The interplay between class actions and arbitration provisions was a controversial topic for many years in California until Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005) and Gentry v. Superior Court, 42 Cal. 4th 443 (2007) eliminated a substantial amount of uncertainty about class arbitration waivers in the areas of consumer contracts and employment arbitration agreements. These decisions, and other applying their principles, declared that, in California, many class action waivers in the consumer and employment law settings are unconscionable under California law. Gentry, at 779. “[A]lthough ‘[c]lass action and arbitration waivers are not, in the abstract, exculpatory clauses’ (Discover Bank, supra, 36 Cal.4th at p. 161, 30 Cal.Rptr.3d 76, 113 P.3d 1100), such a waiver can be exculpatory in practical terms because it can make it very difficult for those injured by unlawful conduct to pursue a legal remedy.” Gentry, at 783.

On April 27, 2010, the United States Supreme Court issued its Opinion in Stolt-Nielsen S. A. et al. v. AnimalFeeds International Corp. Initial commentary quickly concluded that Stolt-Nielsen will eliminate many consumer and employment law class actions. Whether that is accurate at the macro level won’t be known for years. However, the question raised by Stolt-Nielsen, for the perspective of California litigation, is whether Stolt-Nielsen altered controlling California law negatively, or, perhaps unexpectedly, added strength to California’s approach to arbitration provisions.

Stolt-Nielsen and other petitioners “are shipping companies that serve a large share of the world market for parcel tankers—seagoing vessels with compartments that are separately chartered to customers wishing to ship liquids in small quantities.” Stolt-Nielsen, at 1. One of the customers is AnimalFeeds International Corp., which supplies raw ingredients to animal-feed producers around the world. After learning that Stolt-Nielsen and the other petitioners were allegedly engaged in an illegal price-fixing scheme uncovered by the Department of Justice, the plaintiffs brought a class action antitrust suit.

Following a ruling by the Second Circuit about the arbitrability of claims, the parties to several consolidated actions against Stolt-Nielsen (and others) agreed to arbitrate, but they disputed whether the arbitration agreement allowed for class arbitration. The arbitration agreement was silent on this issue. The parties agreed to resolve this issue at arbitration, and an arbitration panel ruled that, because the arbitration agreement did not expressly preclude class arbitration, it allowed for class arbitration. The defendants then moved to vacate that decision.

In the most general terms, the Supreme Court ruled that the arbitration panel erred because class arbitration cannot be imposed on a party who has not agreed to class arbitration, and an implicit agreement to authorize class action arbitration cannot be inferred solely from the existence of an arbitration agreement which is silent on that issue. This summary of the holding, appealing though it is for reporters on a deadline, does not clearly explain what the Supreme Court decided or why it may have little impact on California’s approach to arbitration issues in the consumer and employment law settings.

The majority began by examining the ruling of the arbitration panel. AnimalFeeds made three arguments in support of construing the arbitration agreement as one authorizing class arbitrations:

“The parties’ arbitration clause should be construed to allow class arbitration because (a) the clause is silent on the issue of class treatment and, without express prohibition, class arbitration is permitted under Bazzle; (b) the clause should be construed to permit class arbitration as a matter of public policy; and (c) the clause would be unconscionable and unenforceable if it forbade class arbitration.” App. in No. 06–3474–cv (CA2), at A–308 to A–309 (emphasis added).

Stolt-Nielsen, at 8. The Supreme Court noted that the panel rejected the first argument ignored the third. The Supreme Court majority then explained what should have happened next:

Because the parties agreed their agreement was “silent” in the sense that they had not reached any agreement on the issue of class arbitration, the arbitrators’ proper task was to identify the rule of law that governs in that situation. Had they engaged in that undertaking, they presumably would have looked either to the FAA itself or to one of the two bodies of law that the parties claimed were governing, i.e., either federal maritime law or New York law. But the panel did not consider whether the FAA provides the rule of decision in such a situation; nor did the panel attempt to determine what rule would govern under either maritime or New York law in the case of a “silent” contract.

Stolt-Nielsen, at 8. In other words, the majority criticized the arbitration panel because, rather than inquiring whether the various bodies of law at issue contained a “default rule” permitting an arbitration clause to allow class arbitration absent express consent, the panel proceeded as if it had a common-law court’s authority to develop what it viewed as the best rule for such a situation. Instead, the panel based its decision on post-Bazzle arbitral decisions without mentioning whether they were based on a rule derived from the FAA or on maritime or New York law.

The Court’s discussion contained a great deal of repetition, as if the holding seemed to lack substance without enough pages to back it up. For instance, on page 9 the Court said, “Rather than inquiring whether the FAA, maritime law, or New York law contains a ‘default rule’ under which an arbitration clause is construed as allowing class arbitration in the absence of express consent, the panel proceeded as if it had the authority of a common-law court to develop what it viewed as the best rule to be applied in such a situation.” Consistent with its holding, the Court observed that, under both New York law and general maritime law, evidence of “custom and usage” is relevant to determining the parties’ intent when an express agreement is ambiguous. Stolt-Nielsen, at 10, n. 6.

However, in the case before it, there was no opportunity to consider parole evidence on the issue of intent; the parties were in total agreement:

But the panel had no occasion to “ascertain the parties’ intention” in the present case because the parties were in complete agreement regarding their intent. In the very next sentence after the one quoted above, the panel acknowledged that the parties in this case agreed that the Vegoilvoy charter party was “silent on whether [it] permit[ted] or preclude[d] class arbitration,” but that the charter party was “not ambiguous so as to call for parol evidence.”

Stolt-Nielsen, at 11-12. Irrespective of the unnecessary repetition by the Court, its holding is important from the standpoint of practitioner considering whether Stolt-Nielsen will have a major impact on class arbitrations in California. In most employment arbitration agreements, the agreements are drafted broadly to provide for all remedies otherwise available in Court. This suggests an intent to mimic the structure of court-based litigation. Further, many arbitration agreements in the employment context are phrased broadly as to the included claims, using language such as "all disputes arising out of employment...."

California has clear default rules under Discover Bank and Gentry that barring class arbitrations – particularly in wage and hour employment cases and consumer cases - is routinely unconscionable. Since, under California law, the preclusion of class-wide relief can be and is often considered unconscionable, when this issue arises in California, the answer to the question posed by the Supreme Court is that, in California, a "default rule" exists requiring the availability of class-wide relief as a condition to a finding that an arbitration agreement is valid under state law contract principles in California.

The Supreme Court spent a good deal of time attempting to limit the reach of Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003). It did so by explaining the fractured nature of the majority result:

When Bazzle reached this Court, no single rationale commanded a majority. The opinions of the Justices who joined the judgment—that is, the plurality opinion and JUSTICE STEVENS’ opinion—collectively addressed three separate questions. The first was which decision maker (court or arbitrator) should decide whether the contracts in question were “silent” on the issue of class arbitration. The second was what standard the appropriate decision maker should apply in determining whether a contract allows class arbitration. (For example, does the FAA entirely preclude class arbitration? Does the FAA permit class arbitration only under limited circumstances, such as when the contract expressly so provides? Or is this question left entirely to state law?) The final question was whether, under whatever standard is appropriate, class arbitration had been properly ordered in the case at hand.

Stolt-Nielsen, at 14.

The balance of the opinion reviews the general principle that arbitration is a special form of contractual agreement. The majority began its discussion by asserting the notion that arbitration is a matter of consent:”

While the interpretation of an arbitration agreement is generally a matter of state law, see Arthur Andersen LLP v. Carlisle, 556 U. S. ___, ___ (2009) (slip op., at 6); Perry v. Thomas, 482 U. S. 483, 493, n. 9 (1987), the FAA imposes certain rules of fundamental importance, including the basic precept that arbitration “is a matter of consent, not coercion,” Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U. S. 468, 479 (1989).

Stolt-Nielsen, at 17. The presumption that arbitration is a matter of “content, not coercion” is one of the presumptions that breaks down in employment and consumer contexts. Gentry and Discover Bank are both based, in major part, on the recognition that the presumption of “consent” in any agreement requires contracting parties of relatively equal sophistication and bargaining power. The typical consumer or employee, presented with an arbitration provision drafted by skilled attorneys, faces a take-it-or-leave-it proposition, often with not reasonable alternatives. Fortunately for consumers and employees, California has definitively stated rules that, if nothing else, create a default inference that class arbitrations are appropriate when arbitration agreements are silent as to that issue.

The majority then wrapped up its opinion:

From these principles, it follows 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. In this case, however, the arbitration panel imposed class arbitration even though the parties concurred that they had reached “no agreement” on that issue, see App. 77a. The critical point, in the view of the arbitration panel, was that petitioners did not “establish that the parties to the charter agreements intended to preclude class arbitration.” App. to Pet. for Cert.51a. Even though the parties are sophisticated business entities, even though there is no tradition of class arbitration under maritime law, and even though AnimalFeeds does not dispute that it is customary for the shipper to choose the charter party that is used for a particular shipment, the panel regarded the agreement’s silence on the question of class arbitration as dispositive.

Stolt-Nielsen, at 20. Even in stating this seemingly definitive holding, the majority recognized important factors that may very well be present in other types of cases: “Even though the parties are sophisticated business entities, even though there is no tradition of class arbitration under maritime law, and even though AnimalFeeds does not dispute that it is customary for the shipper to choose the charter party that is used for a particular shipment.” Ibid. In consumer and wage & hour employment arbitrations, you routinely find (1) disparate sophistication between the parties, (2) a custom in California of protecting class actions, and (3) clarity of identity of the parties to the agreement. So much for Stolt-Nielsen destroying class actions. All it will do is create massive amounts of collateral litigation in jurisdiction or areas of law with less clarity about the central importance of classwide relief.

Turning briefly to the dissent, some interesting and unexpected conclusions surface. As one example, the dissent highlights the fact that the majority is diminishing the strict limitations on judicial review of arbitration awards: “Were I to reach the merits, I would ad-here to the strict limitations the Federal Arbitration Act (FAA), 9 U. S. C. §1 et seq., places on judicial review of arbitral awards. §10.” Stolt-Nielsen, Dissent, at 1. In fact, the dissent spends a good deal of time analyzing “the fitness of the arbitrators’ clause-construction award for judicial review.”

Once the dissent gets past the issue of whether the Court should be involved at all, it identifies problems that would arise following mechanical application of the rule suggested by the majority. For instance, the dissent notes the very evils identified by California’s Supreme Court as a basis for protecting the class action device in consumer and employment law contexts:

Several courts have invalidated contractual bans on, or waivers of, class arbitration because proceeding on an individual basis was not feasible in view of the high costs entailed and the slim benefits achievable. See, e.g., In re American Express Merchants’ Litigation, 554 F. 3d 300, 315–316, 320 (CA2 2009); Kristian v. Comcast Corp., 446 F. 3d 25, 55, 59 (CA1 2006); Discover Bank v. Superior Court, 36 Cal. 4th 148, 162–163, 113 P. 3d 1100, 1110 (2005); Leonard v. Terminix Int’l Co., LP, 854 So. 2d 529, 539 (Ala. 2002). Were there no right to proceed on behalf of a class in the first place, however, a provision banning or waiving recourse to this aggregation device would be superfluous.

Stolt-Nielsen, Dissent, at 11, n. 10. The dissent also identifies logical inconsistency between this opinion and other statements by the Supreme Court:

Arbitration provisions, this Court has noted, are a species of forum-selection clauses. See Scherk v. Alberto-Culver Co., 417 U. S. 506, 519 (1974). Suppose the parties had chosen a New York judicial forum for resolution of “any dispute” involving a contract for ocean carriage of goods. There is little question that the designated court, state or federal, would have authority to conduct claims like AnimalFeeds’ on a class basis. Why should the class-action prospect vanish when the “any dispute” clause is contained in an arbitration agreement? Cf. Connecticut General Life Ins. Co. v. Sun Life Assurance Co. of Canada, 210 F. 3d 771, 774–776 (CA7 2000) (reading contract’s authorization to arbitrate “[a]ny dispute” to permit consolidation of arbitrations). If the Court is right that arbitrators ordinarily are not equipped to manage class proceedings, see ante, at 21–22, then the claimant should retain its right to proceed in that format in court.

Stolt-Nielsen, Dissent, at 12.

The dissent, then, observes limitations to the majority’s opinion, limitations suggested by the majority’s careful use of limiting language in its final statement of its holding:

First, the Court does not insist on express consent to class arbitration. Class arbitration may be ordered if “there is a contractual basis for concluding that the part[ies] agreed” “to submit to class arbitration”. Ante, at 20; see ante, at 23, n. 10 (“We have no occasion to decide what contractual basis may support a finding that the parties agreed to authorize class-action arbitration.”). Second, by observing that “the parties [here] are sophisticated business entities,” and “that it is customary for the shipper to choose the charter party that is used for a particular shipment,” the Court apparently spares from its affirmative-authorization requirement contracts of adhesion presented on a take-it-or-leave-it basis. Ante, at 20. While these qualifications limit the scope of the Court’s decision, I remain persuaded that the arbitrators’ judgment should not have been disturbed.

Stolt-Nielsen, Dissent, at 12-13.

The directive to look to the governing law will, at least for California class actions, answer the question of arbitrability of class claims in the affirmative, at least for most consumer and employment class actions. While collateral litigation will probably last longer in other states, the FAA’s recognition of state-law claims of unconscionability will likely lead to the same conclusion about any unconscionable “contracts of adhesion presented on a take-it-or-leave-it basis.” Aside from the odd result that the majority essentially promotes additional judicial review of arbitration activity, there is actually less here than what initially meets the eye.