Legal Alerts

Supreme Court Defers to Arbitrator’s Decision to Allow Class Arbitration

Oxford Health Plans LLC v. John Ivan Sutter M.D., 569 U.S. __ (No. 12-135) (June 10, 2013)

The Supreme Court unanimously affirmed an arbitrator’s decision to allow class arbitration based on a broad arbitration clause in a doctor’s contract with a health insurance company, saying that courts cannot second guess an arbitrator’s interpretation of the clause. Justice Elena Kagan explained that because both Oxford Health Plans and the doctor who sued it had bargained for the arbitrator’s construction of their agreement, an arbitral decision even arguably construing the arbitration agreement must stand, regardless of a court’s view on the merits of the interpretation.

The sole question before the court was whether the arbitrator interpreted the parties’ arbitration clause, not whether he got its meaning right or wrong. The court found that the arbitrator interpreted the clause. Significantly, the court concluded that “Oxford agreed with Sutter that an arbitrator should determine what their contract meant, including whether its terms approved class arbitration.”

The doctor claimed that Oxford failed to provide him and other physicians with full and prompt payment, in violation of their agreements. His contract with the insurer provided that any disputes arising under it would be decided by an arbitrator, but it never explicitly mentioned class proceedings. The arbitrator concluded that the contract’s mention of “any dispute” meant that the parties intended to allow class proceedings, even in the wake of the high court’s 2010 ruling in Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp.

In Stolt-Nielsen, which overturned an arbitrator’s decision to permit class arbitration, the justices held that a party may not be compelled under the Federal Arbitration Act to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so. The justices found that Oxford’s case was different from Stolt-Nielsen because in that case the parties had stipulated that they had not reached an agreement regarding class arbitration, so the arbitrator did not construe the contract.

By contrast, the arbitrator in Oxford interpreted the contract and found that there had been an agreement to arbitrate. To overturn the decision, the court would have had to find that the arbitrator had misinterpreted the parties’ intent with respect to whether class arbitration was allowed. But the FAA bars a court from making that determination.

The justices noted that they were not endorsing the arbitrator’s interpretation of the contractual language or disagreeing with Oxford’s contrary interpretation of it. Instead, the court stated the issue could not be properly put before a court. The FAA permits a court to vacate an arbitrator’s decision only when the arbitrator has strayed from his delegated task of interpreting a contract — not when he performed that task poorly. The arbitrator’s decision to allow class arbitration against Oxford thus survives the “limited judicial review” the FAA allows. Thus, “[t]he arbitrator’s construction holds, however good, bad or ugly.”

This decision does not break much ground, as evidenced by the justice’s unanimity. By deferring to the arbitrator’s construction of the clause, the court reaffirmed the long-standing principle that an arbitrator’s decision will not be disturbed except in extraordinary circumstances (for example, an ethical or other significant abdication by the arbitrator of his obligations). The case further reaffirms that parties must carefully weigh the pros ands cons of arbitration before compelling arbitration — especially when the complaint is a class action — because only minimal judicial review is available. This case also provides further impetus for companies to include express class-action waivers in their arbitration agreements.

From a defense perspective, the most important part of this case comes from a footnote in the opinion and from the concurrence. Both note that the outcome may have been different if Oxford had argued that the court — when deciding the motion to compel in the first instance — should decide the availability of class arbitration because it is a threshold “question of arbitrability.” Questions of arbitrability are the basic questions that a court must decide before compelling arbitration, like whether the parties have a valid arbitration agreement at all. These basic questions can be more carefully reviewed by appellate courts. As such, defendants should consider asking the court to decide the class-arbitration issue and not wait for the arbitrator to decide it. The plaintiff will not likely disagree because he or she will want judicial review of this issue also.

The concurring opinion written by Justice Samuel Alito (the author of Stolt-Nielsen) and joined by Justice Clarence Thomas noted that the arbitrator’s decision was wrong because the arbitrator improperly inferred an implicit agreement to authorize class-action arbitration from the fact of the parties’ agreement to arbitrate. The concurrence argues that class arbitration is barred unless parties have explicitly agreed to allow it. But because virtually no arbitration agreements include express class-arbitration authorizations, class arbitration will almost never be allowed. This lack-of-contractual-basis-for-class-arbitration argument forms the core of most defendants’ arguments to compel individual arbitrations.

More fundamentally, the concurrence questioned whether absent class members could be bound by the arbitrator’s ultimate resolution of the class arbitration where a defendant, like Oxford, conceded that the arbitrator could decide the threshold issue of whether class arbitration is available. In the absence of concessions like Oxford’s, the concurrence noted that the possibility of a collateral attack on a class-arbitration judgment by class members facing an unfavorable judgment should give courts pause before concluding that the availability of class arbitration is a question the arbitrator should decide.

In sum, Oxford v. Sutter reaffirms the basic defense strategy for deciding whether to compel arbitration: if a defendant believes that their arbitration clause only allows an individual arbitration, they should move to compel the individual arbitration and request that the court decide whether the arbitration can proceed on a class basis, rather than leave this determination to the arbitrator.

Eric Y. Kizirian, Vice Chair of the Class Action and Mass Tort practice group, Los Angeles

Michael K. Grimaldi, associate in the Class Action and Mass Tort practice group, Los Angeles

Related Practices

• Class Action & Mass Tort