United States: Supreme Court Docket Report - June 15, 2009

Originally published June 15, 2009

Keywords: Federal Arbitration Act, FAA, class arbitration, Petroleum Marketing Practices Act, Stolt-Nielsen S.A. v. Animalfeeds International Corp, Green Tree Financial Corp. v. Bazzle, Mac's Shell Service, Inc. v. Shell Oil Products Company, constructive termination, constructive nonrenewal claims, Marcoux v. Shell Oil Products Co, Hamilton v. Lanning

On June 15, 2009, the Supreme Court granted certiorari in two cases of interest to the business community:

Federal Arbitration Act—Class Arbitration

The Supreme Court today granted certiorari in Stolt-Nielsen S.A. v. Animalfeeds International Corp., No. 08-1198, to decide whether the Federal Arbitration Act (FAA) authorizes the use of class arbitration proceedings when the parties' arbitration agreement does not expressly permit class arbitration—an issue that was presented in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), but ultimately not decided when that case was remanded for a determination by the arbitrator of whether the parties' contract was actually silent on the question of class arbitration. 

The Court's decision in Stolt-Nielsen will be of significant interest to all businesses that have entered into arbitration agreements that do not specifically address the availability of class arbitration, and will likely also be of interest to businesses whose arbitration agreements prohibit the use of class arbitration.  At a minimum, the Court seems poised to determine whether the FAA permits an arbitrator to allow class arbitrations to proceed when an arbitration clause is silent on that question.   The answer is of great importance, because class arbitration dramatically increases the stakes of any arbitration proceeding and because arbitral awards are generally given far greater deference by reviewing courts than are class action judgments arising from litigation.

In the action giving rise to Stolt-Nielsen, Animalfeeds sued Stolt-Nielsen and other shippers, alleging that they had "engaged in a global conspiracy to restrain competition in the world market for parcel tanker shipping services." Stolt-Nielsen SA v. Animalfeeds Int'l Corp., 548 F.3d 85, 87 (2d Cir. 2008) (internal quotation omitted).  The parties had entered into an arbitration agreement contained in a standard form contract used in the shipping industry that was silent on whether class arbitration proceedings are permissible.   After the plurality opinion in Bazzle was issued, the parties agreed that a panel of arbitrators would be initially charged with determining "whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class."  Id. at 88 (internal quotation omitted).  The panel determined that, under the arbitration clause at issue, class arbitration was permissible.  Defendants filed a petition to vacate the arbitrators' determination with the federal district court for the Southern District of New York, which held that class arbitration was impermissible and that the arbitrators' decision "was made in manifest disregard of the law."  Id. at 90.

On appeal, the Second Circuit reversed.  The court of appeals stressed that the "manifest disregard" doctrine is applied "exceedingly rare[ly]" and may only be used to overturn the decision of an arbitration panel when "the law . . . [is] clear," "the law was in fact improperly applied," and the arbitrators "actually" knew of the law.  Id. at 93 (quoting Duferco Int'l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 389-90 (2d Cir. 2003)).  The court rejected Stolt-Nielsen's contentions that the panel had manifestly disregarded the law, notably holding that industry-wide custom—which excludes class arbitration—is not determinative under either federal maritime doctrine or state contract law.  See Stolt-Nielsen, 548 F.3d at 96-99. The Second Circuit also distinguished earlier cases that had disallowed class arbitration in the face of contractual silence, holding that because these cases "read the [FAA] to prohibit [consolidated or class] proceedings," they were "abrogated" by Bazzle's determination that "arbitrators must approach such questions as issues of contract interpretation to be decided" as matters of "contract law."  Stolt-Nielsen, 548 F.3d at 100.

Petitioners (defendants below) argued that the Second Circuit's interpretation of Bazzle is in conflict with the views of other circuits.  For example, petitioners contended that the Seventh Circuit has held, in effect, that Bazzle is not binding precedent because there was no "single rationale endorsed by a majority of the Court."  Employers Ins. Co. of Wausau v. Century Indem. Co., 443 F.3d 573, 580 (7th Cir. 2006).  The Association of Ship Brokers and Agents, the Society of Maritime Arbitrators, Inc., and the U.S. Chamber of Commerce all filed amicus curiae briefs in support of the petition for certiorari.

Absent extensions, which are likely, amicus briefs in support of the petitioners will be due on August 6, 2009, and amicus briefs in support of the respondent will be due on September 8, 2009.  Any questions about this case should be directed to Evan Tager (+1 202 263 3240) in our Washington, D.C. office.

* * * * * *

Petroleum Marketing Practices Act—Constructive Termination and Constructive Nonrenewal Claims

Today the Supreme Court, consolidating two cases that arose from the same decision below, granted certiorari in Mac's Shell Service, Inc. v. Shell Oil Products Company and Shell Oil Products Company v. Mac's Shell Service, Nos. 08-240 and 08-372, to consider the availability and scope of claims for "constructive termination" and "constructive nonrenewal" under the Petroleum Marketing Practices Act (PMPA), 15 U.S.C. §§ 2801–2806.  The scope and availability of such claims are of considerable importance to franchisors and franchisees in the petroleum industry across the country.

In 08-372, the Supreme Court agreed to review the First Circuit's conclusion that a franchisee may assert a claim of "constructive termination" under the PMPA even if the franchisee continues to exercise rights under all three statutory elements of the "franchise," which comprises a set of contracts giving the franchisee the right to occupy leased marketing premises, to purchase fuel from the franchisor, and to use the franchisor's trademarks.  In the decision below, Marcoux v. Shell Oil Products Co., 524 F.3d 33, 46 (1st Cir. 2008), the First Circuit agreed with the franchisees that the franchisors' elimination of a rent subsidy program amounted to a constructive termination of the franchise insofar as the change in terms "effectively ended" the lease component of the franchise.  The First Circuit reached this conclusion notwithstanding the fact that the franchisees, despite the effective rent increase, remained in business selling the franchisor's fuel and using the franchisor's trademarks at their respective leased premises.

The Fourth Circuit has taken a similarly broad view of constructive termination claims.  By contrast, two other circuits (the Sixth and the Ninth) have taken a narrower view of constructive termination, and held that such a claim will lie only if the franchisor's conduct effectively compels the franchisee to abandon one or more of the statutory elements of the franchise.  In Portland 76 Auto/Truck Plaza, Inc. v. Union Oil Co., 153 F.3d 938, 948 (9th Cir. 1998), for example, the Ninth Circuit found that a constructive termination claim failed as a matter of law because the franchisee "stayed in business" even after it started getting charged more for fuel.

The question presented in 08-240 is whether a franchisee that operates under a renewal agreement that it signed "under protest" can state a claim for "constructive nonrenewal" of the franchise relationship.  524 F.3d at 49.  In the case below, as each franchisee's lease expired, the franchisor presented the franchisee with a new lease that altered the way that rent was calculated.  The franchisees claimed that the change was not made in good faith, and therefore violated the PMPA; nevertheless, they signed the new leases under protest and operated under the new terms.  Agreeing with the Fifth and Seventh Circuits, and parting ways with the Ninth, the First Circuit concluded that a franchisee that signs a renewal agreement cannot claim constructive nonrenewal even if the franchisee signs "under protest" and immediately brings suit under the PMPA.  The First Circuit observed that the proper course of action for a franchisee faced with objectionable renewal terms is to refuse to sign the agreement, wait for a notice of termination, and then seek a preliminary injunction and other relief pursuant to the PMPA.  See id. at 48–49; 15 U.S.C. § 2805.

Perceiving a disparity in bargaining power between franchisors and franchisees, Congress enacted the PMPA to create a single, uniform set of federal rules governing the termination of franchises and the nonrenewal of franchise relationships.  The First Circuit's decision squarely implicates two different circuit splits that go to the heart of how the PMPA structures the relationship between franchisors and franchisees in the petroleum industry.  The Supreme Court's decision in this case will inevitably have significant national ramifications.

Absent extensions, which are likely, amicus briefs in support of the petitioners are due August 6, 2009, and amicus briefs in support of the respondents are due September 8, 2009.  Any questions about this case should be directed to Andrew Tauber (+1 202 263 3324) in our Washington, DC office.

* * * * * *

Today, the Supreme Court also invited the Solicitor General to file a brief expressing the views of the United States in one other case of interest to the business community:

Hamilton v. Lanning, No. 08-998.  The question presented is whether the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 eliminated judicial discretion by requiring an above-median income debtor to pay to unsecured creditors the net result reported on Official Form 22C.

Please visit us at www.appellate.net.

Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Copyright 2009. Mayer Brown LLP, Mayer Brown International LLP, and/or JSM. All rights reserved.