review” of a question that was not ripe for review and then substituting its own judgment for that of experienced arbitrators.

U.S. Supreme Court. Stolt-Nielsen v. AnimalFeeds International Corp, No. 08-1198. April 27, 2010. Lawyers USA No. 993-1832.

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