For the second time this term, the Supreme Court heard oral arguments in a case involving class arbitration. In Oxford Health Plans LLC v. Sutter, No. 12-135 (cert. granted Dec. 7, 2012) ("Oxford Health"), the parties dispute whether the arbitrator exceeded his authority under the Federal Arbitration Act ("FAA") when he held that the parties’ agreement permitted class arbitration – despite the fact that the agreement was silent on the issue.

At first blush, this does not appear to be a knotty legal issue. After all, the Court in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010), stated 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 1775) (emphasis in the original) and that an agreement to permit class arbitration "is not a term that the arbitrator may infer solely from the fact of the parties’ agreement to arbitrate." (Id.) The contract between the Oxford Health parties is silent on the issue of class arbitration, and, under Stolt-Nielsen, it would appear that the arbitrator’s decision to permit class arbitration is on shaky ground.

The issue is complicated, however, by the FAA’s standard of review. The Oxford Health parties expressly submitted the question of class arbitration to the arbitrator before and after the Court’s decision in Stolt-Nielsen. Even after considering Stolt-Nielsen, the arbitrator held that the contract allowed class arbitration. Under the FAA, the standard of review for vacating an arbitrator’s decision is extremely deferential. Section 10(a) of the FAA provides only four limited grounds for vacating an arbitrator’s decision: (1) the award was procured by corruption, fraud, or undue means; (2) there was evident partiality or corruption in the arbitrators, or either of them; (3) the arbitrators were guilty of misconduct in refusing to postpone the hearing, in refusing to hear evidence, or any other misbehavior that prejudiced the rights of the parties; or (4) the arbitrators exceeded their powers or so imperfectly executed those powers that a mutual, final, and definite award was not made. 9 U.S.C. § 10(a). In 2008, the Court held that these grounds were the exclusive grounds for vacating an arbitration award. See Hall St. Assocs., L.L.C. v. Mattel, Inc., 128 S. Ct. 1396, 1403 (2008).

In oral arguments on March 25, the parties and the Justices struggled with how a court should review an arbitrator’s arguably incorrect decision in light of this extremely deferential standard of review, and whether (and where) to limit that deference. Counsel for Oxford Health argued that the arbitrator exceeded his powers when he forced the parties into class arbitration. The Court, therefore, had grounds to vacate the award under Section 10(a)(4) of the FAA. Counsel for the Respondents, however, argued that the arbitrator was merely interpreting the parties’ contract, and neither the FAA nor the Court’s jurisprudence permit as court to vacate a decision on an issue submitted to the arbitrator just because the court disagrees with the decision.

The Respondents’ arguments appeared to resonate with Justices Sotomayor, Ginsburg, Kagan, and Kennedy. Justice Ginsburg noted that courts do not overturn an arbitrator’s decision unless it is "off the wall." Justice Kagan attempted to limit Stolt-Nielsen’s application by noting that the parties to that case had stipulated that their contract was "silent" on the issue of class arbitration, which was not the case here. Justice Sotomayor, too, challenged Oxford Health’s assertion that the arbitrator exceeded his powers when he construed the contract – a task that the parties expressly submitted to him. Oxford Health responded with what may be its strongest argument – if an arbitrator decides to arbitrate a subject matter that the parties did not agree to arbitrate, that arbitrator has exceeded his powers. Under Stolt-Nielsen, therefore, the arbitrator had no legal grounds for holding that the parties agreed to class arbitration and exceeded his authority in imposing it on the parties.

Despite posing tough questions regarding Section 10(a)(4)’s deferential standard of review, the Court appeared uncomfortable applying a standard that would give no meaningful review of an arbitrator’s decision that flew in the face of established precedent and the language of the contract. For instance, Justice Breyer asked whether an arbitrator could consult a Magic 8-Ball in making decisions but be insulated from review as long as he stated that he was construing the contract. When questioning Respondents’ counsel, Justices Sotomayor, Scalia, and Roberts also indicated that the arbitrator’s decision disregarded the law. Counsel responded that Section 10(a)(4) does not permit a court to second-guess an arbitrator’s decision, even if that decision is wrong.

The Justices also expressed unease about the legality and practicality of imposing class arbitration in light of a contract that is silent on the issue. Justices Scalia and Alito pressed Respondents’ counsel regarding whether absent class members had agreed to be bound to or participate in class arbitration procedures and whether they had the ability to opt out of the class. Justices Breyer and Alito both inquired whether the Court’s decision in First Options of Chicago, Inc. v. Kaplan, 115 S. Ct. 1920 (1995), permits the Court to overturn the arbitrator’s decision under the holding that a court, not the arbitrator, may decide whether a party actually agreed to be bound by an arbitrator’s decision. Chief Justice Roberts stated, "The one thing First Options says is the question of who’s going to be bound by arbitration is decided by the court de novo. And in the class context, you are binding 19,999 individuals who did not agree to be bound, depending on the particular interpretation."

Justices Alito and Kennedy also appeared concerned with whether an arbitrator compensated on an hourly basis has an incentive to proceed on a class basis even if the contract does not support class arbitration. On the other hand, Justice Ginsburg raised concerns that class proceedings may be the only effective method for resolving small value claims.

As with In re American Express Merchants’ Litigation, No. 12-133 (oral arg. Feb. 27, 2013)1, the other class arbitration case the Court is considering this term, the Court will likely issue its decisisometime this Spring. Given the tension between the deferential statutory standard of review, the Justices’ clear disapproval of the arbitrator’s decision, and the Court’s recent decisions in other cases involving class arbitration, the outcome of this case is difficult to predict. Nevertheless, it would be surprising if the Court adopts a standard of review that would permit arbitrators to disregard established Supreme Court precedent under the shield that they are interpreting the language of the contract. It is more likely that the Court will attempt to find a way to reject the arbitrator’s decision in this specific case while maintaining the otherwise deferential standard of review set forth in Section 10(a) of the FAA.

In the meantime, businesses that include arbitration clauses in their commercial, consumer, and employment contracts can take certain steps to avoid finding themselves in Oxford Health’s shoes. For instance, if the parties wish to preclude class arbitration, the agreement should clearly and unmistakably state that class arbitration is prohibited and that all disputes will be resolved on the basis of individual arbitration. They may also consider including streamlined procedures for resolving small value claims or expressly require that such claims be resolved in small claims court, alleviating concerns that parties can only effectively pursue such claims in class actions. In short, carefully crafting arbitration agreements can provide at least some measure of certainty, even in the face of the Court’s evolving jurisprudence of arbitration and class actions.