United States Supreme Court Allows Class-wide Arbitration, “However Good, Bad, or Ugly”

June 21, 2013

Security guards walk the steps of the Supreme Court before Justice Elena Kagan's investiture ceremony in Washington As I have examined elsewhere, arbitration clauses in many standardized contracts effectively shield the contract drafter from liability unless the arbitrator has the authority to address disputes on a class-wide basis. A variety of factors—including the modest size of the potential individual recovery, the lack of understanding among consumers of their rights, and potential retaliation—often are practical obstacles to vindication of rights unless the arbitrator’s findings are applicable to others affected by the challenged business practice.

In recent years, the United States Supreme Court has been highly protective of the efforts of large corporations to force waivers of the right to arbitrate disputes on a class-wide basis on their customers, their vendors, and their employees. In Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758, the Court interpreted the Federal Arbitration Act (FAA) to deprive arbitrators of discretion to order class arbitration when an arbitration agreement is silent on the question of class. A year later, in AT & T Mobility LLC v. Concepcion, 131 S.Ct. 1740, the Court interpreted the Federal Arbitration Act to preempt state courts from refusing to enforce class arbitration waivers that the state court determine to be unconscionable.

Given this track record, many were surprised by the Court’s decision last week in Oxford Health Plans, LLC v. Sutter. In Sutter, the Court held that an arbitrator did not exceed his authority in interpreting a clause requiring arbitration of “all” disputes to authorize class-wide arbitration of similar disputes. Since the arbitrator did not exceed his authority, the Court found that it lacked authority under the Federal Arbitration Act, 9 USC § 10(a)(4), to overrule the arbitrator’s decision, “however good, bad, or ugly.”

Arbitration Clause in Fee-for-service Contract Between a Health Insurer and a Health Care Provider Allows Class-wide Arbitration

John Sutter, a pediatrician, brought a class action against Oxford Health Plans LLC (Oxford), a health insurer, alleging that Oxford had failed to pay for the medical services the class provided to its insureds. Oxford moved to compel individual arbitration based on a clause in its fee-for-service contract with Sutter requiring arbitration of “any” and “all” disputes

After the state court granted Oxford’s motion, the parties agreed that the arbitrator should decide whether the contract authorized arbitration on a class-wide basis. Focusing on the text of the contract, the arbitrator found that the intent was “to vest in the arbitration process everything that is prohibited from the court process” and that a putative class action “is plainly one of the possible forms of a civil action that could be brought in a court.”

Oxford asked the arbitrator to reconsider its decision to allow class-wide following the United States Supreme Court’s decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corporation. The arbitrator refused, explaining that in Stolt-Nielsen the parties had stipulated that the arbitration agreement did not address class-wide arbitration, while here the parties asked the arbitrator to address the question of whether the agreement authorized class-wide arbitration.  The United States Supreme Court unanimously affirmed the Third Circuit’s decision upholding the arbitrator’s ruling. In an opinion authored by Justice Kagan, the Court agreed with the arbitrator’s interpretation of Stolt-Nielsen:

 In Stolt-Nielsen, the arbitrators did not construe the parties’ contract, and did not identify any agreement authorizing class proceedings. So in setting aside the arbitrators’ decision, we found not that they had misinterpreted the contract, but that they had abandoned their interpretive role. Here, the arbitrator did construe the contract (focusing, per usual, on its language), and did find an agreement to permit class arbitration.

Emphasizing the limited scope of review under § 10(a)(4) of the Federal Arbitration Act, the Court explained that “the sole question for us is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got it right or wrong.” Oxford must live with the arbitrator’s decision, in the Court’s view, if he performed “his delegated task of interpreting a contract,” even if “he performed that task poorly.”

Implications

The Court’s decision will have limited impact beyond the unusual circumstances of the case in which the insurer agreed to have the arbitrator decide whether the arbitration provision allowed a class arbitration procedure. In footnote 2, the Court acknowledged that it “would face a different issue if Oxford had argued below that the availability of class arbitration is a so-called ‘question of arbitrability,’” which a court may review “de novo absent ‘clear[] and unmistakeable[]’ evidence that the parties wanted an arbitrator to resolve the dispute.” Most arbitration clauses now expressly prohibit class-wide arbitration, and most defendants are likely to challenge the arbitrator’s authority to authorize class-wide arbitration.