On April 27, 2010, the Supreme Court issued a 5-3 decision important for businesses that rely on pre-dispute arbitration agreements to provide alternatives to litigation.  The financial services sector, the telecommunications industry, and other providers of consumer goods and services have used arbitration agreements in consumer contracts for years, and since the Supreme Court's 2003 decision in Green Tree Fin. Corp. v. Bazzle, these businesses have encountered the risk of being compelled to class arbitration.  This week the Supreme Court answered a question first presented in Bazzle and in doing so identified some common misconceptions about what Bazzle requires—and, more importantly, does not require.  With the Supreme Court's decision in Stolt-Nielsen, a reduced risk of class arbitration lies ahead.

Key points from the decision include the following:

• The court held 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.”  The parties stipulated that their arbitration agreement was silent on the issue of class arbitration, so there was no agreement to authorize class arbitration and the parties could not be compelled to arbitrate on a class-action basis. 
• The arbitration panel had inferred from the agreement's silence on the issue of class arbitration that class arbitration was permitted.  This conclusion was “fundamentally at war with the foundational FAA principle that arbitration is a matter of consent.”
• The court's decision rests on the Federal Arbitration Act (FAA) and its foundational principles of consent.  “While the interpretation of an arbitration agreement is generally a matter of state law, . . . the FAA imposes certain rules of fundamental importance, including the basic precept that arbitration ‘is a matter of consent, not coercion’. . . .”
• In an especially noteworthy passage, the majority explained that Bazzle did not require the arbitrator to decide whether the contract permits class arbitration, and it “did not establish the rule to be applied in deciding whether class arbitration is permitted.”  The parties and the arbitrators were mistaken in believing that Bazzle required the arbitrators, not the court, to decide whether a contract permits class arbitration; only the plurality in Bazzle decided that the contract-interpretation issue was for the arbitrator to decide.  Likewise, the parties were mistaken in believing that Bazzle established the standard for the decision maker to apply in determining whether a contract permits arbitration. 
• The question of whether a contract permits arbitration is not a procedural issue arising from the parties' agreement to arbitrate.  Instead, said the court, "we see the question as being whether the parties agreed to authorize class arbitration.”

The links below will connect you to the court's opinion and to an article about the opinion.

To read the court's opinion, click here.

To read an article about the opinion, click here.

For more information, please contact Rush Smith at 803.255.9492 or rush.smith@nelsonmullins.com. 

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