Today, the Supreme Court held that a court may not overturn an arbitrator’s construction of an agreement to permit class arbitration—even if it is erroneous. In Oxford Health Plans LLC v. Sutter, a unanimous Supreme Court held that an arbitrator’s decision to allow class arbitration cannot be overturned if it was based on the construction of the agreement between the parties. In so holding, the Supreme Court noted that even an arbitrator’s interpretation that incorrectly assesses whether the parties intended to consent to class arbitration is not subject to judicial review. As Justice Kagan bluntly put it, “[ t ]he arbitrator’s construction holds, however good, bad, or ugly.”

The Court’s ruling also clarified the application of its 2010 opinion in Stolt-Nielsen v. AnimalFeeds International. In that case, the Supreme Court determined that a party may not be compelled to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so. In today’s opinion, the Court explained that the parties in Stolt-Nielsen had stipulated that they had not to come to an agreement on class arbitration. Thus, in finding that the agreement permitted arbitration, the arbitration panel in Stolt-Nielsen could not have been construing an agreement that concededly did not decide the issue. The parties in Oxford Health, in contrast, disagreed about whether their agreement permitted arbitration and asked the arbitrator to resolve that disagreement. The Court held that this is an arbitrator’s function and not an abuse of power.

Background

In April 2002, Sutter filed a breach of contract claim against Oxford Health Plans related to reimbursement rates paid by Oxford Health to physicians and other healthcare providers for primary services. After a New Jersey state court compelled arbitration, an arbitrator interpreted the agreement to permit class arbitration, relying on a broad arbitration clause:

“[ n ]o civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration. . . ." The arbitrator ruled that although the arbitration clause did not expressly mention class arbitration, it was broad enough to support the conclusion that the parties agreed to have class arbitration. The arbitrator reached the same conclusion once more after the Supreme Court decided Stolt-Nielsen.

Oxford Health attempted to vacate the arbitrator’s decisions in federal district court by claiming that he had “exceeded [ his ] powers” under Section 10(a)(4) of the Federal Arbitration Act (FAA), 9 U. S. C. §1 et seq. The district court denied Oxford Health’s motion, and the Third Circuit affirmed because the arbitrator’s interpretation of the agreement was not “totally irrational.”

The opinion

The Supreme Court unanimously affirmed. The Court held that the arbitrator was not acting outside the scope of his contractually delegated authority. Instead, the arbitrator was simply performing his bargained-for obligation: resolving the parties’ disagreement about the interpretation of their agreement.

In reaching today’s holding, the Supreme Court relied on the limited scope of review prescribed by Section 10(a)(4). Under that section, the Court explained, the “sole question” for a reviewing court “is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” As a result, the Supreme Court was not required to and did not endorse the arbitrator’s interpretation of the parties’ agreement to permit class arbitration. This limited judicial inquiry, the Court held, is justified because it gives the parties what they bargained for: the arbitrator’s construction of their agreement. Narrow judicial review also maintains arbitration’s ability to resolve disputes quickly.

The Supreme Court also noted in a footnote that Oxford Health had not argued that the availability of class arbitration is a “question of arbitrability.” Questions of arbitrability, including, for example, whether a valid agreement to arbitrate exists in the first place or whether an arbitration agreement applies to a certain type of controversy, are “presumptively for courts to decide.” When that presumption attaches, judicial review of an arbitrator’s determination of a question of arbitrability is de novo. But the Court had no occasion in this case to decide whether the availability of class arbitration is a “question of arbitrability” because Oxford Health had twice agreed to submit the question as a matter of contract interpretation to the arbitrator.

The concurrence

Justice Alito, writing for himself and Justice Thomas, concurred in the judgment. He emphasized that the majority’s result rests on Oxford Health’s concession that the arbitrator should decide the availability of class arbitration in this case and the narrow review of arbitrators’ decisions prescribed by 10(a)(4). Justice Alito cautioned, however, that there is no reason to assume that absent class members would also agree that the arbitrator should decide the availability of class arbitration. As a result, according to Justice Alito, it is unlikely that absent class members could be bound by a decision that in turn depends on the arbitrator’s erroneous interpretation of the agreement to permit class arbitration. Because arbitration is simply a matter of contract, the arbitrator had no power to modify the contract’s terms without each and every offeree, or putative class member, consenting. Going forward, Justice Alito admonished courts to keep in mind this fundamental problem before entrusting arbitrators with questions on the availability of class arbitration.

Practical implications of the decision

Today’s decision potentially increases the risks of class arbitration for defendants. As long as arbitrators’ decisions to permit class arbitration are even arguably based on the interpretation of an agreement, those decisions are not subject to searching judicial review. As a result, despite recent defense-side victories in Stolt-Nielsen and other recent Supreme Court cases, defendants face an increased likelihood of finding themselves in class arbitration with commercial stakes comparable to those of class-action litigation, yet without the protection of traditional judicial review. Yet the concerns expressed in the majority’s footnote and in the concurrence suggest that there will continue to be litigation about the availability of class arbitration. Going forward, defendants in cases presenting potential class-arbitration issues may do well to question whether they should concede that an arbitrator may pass on the question, or whether they might object on the ground that the availability of class arbitration poses a question of arbitrability warranting de novo review by a court.