The Supreme Court voted 9-0 on Monday to uphold an arbitrator’s ruling that an arbitration agreement provides for class arbitration, despite suggestions that most of the Justices believed the arbitrator misconstrued the contract. The decision in Oxford Health Plans LLC v. Sutter, 569 U.S. ---, No. 12-135 (June 10, 2013) (“Oxford Health”) reaffirms the deferential standard of review in Section 10(a) of the Federal Arbitration Act (“FAA”). When parties agree to submit their disputes to arbitration, the courts will not disturb the arbitrator’s ruling except in extraordinary circumstances – and an arbitrator’s error is not enough to qualify as an extraordinary circumstance. The case underscores the importance of drafting arbitration agreements that express the parties’ intent specifically and unambiguously.
Sutter filed a putative class action against Oxford Health in New Jersey Superior Court in 2002, alleging that Oxford Health failed to promptly pay physicians with whom it contracted. Oxford Health successfully moved to compel arbitration of Sutter’s claims pursuant to an agreement providing that “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…” The agreement did not mention class arbitration. Oxford Health and Sutter then agreed to submit the issue of class arbitration to the arbitrator, who found that the agreement, despite its silence, “express[ed] the intent that class arbitration can be maintained.”
In Stolt-Nielsen v. AnimalFeeds International Corp., 559 U.S. 662 (2010), a 5-4 majority of the Court 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,” (559 U.S. at 684 (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.). After Stolt-Nielsen, Oxford Health asked the arbitrator to reconsider his prior decision. The arbitrator again construed the language of the arbitration provision to authorize class arbitration. Arguing that the arbitrator exceeded his authority, Oxford Health attempted to convince a federal court to vacate the arbitrator’s decision under Section 10(a)(4) of the FAA. The District Court and the Third Circuit rejected Oxford Health’s attempts, holding that its arguments addressed the merits of the arbitrator’s decision rather than his power to make that decision.
The Court’s Decision
The Court affirmed the Third Circuit, stating that, under Section 10(a)(4) of the FAA and its own precedent, “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 Court held that each of the arbitrator’s decisions regarding class arbitration were, “through and through,” interpretations of the parties’ agreement. The parties had twice expressly submitted the question of class arbitration to the arbitrator. The arbitrator analyzed the agreement and found that the parties intended to authorize class arbitration. Section 10(a)(4) of the FAA prohibits courts from inquiring further because “it permits the 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.”
The Court took pains to distinguish the facts in Stolt-Nielsen from those in Oxford Health, finding a “stark contrast” between the two. The Court emphasized that the parties in Stolt-Nielsen stipulated that the parties had never reached agreement on the issue of class arbitration, which eliminated the arbitrators’ ability to make a contrary finding based on interpretation of the agreement. In contrast, Oxford Health expressly invited the arbitrator to interpret the contract and determine whether or not the agreement permitted class arbitration. Once the arbitrator was authorized to interpret the contract, his interpretation was insulated from a court’s de novo review.
Both the Court’s opinion and Justice Alito’s concurring opinion (joined by Justice Thomas) strongly implied that the Court disagreed with the arbitrator’s interpretation of the contract. Justice Kagan’s opinion for the Court emphasized that “nothing we say in this opinion should be taken to reflect any agreement with the arbitrator’s contract interpretation, or any quarrel with Oxford’s contrary reading.” Justice Alito went even further, writing that, if the Court were to proceed under a de novo standard, it would have “little trouble concluding that [the arbitrator] improperly inferred an implicit agreement to authorize class-action arbitration.” Both opinions, however, were constrained by the arbitration agreement’s failure to address the issue directly, the FAA’s strict standard of review, and the parties’ express submission of the issue to the arbitrator.
Guidelines for the Future
Despite its narrow holding in Oxford Health, both the Court’s opinion and the concurrence provide valuable guidelines for attorneys drafting and litigating arbitration clauses. In footnote 2 of the Court’s opinion, Justice Kagan wrote that the Court would be “face[d] with a different issue” if Oxford Health argued to a court that class arbitration was a gateway “question of arbitrability” that should be decided by a court. She noted that the Court has not decided whether the availability of class arbitration is such a gateway question, but that Oxford Health had not presented the Court with an opportunity to do so. While the Court thus hinted at inviting the issue, it noted that a clause in the agreement delegating enforceability determinations to the arbitrator would also preclude the Court from evaluating the question de novo.
Justice Alito’s concurring opinion also raised a novel question of whether the arbitrator’s decision would be enforceable against absent class members. While both opinions agree that the Court’s hands were tied by the parties’ submission of the question to the arbitrator, Justice Alito doubted that this submission could be interpreted as an agreement by all persons who were absent members of a merely proposed class to submit the issue to the arbitrator. Justice Alito’s concurrence thus appears to build on the Court’s unanimous opinion in Standard Fire Insurance Co. v. Knowles, 133 S. Ct. 1345 (Mar. 19, 2013), which held that a putative class representative’s stipulation cannot bind absent class members before a class is certified.
While Oxford Health did not break new ground regarding class action waivers in arbitration, practitioners can apply the decision’s principles to draft and enforce class action waivers in arbitration provisions. That begins by including an express and unambiguous statement that the parties do not agree to class arbitration. Had the Oxford Health agreement contained such an express term, the arbitrator would have had no discretion to imply the availability of class arbitration. Parties seeking to enforce existing arbitration provisions that do not contain an express prohibition on class arbitration can arguably best do so before a court as a question of arbitrability, rather than submitting the issue to an arbitrator as a question of contract interpretation, which dramatically limits the scope of appellate review.
When a party has the luxury of drafting a new arbitration agreement, another option, following the Court’s decision in Rent-A-Center West v. Jackson, 561 U.S. ---, 130 S. Ct. 2772 (2010), may be to include both a clear prohibition on class arbitration and a “delegation provision” directing that the arbitrator will decide all challenges to the arbitration agreement. Parties often use such delegation provisions to insulate arbitration agreements from courts that are traditionally hostile to arbitration. But, it is important to balance the risks in each case. While some judges have gone out of their way to strike down arbitration agreement, Oxford Health indicates that parties who invite arbitrators to interpret their contracts must be prepared to live with the arbitrator’s decision.