U.S. Supreme Court Class Arbitration Ruling Creates Tension With California Law -- Stolt-Nielsen v. Animal Feeds Int'l Corp.

As we have previously posted, over the past few years arbitrators following U.S. and California Supreme Court precedent have consistently found that "silent" arbitration agreements must be interpreted to allow class-wide arbitrations.   

The recent U.S. Supreme Court opinion in Stolt-Nielsen v. Animal Feeds , however, holds that arbitrators may not conduct a class-wide arbitration where the parties' agreement fails to address the issue at all.  As the Court succinctly stated: "[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."

Many employers and other defendants will be tempted to read this opinion as creating a new panacea against class actions.  In California, however, this interpretation is probably wrong.   

The reason is the California Supreme Court's holding Gentry v. Superior Court , which created a state law rule that any arbitration agreement that precludes class certification is an unenforceable "exculpatory clause."  Gentry explained that this state law rule creates no conflict with the Federal Arbitration Act ("FAA") because it applies generally to all class-waiver "exculpatory clauses" regardless of whether they happen to appear in arbitration agreements. 

Furthermore, Stolt-Nielsen merely holds that, without an express agreement by the parties, class arbitrations cannot be ordered "under the FAA."   The opinion does not hold, however, that the FAA preempts California courts from compelling class-wide arbitration under state law, such as the California Arbitration Act or the anti-exculpatory rule announced in Gentry.    

In short, defendants will inevitably argue that Stolt-Nielsen bars class certification -- whether in court or arbitration -- if an arbitration agreement does not expressly consent to it.  But California courts are still presumably bound by Gentry to reject this argument as a back-door attempt to enforce an exculpatory class-waiver clause.  Defendants thus may be forced to choose between class-wide arbitration or class-wide litigation.  But under Gentry it is too much to avoid both.

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Management lawyer - May 11, 2010 10:12 AM

There is no question that, if the FAA applies, then Gentry and it's progeny, all based on judicially created state law public policy concerns, are preempted by the Stolt Nielsen holding. See Perry, Preston, etc.

More importantly, Stolt Nielsen creates an easy path around Gentry. You simply make your arbitration agreement completely silent on the topic of class arbitration procedures or other forms of consolidation. Then no Gentry issue can be raised to oppose enforcement and when you arrive in arbitration you insist that the arbitrator follow Stolt Nielsen and proceed with only individual arbitration.

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