In Oxford Health Plans, LLC v. Sutter, a case addressing an arbitration clause that was silent as to whether it permitted class-wide arbitration, the United States Supreme Court held that so long as an arbitrator’s decision construes the parties’ contract, the arbitrator has not "exceeded his powers" – which would permit a court to vacate the decision under §10(a)(4) of the Federal Arbitration Act (“FAA”) – and the arbitrator’s constructions should be upheld, “however good, bad, or ugly.”
Before we dig into Sutter, we have to go back a little to 2010 when the Supreme Court issued its decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., and held that the FAA bars class arbitration unless the parties have specifically agreed to it. Many, including Oxford Health who relied on Stolt-Nielsen heavily in its briefing, read Stolt-Nielsen as the curtain closing on class-wide arbitrations, but Sutter (and AT&T Mobility LLC v. Concepcion) makes clear that class-wide arbitration was not eradicated by Stolt-Nielsen.
The Facts Are Not Complicated, But the Procedure Is a Little Muddled
Sutter, a pediatrician, provided medical services to Oxford Health Plans’ insureds under a fee-for-services contract that required binding arbitration of contractual disputes, though it did not specify whether it covered class claims. The arbitration clause more broadly provided in relevant part:
“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.”
Nevertheless, Sutter filed a proposed class action claiming Oxford failed to properly pay him and others like him who had similar contracts with Oxford. Oxford moved to compel arbitration, and the parties agreed the arbitrator should decide whether the contract authorized class arbitration. The arbitrator found that it did, reasoning that the clause sent to arbitration “’the same universal class of disputes’ that it barred the parties from bringing ‘as civil actions’ in court: the ‘Intent of the clause’ was ‘to vest in the arbitration process everything that is prohibited from the court process.’” Oxford then filed a motion to vacate the arbitrator’s decision claiming the arbitrator “exceeded [his] powers” under the FAA. The trial court denied the motion, and the Third Circuit affirmed.
While Sutter proceeded to arbitration, the Supreme Court decided Stolt-Nielsen and held that an arbitrator may employ class procedures only if the parties have authorized him to do so. Oxford asked the arbitrator to reconsider his decision on the class arbitration in light of Stolt-Nielsen, and the arbitrator held that Stolt-Nielsen had no effect on Sutter because the agreement at issue authorized class arbitration. Oxford then renewed its motion to vacate the arbitrator’s decision on the same basis as before. Once again, the trial court denied the motion and the Third Circuit affirmed.
Now On to the Fun Stuff – The Supreme Court’s Decision and Analysis
The heavy burden required to overturn an arbitrator’s opinion was critical in the Supreme Court’s analysis. Oxford argued that the arbitrator’s decision should be vacated under §10(a)(4) of the FAA, i.e., that the arbitrator “exceeded [his] powers .” However, the Court stated, “’[i]t is not enough … to show that the [arbitrator] committed an error —or even a serious error….Because the parties ‘bargained for the arbitrator’s construction of their agreement,’ an arbitral decision ‘even arguably construing or applying the contract’ must stand, regardless of a court’s review of its (de)merits….Only if ‘the arbitrator act[s] outside the scope of his contractually delegated authority ‘—issuing an award that ‘simply reflect[s] [his] own notions of [economic] justice’ rather than ‘draw[ing] its essence from the contract] ‘—may a court overturn his determination.”
The Supreme Court looked at the arbitrator’s ruling, which recited the “question for construction” the parties had submitted to him: “whether [their] Agreement allows for class action arbitration.” The arbitrator concluded that the arbitration clause “on its face…expresses the parties’ intent that the class action arbitration can be maintained.”
In trying to undue the arbitrator’s decision, Oxford relied on Stolt-Nielsen and argued that §10(a)(4)’s heavy burden can be met when an arbitrator imposes class arbitration without a sufficient contractual basis and argued that a court can vacate an arbitrator’s decision for misconstruing a contract to approve class proceedings.
But, as the Supreme Court found, Oxford got it wrong because, Stolt-Neilsen and Oxford Health are distinguishable. In distinguishing the two cases, the Supreme Court emphasized that in Stolt-Neilsen, the parties stipulated they had not reached an agreement on class arbitration, so the arbitrators did not construe the contract, and did not identify any agreement authorizing class proceedings. Thus, the Supreme Court “overturned the arbitral decision there because it lacked any contractual basis for ordering class procedures, not because it lacked, in Oxford’s terminology, a ‘sufficient’ one.’” However, in Sutter, the Supreme Court found the arbitrator did construe the contract and found that it permitted class arbitration. So, in order to overturn the arbitrator’s decision, the Court would have to find that the arbitrator misinterpreted the parties’ intent, but that analysis is not allowed by the FAA (which only allows a court to vacate an arbitral decision when the arbitrator has strayed from his delegated task interpreting the contract, not when he performed that task poorly). By contrast, in setting aside the arbitrators’ decision in Stolt-Nielsen, the Supreme Court found not that they had misinterpreted the contract, but that they had abandoned their interpretive role.”
“The arbitrator’s construction holds, however good, bad, or ugly….Oxford chose arbitration, and it must now live with that choice.”
Reading Stolt-Nielsen and Sutter together, here is what you get: When parties agree to submit a dispute to arbitration, a party can represent a large class of similarly situated claimants in the dispute only if the parties have agreed to permit such action. If the agreement is not clear with respect to permitting a class-wide arbitration and the parties have agreed that the arbitrator should make that decision, courts cannot overturn that decision even if it is wrong so long as the arbitrator based his decision on an interpretation of the arbitration clause.
Sutter reaffirms the Supreme Court’s ringing endorsement for arbitration in Concepcion, where it held that most collective and class waivers are unconscionable and preempted by the FAA. It also reiterates the deference to be given arbitrators when it comes to their interpretation of arbitration agreements by upholding an arbitrator’s interpretation of a “silent” class-wide arbitration despite any clear language in the underlying contract to that effect.
There are some gaps. While Stolt-Nielsen set forth a critical principle regarding the availability of class-wide arbitrations, it did not determine “what contractual basis may support a finding that the parties agreed to authorize class-action arbitration” leaving open the issue of whether parties’ consent to class-wide arbitration must be expressly provided for in the arbitration provision, or if it could be inferred from the arbitration agreement itself. Sutter did not provide any clarification on what it means for an arbitrator to be “arguably construing” the arbitration agreement. If it turns out that it is enough for an arbitrator to say his or her finding of consent to class-wide arbitration is based upon the arbitral agreement, regardless of the actual analysis, Sutter severely shrinks the reach of Stolt-Nielsen. One thing to keep in mind, as Justice Alito pointed out in his concurring opinion in Sutter, even though the arbitrator permitted class arbitration, the decision cannot bind absent class members because arbitration is a matter of consent and there is no indication that any of the absent class members consented to the arbitrator’s authority. So, whatever the award ends up being, there may be collateral attacks by absent class members making the complex class arbitration more than Sutter wanted too! But, as the title indicates, you choose, you lose. In this case, that might be true for both parties.
As highlighted by a footnote in the decision and in the concurrence, the result might well have been different had Oxford not agreed to the arbitrator deciding the issue but instead argued that it was a “question of arbitrability.” The latter includes “gateway matters, such as whether parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy” which are “presumptively for courts to decide.” As the footnote continues, “a court may therefore review an arbitrator’s determination of such a matter de novo absent ‘clear and unmistakable’ evidence that the parties wanted an arbitrator to resolve the dispute.” Returning to the issue at hand, the court then continued:
…Stolt-Nielsen made clear that this court has not yet decided whether the availability of class arbitration is a question of arbitrability. …But this case gives us no opportunity to do so because Oxford agreed that the arbitrator should determine whether its contract with Sutter authorized class procedures. See Brief for Petitioner 38 n.9 (conceding this point). Indeed, Oxford submitted that issue to the arbitrator not once, but twice — and the second time after Stolt-Nielsen flagged that it might be a question of arbitrability.
Commensurately, in his concurrence, Justice Alito stated that “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 … from the fact of the parties’ agreement to arbitrate.’” (citing Stolt-Nielsen). Accordingly, although upholding the arbitrator’s decision to allow class arbitration, the court reserved the final determination of arbitrability after Stolt-Nielsen for another case on another day.
A Review of the Supreme Court’s Review Of Class Actions and What’s on the Horizon.
Sutter is just the latest opinion the Supreme Court has issued concerning class actions this term. It has already decided: Amgen, Inc. v. Connecticut Retirement Plans, where it held proof of materiality is not a prerequisite to certification of a securities-fraud class action seeking money damages for alleged violations of Securities and Exchange Commission Rule §10(b) and Rule 1; Trust Funds Standard Fire Insurance Co. v. Knowles, where it held that a named plaintiff cannot bind the class by stipulating to damages under the $5 million cap to defeat jurisdiction under the Class Action Fairness Act, which we wrote about here; Comcast Corp. v. Behrend, where it held that a trial court may not certify a class action without first resolving whether the plaintiff class has introduced adequate evidence to show that the case is susceptible to an award of class-wide damages, which we wrote about here; Genesis HealthCare Corp. v. Symczyk, where the court held that because plaintiff had no personal interest in representing putative, unnamed claimants, nor any other continuing interest that would preserve her suit from mootness, which we wrote about here.
We are currently waiting for one more decision from the Supreme Court on class actions this term. Express Co. v. Italian Colors Restaurant. The issue certified in that case is whether the Federal Arbitration Act permits courts, invoking the “federal substantive law of arbitrability,” to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.