Supreme Court Declines To Overturn Arbitrator’s Decision Permitting Class Arbitration



In a unanimous decision, the United States Supreme Court once again considered the Federal Arbitration Act (FAA), this time reiterating the FAA's highly deferential standard for judicial review of arbitrator decisions. Oxford Health Plans LLC v. Sutter, __ S. Ct. __, 2013 WL 2459522 (June 10, 2013). In Oxford Health Plans, the Court refused to disturb an arbitration interpretation of a contract to permit class-wide arbitration—and reiterated the fact that federal courts are largely powerless to relieve parties from an arbitrator’s substantive interpretation of a contract’s terms, even if that interpretation is wrong. 

Background Cases

In Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010), the Court vacated an arbitration decision permitting class arbitration where the parties had stipulated that they had not reached an agreement regarding class arbitration.  Id. at 1776.  Under the Federal Arbitration Act, 9 U.S.C. § 10(a)(4), federal courts have the power to vacate an arbitral award “where the arbitrators exceeded their powers.”  See id. at 1766.  Obtaining such relief is a “high hurdle” where the arbitrator “strays from interpretation and application of the agreement” and “dispenses his own brand of industrial justice.”  Id. at 1767 (citations omitted).  In that case, the Court held that the arbitrators exceeded their powers because they concluded that class arbitration was authorized under the agreement despite the parties’ stipulation to the contrary.  Id. at 1776.

The Court discussed the implications of Stolt-Nielsen in its Concepcion decision, which was authored by Justice Scalia: “We then held that the agreement at issue, which was silent on the question of class procedures, could not be interpreted to allow them because the ‘changes brought about by the shift from bilateral arbitration to class-action arbitration’ are ‘fundamental.’”  AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1750 (2011) (quoting Stolt-Nielsen, 130 S. Ct. at 1776).  Given the wide-reaching effect of Concepcion, many commentators construed this dicta to interpret Stolt-Nielsen as standing for a broader principle: class arbitration could not exist absent an express agreement.  The important fact of the Stolt-Nielsen parties’ stipulation had been forgotten.    

Oxford Health Plans

The Oxford Health Plans decision restores one of the core tenets of Stolt-Nielsen: “[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.”  Stolt-Nielsen, 130 S. Ct. at 1775 (emphasis omitted).   In Oxford Health Plans, the parties agreed to a relatively straightforward arbitration agreement requiring all disputes to be submitted to final and binding arbitration.  Oxford Health Plans, 2013 WL 2459522, at *2.  The agreement said nothing about the availability of class arbitration.  When the issue arose, the parties agreed that it should be decided by the arbitrator, who promptly decided that since (a) the arbitration agreement foreclosed all “civil actions” and required them to be arbitrated, and (b) class action litigation was a form of a civil action, therefore (c) the contract authorized class arbitration.  Id.

The Court unanimously rejected the challenge to the arbitrator’s decision.  Because the arbitrator based his decision on the language of the contract, the Court refused to substitute its judgment for that of the arbitrator.  In so doing, the Court emphasized the exceedingly narrow scope of review:

All we say is that convincing a court of an arbitrator’s error – even his grave error – is not enough.  So long as the arbitrator was ‘arguably construing’ the contract – which this one was – a court may not correct his mistakes under Section 10(a)(4).  The potential for those mistakes is the price of agreeing to arbitration. . . .  The arbitrator’s construction holds, however good, bad, or ugly.

Id. at *6 (citation omitted).

Strategic Considerations

Interestingly, the Court went out of its way to note that the parties had stipulated to put the decision of the availability of class arbitration to the arbitrator.  Id. at *4 n.2.  If instead Oxford had argued that the availability of class arbitration was a “question of arbitrability,” it would have invited judicial review regarding the scope and enforceability of the arbitration agreement.  Courts presumptively decide such issues on a de novo basis.  See id.  It remains an open question whether the availability of class arbitration is a “question of arbitrability,” but the parties’ agreement to have the arbitrator decide the issue foreclosed the issue on appeal.  Id.

Justice Alito’s concurring opinion, joined by Justice Thomas, pointed out the stipulation and noted their strong disagreement with the arbitrator’s decision on the merits.  The absent class members had never conceded that the contract permitted the arbitrator to decide the issue of class arbitration, and “it is far from clear that they will be bound by the arbitrator’s ultimate resolution of this dispute.” Id. at *7.  As they noted, “an arbitrator’s erroneous interpretation of contracts that do not authorize class arbitration cannot bind someone who has not authorized the arbitrator to make that determination.”  Id.

Practice Pointers

  1. When you choose arbitration, you choose to live with the arbitrator’s decision.
  2. If you do not want class arbitration, the arbitration agreement must say so expressly.
  3. For agreements that are silent on whether class arbitration was intended, consider arguing that the availability of class arbitration is a “question of arbitrability” to be decided by the court whose decision is subject to de novo review.
  4. Use this decision as a good opportunity to rethink whether arbitration is the most efficient method for resolving disputes or whether certain types of disputes could or should be carved out from a broad arbitration clause.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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