Cozen O’Connor: Supreme Court Finds Classwide Arbitration Available Only When Clearly Set Forth in Contract [Alert]

Supreme Court Finds Classwide Arbitration Available Only When Clearly Set Forth in Contract

April 29, 2019

On April 24, 2019, the U.S. Supreme Court issued a decision in Lamps Plus v. Varela that should be of interest to the maritime industry. Even though our industry has long relied upon mandatory arbitration clauses in its contracts, maritime companies are still subject to the threat of class action lawsuits or arbitrations. For example, in Stolt-Nielsen S.A. v. AnimalFeeds Int’l. Corp., 559 U.S. 662 (2010), the U.S. Supreme Court was asked to determine whether an agreement to arbitrate allowed for class arbitration. AnimalFeeds and other shippers had filed individual lawsuits against Stolt-Nielsen, alleging price-fixing in the parcel tanker market. Although each of these shippers contracted with Stolt-Nielsen through individual charter parties (C/P), AnimalFeeds and the other shippers argued that the price-fixing dispute was not bound by the C/P’s mandatory arbitration clause. AnimalFeeds filed its own class action lawsuit in an effort to consolidate these various lawsuits against Stolt-Nielsen into a single proceeding. The Second Circuit ultimately ruled that the price-fixing claim was subject to arbitration, however the parties could not agree whether all of the claims could be subject to class arbitration. In reviewing the agreement to arbitrate, which is silent as to the issue of class arbitration, the Supreme Court held imposing class arbitration on parties who had not specifically agreed to class arbitration is inconsistent with the Federal Arbitration Act (FAA).

The notion that the FAA was designed to favor bilateral arbitration has been consistently repeated in subsequent decisions by the U.S. Supreme Court interpreting arbitration clauses. In Epic Sys. Corp. v. Lewis, 138 S.Ct. 1612 (May 21, 2018), the Supreme Court was presented with a group of employees who argued that the savings clause in the FAA allowed the court to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.” These employees wanted to avoid application of the arbitration clause in order to commence a class action lawsuit against their employer. In ruling that the arbitration clause was valid, the Supreme Court held that this language could only be used to set aside normal contract defenses, such as fraud, duress or unconscionability and could not be used to escape the arbitration agreement.

This policy of favoring bilateral arbitration, and not class arbitration, was repeated in Lamps Plus v. Varela where the Supreme Court was presented with another arbitration clause, which was arguably ambiguous and asked to determine whether an ambiguity within an arbitration clause provided sufficient justification to permit class arbitration. In Lamps Plus, the Supreme Court, in a 5-4 decision, decided it was not, holding that class arbitration was materially different than a bilateral arbitration. In order to compel a class arbitration, the Supreme Court requires that there must be clear consent from all parties bound by the arbitration clause to class arbitration.

For more information about this recent development in Lamps Plus, we direct your attention to SCOTUS: Ambiguous Agreement Insufficient to Compel Class Arbitration, an alert written by our colleague Adam Gutmann


Authors

David Y. Loh

Member

dloh@cozen.com

(212) 908-1202

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