Continuing its recent love affair with arbitration, the U.S. Supreme Court issued two decisions at the end of its term further embracing parties’ ability to contract on the issue.
In a unanimous decision, the justices held in Oxford Health v. Sutter that an arbitrator’s interpretation of an arbitration agreement to allow class arbitration did not “exceed his powers” under §10(a)(4) of the Federal Arbitration Act, upholding an award for the plaintiffs.
On appeal from the 3rd U.S. Circuit Court of Appeals, the Oxford case involved an arbitration agreement between a managed care plan and member physicians. One of the doctors filed a putative class action suit against the plan charging that it failed to make full and prompt payments. A trial court ordered the case to arbitration.
Under the agreement between the parties, arbitration was required of all claims and prohibited any court “civil action concerning any dispute.” But the agreement failed to address the issue of classwide arbitration.
The parties agreed to allow the arbitrator to decide whether class arbitration was authorized by the parties’ agreement. The arbitrator found it was and subsequently issued an award for the plaintiff. In the interim the U.S. Supreme Court decided Stolt-Nielsen v. Animal Feeds International Corp., where the justices held that if the parties consent to class arbitration, it is permitted by the FAA. Pointing to Stolt-Nielsen and arguing the parties hadn’t truly consented to the classwide decision, the health plan appealed to the 3rd Circuit, which affirmed the arbitrator’s decision.
Emphasizing the limited judicial review allowed by the FAA over an arbitrator’s ruling, the Court said it essentially lacked the authority to review the issue.
Or, as Justice Elena Kagan wrote, “the sole question for us is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.”
The arbitrator “did what the parties had asked: He considered their contract and decided whether it reflected an agreement to permit class proceedings,” wrote Justice Kagan. “That suffices to show that the arbitrator did not ‘exceed [his] powers.’ …
“So long as the arbitrator was ‘arguably construing’ the contract – which this one was – a court may not correct his mistakes under §10(a)(4). The potential for those mistakes is the price of agreeing to arbitration,” Justice Kagan noted.
The Court continued its pro-arbitration trend just ten days later with American Express Co. v. Italian Colors Restaurant, where the justices declined to invalidate a contractual waiver of class arbitration under the “effective vindication” doctrine. Even though it would be cost-prohibitive for the plaintiffs to bring their claims on an individual basis, the 5-3 Court stuck with a strict contract interpretation.
The case began with a group of merchants alleging that American Express violated the Sherman Act by forcing them to accept credit cards at rates 30 percent higher than the fees for competing cards. The company moved to compel individual arbitration pursuant to the agreement between the parties, but the plaintiff objected.
The antitrust allegations at issue required complex evidentiary proof involving expensive expert testimony, which the merchants estimated could cost up to $1 million per arbitration. The potential statutory recovery for a victorious plaintiff: $38,549 at most. Facing a losing battle, the plaintiffs said their contractual waiver of classwide arbitration should be thrown out.
The 2nd U.S. Circuit Court of Appeals sided with the merchants, relying upon the doctrine of “effective vindication” to render the class action waiver unenforceable.
But the justices reversed.
“Respondents argue that requiring them to litigate their claims individually – as they contracted to do – would contravene the policies of the antitrust laws,” wrote Justice Antonin Scalia for the majority. “But the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.”
The Court refused to apply the “effective vindication doctrine,” which it characterized as a “judge-made exception to the FAA” intended to prevent a prospective waiver of “a party’s right to pursue statutory remedies.” The doctrine would help plaintiffs facing exorbitant filing and administrative fees attached to arbitration that would make access to the forum impossible, Justice Scalia suggested. “But the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”
“The class-action waiver merely limits arbitration to the two contracting parties. It no more eliminates those parties’ right to pursue their statutory remedy than did federal law before its adoption of the class action for legal relief in 1938,” the Court concluded.
To which Justice Kagan – joined in her dissent by Justices Ruth Bader Ginsburg and Stephen Breyer – replied with “the nutshell version of today’s opinion, admirably flaunted rather than camouflaged: Too darn bad.”
She cautioned that the decision will allow arbitration clauses to “chok[e] off a plaintiff’s ability to enforce congressionally created rights.”
To read the decision in Oxford Health Plans v. Sutter, click here.
To read the decision in American Express Co. v. Italian Colors Restaurant, click here.
Why it matters: Although the American Express case was decided in the context of antitrust litigation, the decision is likely a boon for employers. Under the Court’s reasoning, an employer can prohibit classwide arbitration as part of an employment agreement, effectively shutting the door on employment class actions. Employers seeking to limit class proceedings should broadly define the term “class action” in the arbitration agreement to include Fair Labor Standards Act collective action to avoid any attempts by employees to circumvent the prohibition. While the American Express decision will have a more significant impact, together with the Oxford opinion, the takeaway for lawyers is the Court’s enthusiasm for – and likelihood of upholding – arbitration agreements. The Oxford case did leave one open question for future litigation over arbitration, however. Under the FAA, parties to an arbitration agreement must consent to classwide proceedings. But what constitutes consent? The parties in Oxford agreed to let the arbitrator decide and the agreement itself was silent on whether class-action arbitration was allowed, so the issue remains unclear. One hint was provided by a concurring opinion authored by Justice Samuel Alito and joined by Justice Scalia, which seemed to suggest that silence on the issue does not equate to consent. “If we were reviewing the arbitrator’s interpretation of the contract de novo, we would have little trouble concluding that he improperly inferred [a]n implicit agreement to authorize class action arbitration,” Justice Alito wrote. A key takeaway is that it is critical to be clear in the agreement and not leave the issue open for interpretation.