iSTOLT-NIELSON V. ANIMALFEEDS INTERNATIONAL CORP. (CIVIL ACTION NO.: 06-3474 – DECEMBER 9, 2009)
Oral Argument Provides Insight Into Possible Direction of the Supreme Court
On December 9, 2009, the Supreme Court heard oral argument on whether an arbitration panel can decide if a contract, though silent on class arbitration, can nonetheless infer the parties’ intentions on this issue. In 2008, the arbitration panel concluded that the contract did not preclude class arbitration and the plaintiff sought judicial relief due to the panel’s determination. Plaintiff argued that the arbitration panel, in reaching its decision, manifestly disregarded contract law when it issued its decision and when it asserted that the panel did not have the authority to making a ruling on this issue. The district court agreed with the plaintiff and vacated the arbitration award.
In November 2008, the Second Circuit reversed the district court’s determination. The Second Circuit stated that the arbitration panel did not overextend its powers when it decided the class arbitration issue even if there were no provisions in the contract specifically addressing it. The defendants argued the arbitration panel’s decision showed a “manifest disregard” of the law. The Second Circuit remarked that “it is highly deferential to the arbitral award and obtaining judicial relief for arbitrator’s ‘manifest disregard’ of the law is rare.” Moreover, the Second Circuit stated that the context of contractual interpretation is left to the arbitrators to decide correctly or incorrectly. “We are required to confirm arbitration awards despite ‘serious reservations’ about the soundness of the arbitrator’s reading of the contract.”
As such, the Second Circuit concluded that only instances where “the arbitrator knew of the relevant legal principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it” would it be proper to reverse an arbitrator’s decision on the grounds of “manifest disregard” of the law. The Second Circuit’s position on “manifest disregard” is the minority position among the circuit courts. The Supreme Court accepted certiorari presumably due to the conflicting interpretations of its earlier decision, Hall Street v. Mattel 128 S.Ct 1396 (2008) where the Court addressed the scope and impact of the “manifest disregard” doctrine.
Stolt’s counsel, Seth Waxman, argued before the Supreme Court that the terms and conditions of the arbitration agreement were silent on the issue of class arbitration. Therefore, Mr. Waxman argued that if there was no intent on this issue then there was no meeting of the minds on whether the arbitration panel had authority on this issue. Moreover, Mr. Waxman argued that allowing the arbitration panel to have inherent authority over other contracts belies the Federal Arbitration Act’s fundamental purpose. Justices Breyer and Ginsberg questioned Mr. Waxman’s position. Specifically, Justice Ginsberg inquired of Mr. Waxman as to why his client allowed the arbitration panel to answer the question of whether they had authority to address the class arbitration issue. Justice Ginsberg’s suggested that since the arbitration panel decided the issue in the affirmative, then do the parties may not have the right to challenge the arbitration panel’s authority in federal court? Mr. Waxman stated that the arbitration panel’s decision violated Sections 3 and 7 of the Federal Arbitration Act.
Conversely, Animalfeed’s counsel, Cornelia Pillard, stated that the Federal Arbitration Act along with recent precedent allowed the arbitration panel to have inherent authority over class arbitration. Chief Justice Roberts and Justice Scalia pressed Ms. Pillard on where in the arbitration agreement or the Federal Arbitration Act is an arbitration panel allowed to infer a party’s intention. Ms. Pillard asserted that the broad language in the arbitration agreement allows the arbitration panel to decide this issue.
IMPACT (ARBITRATION): We expect a decision from the Supreme Court in early Spring. Based on the questions poised by the Justices, we do not expect a unanimous decision. Clearly, several of the Justices were concerned whether an arbitration panel should infer the intent of the parties when the arbitration provision is silent on the issue. If the Supreme Court upholds the arbitration panel’s authority to class arbitration, it will be seen as another step toward greater inherent authority of an arbitration panel. Additionally, as discussed in our July edition, this will mark the second major decision from the highest court regarding scope of an arbitration panel’s authority under the Federal Arbitration Act (FAA) in the past year. During the summer, the Supreme Court affirmed, 6-3, to allow non-signatories to a contract to invoke the Federal Arbitration Act. See our commentary on the Arthur Anderson LLP v. Wayne Carlisle decision.
For a copy of oral argument, click here: http://tinyurl.com/rr-February-2010-Edition
