On June 10, 2013, the Supreme Court in Oxford Health Plans LLC v. Sutter, No. 12-135, unanimously held that a court cannot vacate an arbitrator’s decision that the parties’ contract authorized class arbitration, notwithstanding judicial skepticism about the correctness of the arbitrator’s ruling, because courts may review an arbitral decision "only where the arbitrator strayed from his delegated task of interpreting a contract, not where he performed that task poorly." The Court distinguished what some had thought was a contrary prior ruling disallowing class arbitration in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662 (2010), by confining that case to its particular facts. The practical effect of the ruling in Oxford Health Plans is that a party seeking to resolve disputes through arbitration without risking the prospect that the arbitrator might allow class arbitration should state this limitation on the arbitrator’s power clearly and unambiguously in the arbitration agreement.
Oxford Health Plans involved a contract claim brought by a physician against a health insurer over payments to physicians. The physician’s contract with the insurer called for binding arbitration of contractual disputes, but the physician nevertheless filed a proposed class action lawsuit in state court on behalf of himself and various other medical professionals under contract with that insurer. The insurer moved to compel arbitration, and the trial court granted the motion. After the parties agreed to permit the arbitrator to determine whether the contract authorized class arbitration, the arbitrator found that it did.
The arbitrator reached this decision by considering the language of the arbitration provision, which stated that "[n]o 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." Reasoning that the clause sent to arbitration all civil actions that could not be brought in litigation, including class action lawsuits, the arbitrator concluded that the broad language of the provision, on its face, authorized class arbitration.
Dissatisfied with the result, the insurer moved in federal court to vacate the arbitrator’s decision, pursuant to Section 10(a)(4) of the Federal Arbitration Act ("FAA"), which permits vacatur of an arbitral award if the arbitrator has "exceeded [his powers]." The district court denied the motion, and the Third Circuit affirmed the denial.
The Supreme Court’s Earlier Stolt-Nielsen Ruling
While the arbitration was pending, the Supreme Court issued a ruling concerning class arbitrations in the Stolt-Nielsen case. The Court held there that a "party need not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the parties agreed to do so." 559 U.S. at 684. The unusual feature of Stolt-Nielsen, however, was that the parties there had stipulated that they had never reached an agreement regarding class arbitration. Therefore, pursuant to Section 10(a)(4), the Supreme Court vacated the arbitrators’ decision in that case to permit class arbitration, reasoning that in the absence of such an agreement, their determination could not have been based on contractual interpretation and instead was merely an imposition of their "own view of sound policy." Id. at 672.
In light of the Stolt-Nielsen decision, the insurer in Oxford Health Plans requested that the arbitrator review his prior decision on class arbitration. The arbitrator did so but arrived at the same conclusion. He found that Stolt-Nielsen did not apply because in Stolt-Nielsen there was no clause pertaining to class arbitration and thus nothing for the panel to interpret, whereas in Oxford Health Plans there was a clause concerning class arbitration and the parties merely disputed its meaning; there thus was a contractual provision for him to interpret, and he interpreted it to mean that class arbitration was authorized.
The insurer returned to the district court, seeking to vacate this latest ruling, but was again denied by the district court, and that denial was then affirmed by the Third Circuit. The Supreme Court granted certiorari to resolve a split among several circuits (the Second, Third, and Fifth) on whether Section 10(a)(4) permits vacatur of an arbitral award under these or similar facts. Holding that it does not, the Court affirmed the Third Circuit’s ruling.
The Supreme Court’s Ruling
The Court began its analysis by noting that parties seeking relief under Section 10(a)(4) of the FAA bear a heavy burden, as that statute permits vacatur of an arbitral award only if the arbitrator has exceeded his powers. As a general rule, the Court observed, an arbitrator’s decision will be disturbed "only in very unusual circumstances." Citing the Court’s previous decision in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008) (discussed in our March 27, 2008 client alert, "U.S. Supreme Court: Parties May Not Expand by Agreement the Scope of Judicial Review Under the Federal Arbitration Act"), the Court explained that this standard is deliberately set high in order to "maintain arbitration’s essential virtue of resolving disputes straightaway." If parties could take "full-bore legal and evidential appeals," the Court continued, "arbitration would become merely a prelude to a more cumbersome and time-consuming judicial review process."
In the case at hand, the Court noted that the parties had agreed that an arbitrator should decide the proper construction of their contract. Once they entered into that agreement, any decision reached by the arbitrator that in any way, or even arguably, construed or interpreted their contract became binding and beyond the scope of judicial review, even if a court did not agree with the arbitrator or found his analysis to be flawed. Therefore, the Court concluded, the only question before it was whether "the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong." Because the arbitrator, not just once but twice, did as the parties asked — considered the meaning of their contract and whether it authorized class arbitration proceedings — it was clear to the Court that the arbitrator had not exceeded the scope of his authority, and thus any decision he made was out of the reach of judicial review under Section 10(a)(4):
"In sum, Oxford chose arbitration, and it must now live with that choice. Oxford agreed with Sutter that an arbitrator should determine what their contract means, including whether its terms approved class arbitration. . . . [The arbitrator’s] interpretation went against Oxford, maybe mistakenly so. But still, Oxford does not get to rerun the matter in a court."
The Court explained that this ruling was not inconsistent with its prior ruling in Stolt-Nielsen, in which it seemed to have set limits on an arbitral panel’s authority to determine that class arbitration procedures could be used. The Court made clear the significant distinction between the two cases: in Stolt-Nielsen, the parties stipulated that their contract did not contain any agreement at all regarding class arbitration, so that there was simply no basis for the arbitrators’ decision to allow class arbitration. But in Oxford Health Plans, where there was no such stipulation, and there was a contractual provision that at least arguably could be read to concern class arbitration, there was a basis for the arbitrator to issue a decision addressing that question. Thus, even if the basis for that decision appeared slim or insufficient, that decision could not be judicially disturbed.
Although judicial deference to contractual arbitration provisions has frequently been seen as advantageous by corporations seeking swift and favorable resolution of contractual disputes with individuals, Oxford Health Plans may call that perception into question. Judicial deference to arbitral rulings may prove a double-edged sword when contracts do not clearly and unambiguously preclude arbitrators from having the power to authorize class arbitration procedures. Oxford Health Plans thus points to a clear and easy remedy, however: if a party wishes for all contractual disputes to be resolved by individual, and not class, arbitration only, that limitation on the arbitrator’s power to order class arbitration should be stated explicitly in the contract. An arbitration provision which is simply silent on this issue may be read to confer upon the arbitrator the power to decide this issue, and to interpret the contract as authorizing class arbitration. Whether or not this reading is accurate, Oxford Health Plans teaches that once the arbitrator does so, a court will be powerless to intercede.