Supremes Pull The Plug On Class Action Arbitrations

Class action arbitrations are not likely to survive the U.S. Supreme Court’s 5-3 decision, in a closely watched antitrust case, that imposing class arbitration on parties that haven’t agreed to it conflicts with the Federal Arbitration Act.

The decision in Stolt-Nielsen S.A. et al. v. Animalfeeds Int’l Corp., No. 08-1198 (April 27, 2010), delivered by Justice Alito, reversed a panel decision by the U.S. Court of Appeals for the Second Circuit, which had confirmed an arbitration panel’s ruling which allowed Animalfeeds to pursue class arbitration against several shipping companies over alleged price-fixing.  The Supreme Court called the panel’s ruling “fundamentally at war” with the principle that arbitration is a matter of consent.

Justice Ruth Bader Ginsburg dissented from the majority opinion, joined by Justices John Paul Stevens and Stephen Breyer, writing that she would have dismissed the petition as improvidently granted, and if she had to reach the merits, she would have adhered to the Federal Arbitration Act’s strict limitations on judicial review of arbitral awards and affirmed the Second Circuit.

As it is highly unlikely – especially after this decision – that any arbitration agreement would explicitly permit class arbitration, the ruling may well be a death blow for class action arbitrations.

While in recent years the conservative-leaning high court has been favorable toward arbitration, it has also been notably hostile toward class actions as a procedural mechanism.  In this case, its hostility toward class actions appears to have trumped its general approval of arbitration as an acceptable means of resolving disputes.

Furthermore, the decision largely validated the enforceability of class action waivers, rejecting the view of some courts that have found such waivers unconscionable because they effectively preclude consumers from vindicating small-dollar claims.

Only time will tell how far-reaching the impact of this decision will be, including what will happen to the hundreds of pending class arbitration proceedings as defending parties begin using this decision to challenge claims.  However, it seems likely that class actions will continue to fare poorly in cases that reach the high court.