SUPREME COURT PUNTS
ON ISSUE OF CLASS ARBITRABILITY;
PROVIDES GUIDANCE ON JUDICIAL REVIEW
OF ARBITRATION AWARDS

The Supreme Court yesterday issued an opinion in which it deferred to an arbitrator’s decision that a contract permitted class arbitration, while side-stepping the more important issue of whether it is the court or the arbitrator that makes the determination of whether class arbitration has been agreed to. The Court’s reasoning in Oxford Health Plans v. Sutter¹ — that the courts were precluded from deciding the class arbitration issue because the party seeking to compel arbitration conceded that the class arbitration issue was for the arbitrator to decide — provides important lessons to attorneys drafting arbitration provisions in which class certification may be a concern and to attorneys litigating the scope of permissible judicial review of an arbitration award.

Background

John Sutter was a pediatrician in New Jersey who signed an agreement to provide medical services to patients insured by Oxford Health in exchange for payment from Oxford at prescribed rates. Several years later, Sutter filed a law suit in New Jersey state court against Oxford alleging that Oxford breached the agreement and violated various laws by failing to make full and prompt payment. He brought the suit on behalf of himself and a proposed class of other New Jersey physicians who had also signed contracts with Oxford. The contract between Sutter and Oxford contained an arbitration provision providing that:

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.

Relying on this provision, Oxford moved in the New Jersey state court to compel arbitration. The state court granted the motion, referring the dispute to arbitration. Significantly, the parties then agreed that the arbitrator should decide whether their contract authorized class arbitration. The arbitrator ruled that the contract did authorize class arbitration. In so ruling, the arbitrator relied on the text of the arbitration provision and the apparent intent of the parties.

Oxford then filed a motion in the United States District Court for the District of New Jersey in which it sought to have the arbitrator’s decision on the class issue vacated on the sole basis that the arbitrator had exceeded his powers under Section 10(a)(4) of the Federal Arbitration Act (FAA) (authorizing a federal court to set aside an arbitral award “where the arbitrator[] exceeded [his] powers”). The District Court denied the motion and the United States Court of Appeals for the Third Circuit affirmed the decision of the District Court.

The Supreme Court granted certiorari to resolve a split in the Circuits as to “whether §10(a)(4) [of the Federal Arbitration Act] allows a court to vacate an arbitral award in” circumstances such as this.

Recent Supreme Court Precedent on Arbitration

The Supreme Court has taken a robust interest in recent years in the enforceability and permissible scope of agreements to arbitrate. 2013 is the fourth consecutive year that the Supreme Court has addressed the issue of class action waivers in connection with arbitration provisions.² Additionally, the Supreme Court heard oral argument in February of 2013 (but has not yet ruled) in a case in which it will likely be forced to decide “[w]hether the Federal Arbitration Act permits courts, invoking the ‘federal substantive law of arbitrability,’ to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim”³ and, the very same day it issued the Oxford Health decision, granted certiorari in a case involving a suit by a UK investor against the Republic of Argentina, in which the central issue is likely to be whether courts, rather than arbitrators, should decide whether a precondition to arbitration has been satisfied.⁴

The Supreme Court’s Decision

In declining to decide whether class arbitration is ever appropriate, the Court made it clear that its punt on the issue of class arbitrability was “because, and only because, [in this case, this issue] is not properly addressed to a court:”

Nothing we say in this opinion should be taken to reflect any agreement with the arbitrator’s contract interpretation, or any quarrel with Oxford’s contrary reading. All we say is that convincing a court of an arbitrator’s error – even 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 §10(a)(4).

The Court thus framed the decision as one of review of an arbitration award rather than of whether a determination that class arbitration is or is not appropriate should be made by a court or an arbitrator.

The Supreme Court began its analysis by noting that under the FAA, courts may vacate the decision of the arbitrator “only in very unusual circumstances” and “[a] party seeking relief under [§10(a)(4)] bears a heavy burden.” The Court went on to summarize some of its prior holdings on the subject of overturning arbitration awards:

It is not enough . . . to show that the [arbitrator] committed an error – or even a serious error. Because the parties bargained for the arbitrator’s construction of their agreement, an arbitral decision even arguably applying or construing the contract must stand, regardless of a court’s view of if its (de)merits. Only if the arbitrator acts outside the scope of his contractually delegated authority – issuing an award that simply reflect[s] [his] own notion of [economic] justice rather than draw[ing] its essence from the contract – may a court overturn his determination.

(citations and internal quotations omitted). The Court then made clear that “the sole question for us is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.”

In analyzing this issue, the Court first distinguished its 2010 Stolt-Nielsen decision in which it made it clear that “this Court has not yet decided whether the availability of class arbitration is a question of arbitrability.” In Stolt-Nielsen, the Court overturned the arbitrator’s decision to permit class arbitration because there, the arbitrator “lacked any contractual basis for ordering class procedures, not because it lacked, in Oxford’s terminology, a ‘sufficient’ one.” In Contrast to the situation in Stolt-Nielsen, Oxford had agreed in its pleadings in the lower courts that the arbitrator should decide whether its contract authorized class proceedings and had submitted this issue to the arbitrator twice for determination. It was only after the arbitrator determined that the agreement did, in fact, provide for class arbitration that Oxford sought judicial review of the arbitrator’s decision. It was on this basis that the Supreme Court declined to decide the class arbitration issue:

In sum, Oxford chose arbitration, and it must now live with that choice. Oxford agreed with Sutter that an arbitrator should determine what their contract meant, including whether its terms approved class arbitration. The arbitrator did what the parties requested: He provided an interpretation of the contract resolving that disputed issue. His interpretation went against Oxford, maybe mistakenly so. But still, Oxford does not get to rerun the matter in a court. Under §10(a)(4), the question for a judge is not whether the arbitrator construed the parties’ contract correctly, but whether he construed it at all. Because he did, and therefore did not “exceed his powers,” we cannot give Oxford the relief it wants.

It was thus Oxford’s decision to concede that the arbitrator should make the determination of the existence or non-existence of a right to class arbitration that resulted in the Court’s decision to effectively decline to weigh in on the arbitrability issue.

Lessons Learned

The Oxford Health decision provides lessons for both transactional lawyers and litigators. Transactional lawyers drafting arbitration clauses seeking to prevent class litigation should not only provide for a waiver of a right to proceed as a class (an issue the Supreme Court is likely to rule on in the near future) but should also make it clear what role, if any, an arbitrator or court will have in the event of litigation over the enforceability of the class waiver. For example, will a court or an arbitrator determine whether there is a right to proceed as a class, the appropriate members of the class and the appropriate class representative.

An important lesson that litigators will glean from the Oxford Health decision is that where a suit is brought asserting a right to a class action, they need to consider whether to simply move to compel arbitration as Oxford did, or to ask a court to determine whether class status is appropriate before sending the dispute to an arbitrator. Failure to engage in this two-step may result in the decision being made by an arbitrator.

¹ ___ U.S. ___ (June 10, 2013).
² Nitro-Lift Technologies, L.L.C. v. Howard, 568 U.S. ___ (2012) (discussed here) (holding that the Federal Arbitration Act prohibits a state court from determining whether a contract is “null and void and against public policy” when the contract contains an enforceable arbitration provision); CompuCredit Corp. V. Greenwood, 566 U.S. ___ (2011) (holding that an arbitration agreement could be enforced in a case asserting a claim under the federal Credit Repair Organizations Act (CROA) because the CROA does not expressly prohibit arbitration); AT&T Mobility v. Concepcion, 563 U.S. __ (2011) (holding that a state law that invalidated class action waivers in arbitration agreements was preempted (and therefore made invalid) by the Federal Arbitration Act); Stolt-Nielsen v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010) (holding that parties that had not signed an agreement to arbitrate could not be forced into class arbitration).
³ American Express Co. v. Italian Colors Restaurant, No. 12-133.
⁴ BG Group PLC v. Republic of Argentina, No. 12-138.