A recent Second Circuit decision suggests that there may be a loophole in the Supreme Court’s decision in Stolt-Nielsen, S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010), which may allow arbitrators to decide, in some circumstances, whether an arbitration agreement permits class arbitration where it does not expressly provide for it.

In Jock v. Sterling Jewelers Inc., 2011 U.S. App. LEXIS 13633 (2d Cir. July 1, 2011), the plaintiff filed a Title VII complaint with the EEOC and later a class action suit alleging that she and other female employees of the defendant suffered gender discrimination in pay and promotion.  The employment contract provided for arbitration through AAA, and the litigation was stayed pending what the plaintiff sought to pursue as a class arbitration.  The arbitration agreement did not make any mention of a class arbitration, but the arbitrator found that a class arbitration was permissible, construing the contract against the employer because the employer drafted the contract and the arbitrator found it to be a contract of adhesion.  The arbitrator also noted that the agreement gave the arbitrator “the power to award any types of legal or equitable relief that would be available in a court of competent jurisdiction.”  Id. at *8-9.

The district court held that the arbitrator’s decision was contrary to the Supreme Court’s opinion in Stolt-Nielsen and should be vacated.  The Second Circuit reversed, in a 2-1 decision.  The majority extensively analyzed the Stolt-Nielsen opinion, focusing intently on the parties’ stipulation in that case that the arbitration clause was “silent” with respect to class arbitration, and what that stipulation meant.  The court found that in Stolt-Nielsen there was a stipulation not only that the arbitration clause did not mention class arbitration, but also that the parties did not intend to reach any agreement, expressly or implicitly, with respect to class arbitration.  Id. at *16-18.  According to the Second Circuit, the Supreme Court did not hold that an arbitration agreement must expressly provide for class arbitration; rather, it is possible for class arbitration to be permissible if there was an implicit agreement to class arbitration which somehow can be inferred from the terms of the contract.  Id. at *19-20.  The Second Circuit further held that the arbitrator did not exceed her authority in deciding that the arbitration agreement implicitly permitted class arbitration, explaining that the arbitrator’s decision was not contrary to the Supreme Court’s opinion in Stolt-Nielsen, and in any event the arbitrator’s decision was made prior to the Supreme Court’s opinion and an intervening change in controlling law by itself is not grounds to vacate an arbitration award.  Id. at *32-33.  The court suggested in a footnote that in deciding class certification the arbitrator may need to consider the Supreme Court’s Wal-Mart decision.  Id. at *40 n.3.

Judge Winter dissented, describing Stolt-Nielsen as “binding precedent on all fours.”  Id. at *41 (Winter, J., dissenting).  He read the Court’s reference to “silence” in Stolt-Nielsen as simply referring to the fact that the arbitration clause did not expressly allow or bar a class arbitration.  Id. at *43.  He noted that if the Supreme Court’s decision were as narrowly focused on the parties’ stipulation in Stolt-Nielsen as the Second Circuit majority suggests, the Court would not have granted certiorari to address such a narrow, idiosyncratic issue.  Id. at *45 n.2.  He further read Stolt-Nielsen as barring an inference that an arbitration agreement allows class arbitration based on the absence of an express bar on class arbitrations; otherwise, there would have been a remand in Stolt-NielsenId. at *46.  Judge Winter also interpreted the arbitrator’s decision as finding that class arbitration was allowable because the arbitration agreement did not prohibit it, not because the parties implicitly agreed to it.  Id. at *56.  He would have found this to be a manifest disregard of the law.  Id.

The key takeaway here is that, at least according to this Second Circuit panel, Stolt-Nielsen may not have fully resolved whether an arbitration agreement that is silent with respect to class arbitration (in the sense that it does not expressly provide for or prohibit it) may allow an arbitrator to find that class arbitration is appropriate.  Although en banc rehearings in the Second Circuit are quite rare, this case might call for it, and a grant of certiorari is also possible.   

In insurance policies, arbitration and appraisal clauses are often narrowly constructed, and it would be difficult for plaintiffs to argue that class treatment was implicitly agreed to.  Nevertheless, if the decision of whether there was an implicit agreement is left in the hands of an arbitration panel with only limited court review, there will be some risk.  In drafting new policy provisions, insurers would be wise to include an express bar on class treatment if feasible.