In its recent decision in Oxford Health Plans LLC. v. Sutter, 569 U.S. ____ (2013), the U.S. Supreme Court confirmed that parties to an arbitration agreement still face the risk of class arbitration even if the agreement does not expressly authorize it, and that almost all the time, parties are stuck with the arbitrator's interpretation of their agreement.

The Court addressed two potentially opposing principles: that a party can be required to arbitrate claims with a class of individuals only if the party agreed to do so, and that courts will almost never overturn an arbitrator's interpretation of a contract. It concluded that the latter principle trumped, and refused to overturn an arbitrator's determination that a party agreed to class-based arbitration even though its arbitration agreement was silent on the subject. The Court left open the possibility that the result might have been different if the issue of class-based arbitration had been initially presented to the court as a gateway issue of arbitrability. Also, the Court's more recent decision in American Express Co. v. Italian Colors Restaurant, No. 12–133 (June 20, 2013) gives parties an opportunity to avoid the problems Oxford Health faced by clearly stating that the arbitration agreement precludes class arbitration.

Although Oxford Health arose as a claim against a health care plan, what it teaches fully applies to employment arbitrations as well.

Background

The Federal Arbitration Act (FAA) gives parties only very narrow bases to challenge an arbitrator's award in court. A party may overturn an arbitrator's award only by showing that:(1) the award was procured by corruption, fraud or undue means; (2) there was evident partiality or corruption in the arbitrators; (3) the arbitrators were guilty of misconduct in refusing to postpone the hearing or to hear material evidence, or by engaging in other prejudicial misconduct; or (4) the arbitrators exceeded their powers. See 9 U.S.C. 10(1)-(4). More generally, a party cannot overturn an arbitrator's award based on the argument that the arbitrator got the facts or the law wrong.

The Dispute and the Arbitration Proceedings

Oxford Health Plans entered into arbitration agreements with the physicians that provided services to its insureds. Those arbitration agreements stated, in relevant part:

No 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 in New Jersey, pursuant to the rules of the American Arbitration Association with one arbitrator.

The arbitration agreements did not discuss whether claims could be arbitrated on a class basis.

Despite this arbitration agreement, pediatrician John Sutter filed a class action in New Jersey state court alleging that Oxford Health had not properly paid him and other physicians for their services. Oxford Health sought to compel arbitration under the arbitration agreement. The parties agreed that the arbitrator could decide whether the language quoted above authorized Mr. Sutter to bring claims on behalf of a class in arbitration. The arbitrator found that it did do so.

After the arbitrator's ruling, the Supreme Court decided Stolt-Nielsen v. Animal Feeds Int’l Corp., 559 U.S. 662 (2009). There, the arbitration agreement was also silent about class arbitration, but the parties had stipulated that they had not reached any agreement about class arbitration. The arbitrators nonetheless ordered class arbitration, and lower courts rejected challenges to that order, but the Supreme Court ruled that the arbitrators exceeded their authority in ordering class arbitration. It held that "a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so." Id. at 684.

Oxford Health then asked the arbitrator to reconsider his conclusion that the arbitration agreement authorized class arbitration in light of Stolt-Nielsen. The arbitrator stood by his earlier ruling, and federal trial and appellate courts refused to overturn the arbitrator's decision.

The Supreme Court's Decision

Oxford Health appealed to the Supreme Court. It argued that, just as in Stolt-Nielsen, its arbitration agreement did not provide a contractual basis for class arbitration and the arbitrator exceeded his authority in ordering class arbitration.

But this time, the Supreme Court disagreed. Writing for the Court, Justice Elena Kagan stated that a party arguing that an arbitrator exceeded his authority under §10(a)(4) of the FAA bears a heavy burden. "It is not enough ... to show that the [arbitrator] committed an error-or even a serious error," she wrote. Because the parties "bargained for the arbitrator's construction of their agreement," an arbitral decision "even arguably construing or applying the contract" must stand, regardless of a court's view of its (de)merits...The sole question for us is whether the arbitrator (even arguably) interpreted the parties' contract, not whether he got its meaning right or wrong."

In upholding the arbitrator’s authority, the Court distinguished Stolt-Nielsen, emphasizing that there it "overturned the arbitral decision because it lacked any contractual basis for ordering class procedures, not because it lacked... a sufficient one." 569 U.S. at ____. The Court further explained that in Oxford, unlike Stolt-Nielsen, in order for the Court to overturn the arbitrator’s decision allowing class arbitration, the justices would have to find that the arbitrator misinterpreted the contract — a course of action that is barred by the FAA. The FAA permits courts to "vacate an arbitral decision only when the arbitrator strayed from his delegated task of interpreting a contract, not when he performed that task poorly." Id.

Importantly, though, the Court emphasized throughout its decision that the parties had authorized the arbitrator to decide whether the arbitration agreement authorized class-wide arbitration. It further recognized that its analysis would have been different if the parties had not asked the arbitrator to decide the question. In that case, a court would have decided whether the parties had agreed to arbitrate on a class basis and there would have been opportunities to appeal; the courts would not have been required to defer to the arbitrator’s contract interpretation.

Still left undecided by Oxford Health is whether an arbitrator or a court should decide the gateway issue of whether claims can be arbitrated on a class basis under an agreement that does not explicitly address class arbitration. The decision also leaves open whether the normal presumption of arbitrability applies to questions of arbitrability on a class basis, as opposed to the usual question of whether the dispute is within the range of matters the parties agreed to arbitrate.

Lessons To Be Learned

Oxford Health teaches both broad and narrow lessons about arbitration and arbitration agreements. Broadly, it reminds parties that arbitration has both benefits and downsides. Although arbitration can provide a quicker, more-cost effective and less risky method to resolve disputes than litigation and jury trials, it leaves parties with very little opportunity to appeal or challenge an adverse arbitration decision, even if the arbitrator makes serious mistakes regarding the facts, the law or both. Basically, parties are stuck with the arbitrator's decision, good, bad or ugly.

Narrowly, the decision shows that careful drafting of arbitration agreements can avoid the problems Oxford Healthfaced in this case. Employers and others can avoid the risk that silence or ambiguity will be interpreted to authorize class arbitration by explicitly stating in the arbitration agreement that class arbitration is prohibited. Under recent Supreme Court and other federal decisions, including AT&T Mobility LLC. v. Concepcion, 131 S. Ct. 1740 (2011), contract provisions prohibiting class arbitration and requiring an individual to arbitrate only his or her individual claims are generally enforceable. Employers should be aware, though, that in the view of the National Labor Relations Board, an arbitration agreement that precludes rank-and-file employees from pursuing claims on a class basis in court and in arbitration violates the National Labor Relations Act. (See Holland & Knight's April 23, 2013 alert discussing this issue.)

More generally, Oxford Health teaches that parties can limit the risk that an arbitrator will be allowed to decide "gateway" questions such as the substantive scope of the parties' agreement to arbitrate, or whether class arbitration is allowed, by specifically stating in their agreement that such questions must be decided by a court and not by an arbitrator. Also, a party with a substantial claim that its arbitration agreement does not cover specific substantive claims or class claims should present its argument to a court and not allow the arbitrator to decide it.