Commercial Litigation

U.S. Supreme Court Authorizes Class-wide Arbitration

U.S. Supreme Court Authorizes Class-wide Arbitration

A unanimous United States Supreme Court affirmed the Third Circuit Court of Appeals’ ruling that an arbitrator had not exceeded his powers under section 10(a)(4) of the Federal Arbitration Act when he interpreted the party’s arbitration clause to authorize class arbitration. In Oxford Health Plans LLC. v. Sutter, 133 S. Ct. 2064 (2013), the Supreme Court held that under the limited judicial review provided by the Federal Arbitration Act (“FAA”), the arbitrator’s interpretation of the parties’ agreement must stand, regardless of whether a court agrees with the interpretation or not.

The Plaintiff, Dr. John Sutter, a pediatrician, filed a class action suit in New Jersey Superior Court alleging that Oxford had failed to make full and prompt payment to the class of doctors, in violation of not only the parties’ agreement but also various state laws. Oxford moved to compel arbitration of the claim and the parties agreed that the arbitrator should decide whether their agreement authorized class arbitration. After interpreting the arbitration clause of the parties’ contract, the arbitrator found that the express intent of the parties was to authorized class arbitration. Following the arbitral decision, Oxford moved to vacate the arbitrator’s ruling in federal court and was denied by both the District Court and the Third Circuit of the U.S. Court of Appeals.

Thereafter, the arbitration proceeded on a classwide basis. As the arbitration was proceeding, the Supreme Court decided Stolt-Nielsen, wherein it established that “a party may not be compelled under FAA to submit to class arbitration unless there is a contractual basis for concluding the party agreed to do so.” Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 684 (2010). In light of the Stolt-Nielsen decision, Oxford requested the arbitrator reconsider his ruling. The arbitrator found that the Court’s recent decision did not effect the present case as the arbitration clauses in the respective cases were distinguishable. Again, Oxford returned to federal court seeking to vacate the arbitrator’s decision under section 10(a)(4) of the FAA. Both the District Court and the Third Circuit Court of Appeals refused to vacate the arbitrator’s decision.

On appeal, the Third Circuit discussed at length the limited judicial review that is available under section 10(a)(4) of the FAA. The Third Circuit explained that arbitration awards are reviewed with a very deferential standard of review—a presumption that the award is enforceable. The Third Circuit remarked that a court should not set aside an arbitrator’s award even if his findings of fact or law are erroneous,  as long as he makes a good faith effort to interpret the contract. In affirming the District Court’s decision, the Third Circuit was satisfied with the arbitrator’s construction of the parties’ arbitration clause.

Justice Kagan wrote on behalf the unanimous court to address a circuit split on whether a court may validly vacate an arbitral award under section 10(a)(4) of the FAA. As Justice Kagan commonsensically noted, “the sole question for us is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” The Justice further commented that the arbitral award will stand “however good, bad, or ugly.”

The Court found dispositive that the parties agreed that the arbitrator should decide whether their agreement authorized class arbitration. At that point, the Court noted that the proper inquiry is simply whether the arbitrator attempted in good faith to interpret the clause. The Court determined the arbitrator interpreted contract, not once but twice. While suggesting that the arbitrator’s interpretation may have been incorrect, the Court went on to say that “the potential for those mistakes is the price of agreeing to arbitration.” Thereby subtly suggesting arbitration is inferior to the judicial process.

What perhaps is most significant is the question the Court declined to answer yet again—the question of arbitrability. The Court made clear that neither Stolt-Nielsen nor Oxford presented the issue of whether the availability of class arbitration is a question of arbitrability, which is an issue the Court can review de novo. Had Oxford not conceded that the arbitrator should determine whether the agreement authorized class proceedings, the Court’s outcome may have been different.

The concurring opinion, announced by Justice Alito, which Justice Thomas joined, noted outright that had the arbitral award been reviewed de novo, the Court would have reached an opposite conclusion and found the arbitrator’s interpretation incorrect. Nonetheless, the concurrence focused more closely on the absent class members of the plaintiff class and was concerned that absent class members would be bound by an arbitrator’s decision to conduct class procedures. Nonetheless, Alito agreed with the majority opinion that Oxford’s concession was dispositive in the matter. 

After 2010, many commentators suggested that Stolt-Nielsen would bring the demise of class-wide arbitration, however, the Court made clear in Oxford that is simply not the case. By affirming the arbitrators ruling, which authorized class-wide arbitration, the Court opened the door to class arbitration.  So long as the decision to conduct class-wide arbitration in grounded in the parties’ agreement, a court will not set aside the decision. While the Court’s ruling is a narrow one, it cautions of the difficulty in setting aside an arbitral award due to the limited judicial review available under the FAA.