Member Article

On June 10, 2013, a unanimous Supreme Court in Oxford Health Plans LLC v. Sutter, 569 U.S. ___ (2013), held that an arbitrator’s decision to allow class arbitration cannot be overturned if the decision was based on the interpretation of the parties’ contract. Even if the interpretation is incorrect, the Court will not overturn the arbitrator’s decision given its limited scope of review allowed under §10(a)(4) of the Federal Arbitration Act (FAA).

Background

Sutter, a pediatrician, filed a class action on behalf of other doctors under contract with health insurance company, Oxford Health Plans, alleging that Oxford failed to make full and prompt payment to the doctors. The New Jersey Superior Court granted Oxford’s motion to compel arbitration. Significantly, both parties then agreed that the arbitrator should decide whether their contract authorized class arbitration. The arbitrator determined that it did. Oxford filed a motion in federal court to vacate this decision on the grounds that the arbitrator exceeded his powers under §10(a)(4) of the FAA. The District Court denied the motion and the Third Circuit affirmed.

While the arbitration proceeded, the Supreme Court issued its opinion in Stolt-Nielsen v. AnimalFeeds International, which held that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” 559 U.S. 662, 684 (2010). Oxford again asked the arbitrator to determine whether the parties’ contract authorized class arbitration. The arbitrator confirmed that it did. Oxford renewed its effort to vacate this decision, which the District Court denied and the Third Circuit affirmed.

Supreme Court’s Analysis

The Supreme Court unanimously affirmed and held that the arbitrator was not acting outside the scope of his powers. Rather, the arbitrator (twice) did what the parties had asked—he interpreted the contract and decided it permitted class arbitration. Under §10(a)(4)’s limited scope of review, the Court can only set aside an arbitral award “where the arbitrator[] exceeded [his] powers.” But if an arbitrator “even arguably” construes or applies the contract, his decision must stand regardless of whether his interpretation is correct.

The Court rejected Oxford’s reliance on Stolt-Nielsen where the Court did overturn the arbitral decision under §10(a)(4). In that case, however, the parties stipulated that they had never reached an agreement on class arbitration. The arbitration panel imposed its own “policy choice” when it ordered class arbitration and thus “exceeded its powers.” The arbitral decision was overturned because it lacked any contractual basis for ordering class procedures. In stark contrast, the parties in Oxfordagreed that the arbitrator should decide whether their contract authorized class arbitration. The arbitrator did construe the contract and found that class arbitration was permitted. And so long as the arbitrator “even arguably” interprets the contract, his decision will hold “however good, bad, or ugly.”

Justice Alito, writing for himself and Justice Thomas, concurred in the judgment. He noted that had the Court reviewed the arbitrator’s decision de novo, it would have likely found the decision to allow class arbitration erroneous. He further warned that it would be unlikely that the arbitrator’s potentially incorrect interpretation to conduct class proceedings would bind absent class members who did not authorize the arbitrator to make that determination.

Impact

This decision reminds defendants of the risks of arbitration and its absence of safeguards and traditional judicial review. Parties should consider reviewing their arbitration clauses to assess whether they include express class action waivers. If there is any doubt as to whether class arbitration is permitted, Oxford instructs that defendants should not agree to allow an arbitrator to decide whether the contract authorizes class arbitration. Instead, defendants may fare better by arguing that the availability of class arbitration poses a question of arbitrability. The Court in Oxford stated that questions of arbitrability are “gateway matters” that are presumptively for the courts to decide and may be the subject of de novo review.

For more information, please visit the Securities Class Action Defense and Shareholder Litigationpage of the Haynes and Boone, LLP website, or contact one of the attorneys below.