The United States Supreme Court has answered whether the Federal Arbitration Act (FAA) empowers an arbitrator to determine that the parties to an arbitration agreement agreed to authorize class arbitration based only on the inclusion of broad language in the agreement, precluding litigation and requiring arbitration of any dispute. In Oxford Health Plans, LLC v. Sutter, No. 12-135, 569 U.S. ___ (June 10, 2013), the Court found that the arbitrator did not exceed his powers under § 10(a)(4) of the FAA when interpreting whether the arbitration agreement authorized class arbitration.
Dr. John Sutter contracted with Oxford Health Plans to provide medical care to members of the plan. Dr. Sutter brought suit on behalf of himself and a proposed class of other doctors alleging that Oxford failed to make payments in a timely manner.
The contract between Dr. Sutter and Oxford contained the following clause:
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 in New Jersey, pursuant to the rules of the American Arbitration Association with one arbitrator.
The parties agreed that the arbitrator should decide whether their contract authorized class arbitration; the arbitrator found that it did. Specifically, the arbitrator determined that the “intent of the clause” was “to vest in the arbitration process everything that is prohibited from the court process.” Oxford moved to vacate the arbitrator’s decision on the grounds that he exceeded his powers under § 10(a)(4) of the FAA. The district court denied the motion and the Third Circuit affirmed.
During the pendency of the arbitration, the Supreme Court decided Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662 (2010). In Stolt-Nielsen, the Court decided whether parties can be compelled to participate in class arbitration when the arbitration agreement is silent to this issue. 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.”
In Sutter, the arbitrator found that Stolt-Nielsen did not change his decision that the subject arbitration clause permitted class-wide arbitration.
Because parties bargain for an arbitrator’s construction of a contract, the arbitrator’s interpretation of the contract must stand regardless of whether it is accurate from a reviewing court’s perspective. Thus, the Supreme Court found the sole issue to be whether the arbitrator interpreted the parties’ contract. In this case, he did.
The Court cautioned that its ruling was not an endorsement of the arbitrator’s decision on the merits; rather, that the arbitrator interpreted the contractual terms and both parties are bound by that decision pursuant to the agreed-upon contractual terms. Further, the Court continued to leave open whether the availability of class arbitration is a “question of arbitrability,” freeing parties to argue that courts, not arbitrators, must first decide the availability issue. Oxford failed to preserve that argument for review.
Justices Alito and Thomas filed a concurrence. They expressed concern with an arbitrator determining the availability of class arbitration under an arbitration agreement due to absent class members not being bound by the arbitrator’s ultimate resolution of the dispute, as they did not authorize the arbitrator to determine whether class proceedings could be conducted. As such, absent class members would need to opt in to a class arbitration.
Sutter makes clear that businesses should affirmatively disclaim class arbitration in their arbitration provisions. Absent this disclaimer, if an arbitrator undertakes an interpretation of the arbitration provision to include class arbitration, the parties may be bound by this ruling with no judicial recourse. As Justice Kagan stated in the opinion, “[t]he arbitrator’s construction holds, however good, bad, or ugly.”
Parties facing an arbitration agreement that is silent on the availability of class arbitration should also consider whether to seek for the court to decide, instead of the arbitrator, the availability issue.