Be Careful What You Wish For: Supreme Court Upholds Arbitrator’s “Erroneous” Class Arbitration Ruling

In Oxford Health Plans LLC v. Sutter, the U.S. Supreme Court affirmed an arbitrator’s decision that an agreement providing for arbitration of any disputes, constituted an agreement to participate in class arbitration. While at first blush this appears to be a departure from Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., it is not. Oxford Health says more about limited judicial review of an arbitrator’s decision than it does about the permissibility of class arbitration.

As reported in this blog on April 24, 2012, the Third Circuit in Oxford Health found that the arbitrator had a contractual basis for his decision to order class arbitration, i.e.  “the phrase ‘no civil action . . . shall be instituted in any court’ meant that a class action may not be instituted in a court of law. ‘All such disputes’ must go to arbitration.” Thus, the Circuit Court concluded that “[w]ithout a conclusive statement of the parties’ intent or clear evidence of arbitral overreaching, we must conclude that the arbitrator performed his duty appropriately and endeavored to give effect to the parties’ intent.”

Affirming the Third Circuit, the Supreme Court’s decision in Oxford Health emphasized that while “[c]lass arbitration is a matter of consent,” an arbitrator’s decision as to whether such consent exists will be upheld provided there is a contractual basis for the conclusion. The Federal Arbitration Act (“FAA”) “permits courts to vacate an arbitral decision only when the arbitrator strayed from his delegated task of interpreting a contract, not when he performed that task poorly.”

Whether the arbitrator was wrong was not the issue, though its seems clear the Court was intentionally distancing itself from the arbitrator’s decision, explaining: “All we say is that convincing a court of an arbitrator’s error—his 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)” of the FAA. Thus, if you choose arbitration, the majority opinion explained, you must live with that choice — “good, bad or ugly.” And, in a concurring opinion, Justice Alito was even more direct: “If we were reviewing the arbitrator’s interpretation of the contract de novo, we would have little trouble concluding that he improperly inferred ‘[a]n explicit agreement to authorize class-action arbitration . . . from the fact of the parties’ agreement to arbitrate.”

Noting that the High Court “has not yet decided whether the availability of class arbitration is a question of arbitrability,” Oxford Health explained that the Court “would face a different issue if Oxford had argued below that the availability of class arbitration is a so-called ‘question of arbitrability’ — questions which are “presumptively for the courts to decide.” Thus, while some courts view the question of whether an arbitration agreement allows for class arbitration to be a question of contract interpretation for the arbitrator, footnote 2 of the Court’s Opinion suggests that this question may instead be a question of arbitrability. Justice Alito’s concurring opinion similarly noted that absent the parties’ agreement in Oxford Health to allow the arbitrator to decide, the possibility that class arbitrations may be subject to collateral attack ― i.e., because absent class members never agreed to allow “the arbitrator to decide whether to conduct a class arbitration” — “should give the courts pause before concluding that the availability of class arbitration is a question the arbitrator should decide.”

Oxford Health thus suggests that (i) arbitration agreements should be crystal clear as to the availability of class arbitration and (ii) parties should insist that the Court, not the arbitrator, decide the issue as one of arbitrability.

Michael R. McDonald is a Director in the Gibbons Business & Commercial Litigation Department.
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