On June 10, 2013, the U.S. Supreme Court held that an arbitrator did not exceed his authority under the Federal Arbitration Act (FAA) when the arbitrator interpreted the parties' arbitration agreement to permit class arbitration, even though the agreement did not specifically permit class treatment of claims. Oxford Health Plans LLC v. Sutter, No. 12-135, ___U.S.___ (June 10, 2013).
In 2010, in Stolt-Nielsen S. A. v. Animal Feeds Int'l Corp., 130 S.Ct. 1758, 1768, 1775 (2010), the U.S. Supreme 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." The parties in Stolt-Nielsen had stipulated that they had not reached an agreement on the issue of class arbitration. Applying Stolt-Nielsen, the federal courts have reached differing conclusions as to whether a party consented to class arbitration when the arbitration agreement fails to address class arbitration.
This week in Sutter, the Court unanimously held that as long as the arbitrator bases a decision to allow or disallow class arbitration on the text of the parties' agreement, the arbitrator's "construction holds, however good, bad, or ugly." A federal court cannot set aside an arbitration award based on an arbitrator exceeding his or her authority if the party shows "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 view of its (de)merits."
Sutter involved a putative class of doctors who sued a health insurer over allegedly inadequate payments for services. The case was brought in state court, the insurer successfully compelled arbitration and the parties then agreed that the arbitrator should decide whether the contract authorized class arbitration. The contract required arbitration of all disputes—"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"—but did not explicitly allow or disallow class treatment in arbitration. The arbitrator construed the text of the arbitration agreement and found that the parties' intent was to allow class arbitration. Because it was clear that the arbitrator was given authority to determine whether the contract authorized class arbitration, and he based his decision on the text of the arbitration clause, the Court would not consider whether "he performed that task poorly."
This decision is a big defeat for opponents of class arbitration, both because it permits arbitrators to infer parties' consent to class arbitration based on a "garden-variety" arbitration clause, and because the Court refused to create any kind of exception even for "grave[ly]" erroneous contract interpretations. Sutter opens the door to more arbitrators authorizing class actions. The take-away point is that parties intending to avoid class arbitration should take care to include explicit language precluding class arbitrations in their agreements.
There are two important issues that the Court left for another day, both of which suggest that the holding in Sutter is limited to the narrow circumstances presented. First, the Court suggested that the availability of class arbitration could be a "question of arbitrability" that is presumptively for courts (not arbitrators) to decide. Second, two concurring justices indicated that there may be no satisfactory procedure for conducting class arbitrations, because the absent members cannot consent to the arbitrator's authority and opt-out notices are not effective.