Whether class-wide claims should be permitted in cases submitted to arbitration under the terms of arbitration provisions in contracts (class arbitrations) and who -- courts or arbitrators -- should make that determination, are questions that have perplexed courts for several years. The United States Supreme Court has addressed class arbitration issues a number of times, and most recently on June 10, 2013, the Court again entered the fray. This time, the Court addressed the scope of an arbitrator’s authority to interpret the terms of an arbitration agreement as permitting class arbitration, and the limits on a court’s authority to overturn that interpretation.
In Oxford Health Plans LLC v. Sutter (Oxford Health), a unanimous Supreme Court held that, where parties to an arbitration agreement bargain for the arbitrator’s interpretation of their agreement, the arbitrator’s decision for or against permitting class arbitration may not be challenged. Speaking for the Court, Justice Elana Kagan left no room for doubt that by agreeing that the arbitrator should interpret the contact, and specifically whether the agreement permits class arbitration, parties were bound to accept the “good, bad or ugly” of the arbitrator’s construction of that agreement. Just as importantly, courts may not overturn the decision of an arbitrator to require class arbitration when the arbitrator has been empowered by the parties to interpret their agreement and does so --whether the conclusion is right or wrong.
Class Arbitrations and Arbitrator Authority
Whether arbitrators may decide to permit class arbitrations under the terms of arbitration agreements that typically contain no reference to class-wide claims has been addressed in terms of whether the arbitrator doing so exceeds his or her authority, and whether a court may overturn such a decision. Under the Federal Arbitration Act (FAA), arbitration agreements are enforced in accordance with their terms, and decisions by arbitrators are subject to very limited review. An arbitrator’s decision may be overturned -- vacated -- only on four specific grounds provided in the FAA, one of which is "where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made." FAA §10(a)(4).
Guided primarily by decisions of the United States Supreme Court, federal courts are extremely deferential to the decisions of arbitrators and, as commonly stated, as long as the arbitrator is even arguably construing or applying a contract and acting within the scope of his or her authority, even if a court believes the arbitrator has committed serious error, the decision will not be overturned. Questions going to arbitrator decisions in regard to class arbitration are considered against this highly deferential backdrop.
Whether class arbitration should be permitted, and who, as between the courts and arbitrators, should make that determination, are issues that have perplexed courts for several years. More recently these and related issues regarding class arbitrations have led to several decisions by the Supreme Court. In 2011, for example, the Supreme Court determined that state laws may not prohibit provisions in arbitration agreements barring class arbitrations. The Court also recently addressed the scope of authority for arbitrators to determine whether class arbitration may proceed when the parties’ arbitration agreement is silent on that point, holding that arbitrators may not do so in the absence of a contractual basis for concluding that parties agreed to class arbitration. Simply agreeing to arbitration of disputes does not equal an agreement for class arbitration. These and other decisions did not finally resolve all issues going to the scope of an arbitrator’s authority in the interpretation of an arbitration agreement.
Uncertainty concerning arbitrators’ authority with respect to determining whether class arbitration is permitted under an arbitration agreement remained. U.S. Courts of Appeal took conflicting positions on whether an arbitrator has the power to decide whether an arbitration agreement permits class arbitration. The U.S. Court of Appeals for the Fifth Circuit held that an arbitrator exceeds his authority by requiring parties to submit to class arbitration when there is no apparent basis in the arbitration agreement to conclude that the parties agreed to proceed with class arbitration. In that case, the parties’ agreement made no mention of class arbitration, and the question was put to the arbitrator by the plaintiff under a "Clause Construction" provision of rules of the American Arbitration Association -- the forum in which the case would be heard -- dealing with class arbitrations. Acting on that request, the arbitrator determined that the parties implicitly agreed to class arbitration. The defendant challenged the decision in federal court as exceeding the arbitrator’s authority because it was made without sufficient contractual basis. The U.S. Court of Appeals ultimately agreed, finding that the arbitrator had exceeded his powers in forcing the parties to class arbitration. The Court observed that nothing in the arbitration agreement addressed class arbitration, and that in spite of the deferential standard of review of arbitrators’ decisions, this arbitrator had no basis for his class arbitration determination. Arbitrators should not, said the Court, find implied agreements to submit to class arbitration.
An opposing view of the U.S. Court of Appeals for the Second Circuit held that an arbitrator does not exceed her authority in interpreting an arbitration agreement that makes no mention of class arbitration in finding that the agreement permits class arbitration of claims where the parties submitted the question to the arbitrator. In that case, the arbitrator proceeded to find that there was no express prohibition on the pursuit of class claims, and that she would not, therefore, read into the agreement any intent to prohibit class arbitration. On that basis, and armed with legal precedent that a term may not be inserted into an agreement to benefit a party that has chosen to omit it from its own contract, the arbitrator permitted claims to proceed in arbitration on a class-wide basis. An attempt to overturn that decision was ultimately rejected by the U.S. Court of Appeals, which held that, despite the fact that the arbitration agreement made no mention of class arbitration, the parties had empowered the arbitrator to determine whether the agreement permitted it. The Court of Appeals concluded that, because the question had been properly submitted to the arbitrator, it was not the province of the court to decide whether she "got it right." The parties, said the Court, had agreed that they disagreed about whether their arbitration agreement permitted class arbitration, and they submitted the question to the arbitrator. The split between these two Courts of Appeal was the basis for the Supreme Court’s review of arbitrator authority "in similar circumstances" in Oxford Health.
Oxford Health: The Parties Got What They Bargained For
John Sutter, a pediatrician, entered into a contract with Oxford Health Plans, a health insurance company. Sutter agreed to provide medical care to members of the Oxford network, for which Oxford would pay him at agreed rates. Sutter eventually claimed that Oxford had failed to make full and prompt payment to him and other doctors in violation of their agreements with Oxford. He brought a class action lawsuit against Oxford in a New Jersey state court, but the case was ordered to arbitration under the terms of an arbitration clause in the agreement providing:
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.
As arbitration clauses go, this one in Sutter’s agreement with Oxford Health Plans is unremarkable. It makes no reference to claims on behalf of a class being submitted to arbitration. When his case was ordered to arbitration by the New Jersey court, Sutter continued to assert his claim on a class basis. Oxford maintained that the parties’ agreement could not be construed as permitting class arbitration. Oxford agreed with Sutter, however, to submit the question of whether the agreement authorized class arbitration to the arbitrator. The question turned on the construction of the parties’ agreement -- whether the language of the arbitration clause, making no mention of class arbitration, nevertheless expressed the intent of the parties that all civil actions, in whatever form, should be heard and determined in arbitration. The arbitrator ruled affirmatively, and ordered the case to proceed in arbitration on a class-wide basis. Although the parties’ agreement made no mention of class arbitration, the arbitrator concluded, based on the text of the arbitration clause, and analyzing the scope of what it barred from court and what it required to be arbitrated, that the clause, on its face, expressed the parties’ intent that class action arbitration could be maintained.
As mentioned earlier, the Supreme Court, prior to Oxford Health, had addressed the scope of an arbitrator’s authority to require class arbitration when the parties’ agreement was silent on the point. The Court, in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp. (2010), held that an arbitrator may not impose class arbitration on parties without identifying a governing rule, or the language of the contract, or some other evidence that the parties had actually agreed on the question of class arbitration. The Court cautioned that arbitrators are not free to impose class action procedures in arbitration based on their own policy judgments or grounds other than the arbitration agreement itself, or some background principle of law that would affect its interpretation. The arbitrator in Stolt-Nielsen did not construe the parties’ agreement or identify any agreement authorizing class arbitration.
Faced with the arbitrator’s ruling to proceed as a class arbitration in Oxford Health, and relying on the Supreme Court’s decision in Stolt-Nielsen, Oxford sought to overturn (vacate) the ruling in court. Oxford argued that, despite the agreement between it and Sutter to submit the interpretation of their arbitration agreement to the arbitrator, the arbitrator necessarily exceeded his power by ordering the parties to arbitration when there was no basis in the arbitration agreement for doing so. The arbitrator, according to Oxford, acted outside the scope of his authority, and his decision "misconstruing a contract to approve class proceedings" in the absence of an identifiable contractual basis, should be vacated under § 10(a)(4) of the FAA. Oxford lost in the lower federal courts. Indeed, the U.S. Court of Appeals for the Third Circuit did not mince words in opining: "Oxford’s objections to the ruling were simply dressed up arguments that the arbitrator interpreted the agreement erroneously." Because of the split among other U.S. Courts of Appeal on related issues of arbitrator authority in regard to class arbitrations discussed earlier, the U.S. Supreme Court agreed to hear the case.
The Supreme Court agreed with each of the lower courts that Oxford had no basis to overturn the arbitrator’s decision permitting class arbitration. Because the parties had agreed that the arbitrator would construe their agreement to determine whether it permitted class arbitration, the issue was not whether the arbitrator had authority to make the decision, but rather only whether he actually construed the parties’ agreement. Justice Kagan framed the issue in simplest terms: "[T]he sole question for us is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong." And on that, she concluded, the parties got exactly what they bargained for -- the arbitrator considered their contract and decided whether it reflected an agreement to permit class proceedings. That, she said, was sufficient to show that the arbitrator did not exceed his authority.
Oxford sought to convince the Court that the arbitrator had committed a serious error in his interpretation of the arbitration agreement. But this, said the Court, goes only to the merits of the arbitrator’s decision, not to whether he exceeded his authority. Justice Kagan explained that convincing a court of an arbitrator’s error -- even his grave error -- is not enough to support a contention that the arbitrator exceeded his authority. She added: The potential for those mistakes is "the price of agreeing to arbitration" and that "[t]he arbitrator’s construction holds, however good, bad or ugly."
Some Concerns in the Wake Of Oxford Health
At one level, this most recent foray by the Supreme Court into the uncertain world of class arbitration speaks simply to the degree of deference accorded decisions of arbitrators who act consistent with the authority extended to them by the parties in determining whatever issue is put before them to decide. The parties in Oxford Health agreed that the arbitrator should decide whether their agreement permitted class arbitration, and he did so. The Court specifically said in Oxford Health, and previously in Stolt-Nielsen, that it was not deciding the overarching issue of whether the availability of class arbitration is a question of arbitrability itself. But it did affirm that class arbitration would proceed in Oxford Health based on the arbitrator’s determination. Two Justices of the Supreme Court, although concurring with the other Justices in the outcome, articulated a broader concern in the circumstances of the case.
Justices Alito and Thomas agreed that the result in Oxford Health followed directly from the concession made by Oxford to have the arbitrator determine whether the parties’ agreement permitted class arbitration. But they expressed concern with the result that, unlike Oxford, absent members of the plaintiff class never conceded that the arbitrator should decide whether to conduct a class arbitration. Moreover, they made clear that, if they were reviewing the arbitrator’s interpretation of the agreement on a clean slate, they would
conclude that he improperly inferred an agreement to authorize class-wide arbitration. The absent members of the plaintiff class, they said, have not submitted themselves to the arbitrator’s authority in any way. Although all members of the defined class signed contracts with arbitration clauses materially identical to that signed by Sutter, the Justices noted that "an erroneous interpretation of contracts that do not authorize class arbitration cannot bind someone who has not authorized the arbitrator to make that determination." The bottom line, of course, is that absent class members may not be bound by an arbitrator’s ultimate resolution of a case.
These concerns remain, and, as Justices Alito and Thomas have pointed out, they also make class arbitrations vulnerable to collateral attack unless, going forward, there is a workable means of binding absent class members to a decision by an arbitrator who they have not contractually authorized to decide anything on a class-wide basis. All things considered, they say, courts should give pause before concluding that the availability of class arbitration is a question that an arbitrator should decide.