Reproduced with permission from The United States Law Week, 81 U.S.L.W. 1727 (June 11, 2013). Copyright 2013 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>
An arbitrator's contract-based decision to allow class proceedings cannot be overturned by a federal court-even if the arbitrator erred in making that decision-because of the narrow judicial review available under the Federal Arbitration Act, the U.S. Supreme Court unanimously held June 10 (Oxford Health Plans LLC v. Sutter, U.S., No. 12-135, 6/10/13).
Petitioner Oxford Health Plans LLC contended an arbitrator overreached when he allowed class arbitration in this dispute between health care providers and the insurance company over reimbursements.
The arbitrator relied on the parties' broad contractual language precluding litigation and requiring arbitration of any dispute arising under the contract.
Oxford invoked § 10(a)(4) of the FAA, which authorizes a federal court to set aside an arbitral award "where the arbitrator exceeded his powers."
The circuits were split on whether § 10(a)(4) allowed a court to vacate arbitral awards in circumstances similar to those presented here.
But Justice Elena Kagan, writing for the majority, said that a party seeking relief under § 10(a)(4) bears a heavy burden.
"It is not enough ... to show that the [arbitrator] committed an error-or even a serious error," the court said. "Because the parties bargained for the arbitrator's construction of their agreement, an arbitral decision even arguably construing or applying the contract must stand, regardless of a court's view of its (de)merits."
The court rejected Oxford's interpretation of the Supreme Court's decision in Stolt-Nielsen SA v. AnimalFeeds Int'l Corp., 130 S. Ct. 1758 (2010) (11 CLASS 432, 5/14/10).
Oxford argued that Stolt-Nielsen meant that a federal court may overturn a decision to impose class arbitration if it is not supported by a "sufficient" contractual basis.
But in Stolt-Nielsen, the court overturned the arbitral decision because it had no contractual basis, not because it lacked "a sufficient one," Kagan said here.
The court said in a footnote to its opinion, and Justice Samuel A. Alito Jr. suggested in his concurrence, that the court would have faced a different issue if Oxford had argued below that the availability of class arbitration was a gateway issue for courts to decide, rather than arbitrators.
That question was not presented here because the parties agreed to allow the arbitrator to decide whether the contract authorized class arbitration.
A Class Arbitration Endorsement?
Eric Katz, a New Jersey attorney who represented respondent John Sutter before the Supreme Court, told BNA June 10 that, most significantly, the court reaffirmed the "finality" of arbitration awards by ruling that parties cannot resort to courts simply because they disagree with an arbitrator's contract interpretation.
The court rejected Oxford's suggestion that because the issue was availability of class arbitration, the court should alter the normal limited scope of judicial review of arbitration rulings, said Katz, a partner with Mazie Slater Katz & Freeman in Roseland, N.J.
The decision here eases concerns class arbitration would become "an extinct procedure" following recent court decisions including Stolt-Nielsen and AT& T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) (12 CLASS 362, 5/13/11), Katz said.
But Jerry Ganzfried, a partner at Holland & Knight LLP in Washington, D.C., told BNA that it would be a misreading of this opinion to view it as an endorsement of class action arbitration.
He cited the majority's statement that nothing in the opinion should be taken as an agreement with the arbitrator's contract interpretation, and the concurrence's statement that the arbitrator improperly inferred an implicit agreement to authorize class arbitration.
The most significant practical impact of the case will be on how parties litigate cases with these issues, Ganzfried said.
"I think subsequent to this decision, a party opposing class action arbitration would be less likely to agree to have the arbitrator decide the question of arbitrability," he said.
Ganzfried represented DRI-The Voice of the Defense Bar in its amicus curiae brief on behalf of Oxford Health.
Joe R. Whatley Jr. of Whatley Kallas LLC in New York told BNA June 10, "I think the decision clearly limits the effect of Stolt-Nielsen."
Further, the discussion of the "heavy burden that any party has in overcoming an arbitration decision is helpful when there is a class certification decision in arbitration. Companies like Oxford will try to limit the decision to its facts, but that will be fought about in the future," he said.
Whatley represented amici curiae The American Medical Association and The Medical Society of New Jersey for their brief supporting Sutter.
Thomas A. Linthorst, a partner in Morgan Lewis & Bockius LLP's labor and employment practice in Princeton, N.J., said that the most significant question in this area remains unanswered by the court: Is the issue of whether a contract authorizes class procedures a "question of arbitrability" reserved for the courts, or a question for the arbitrator?
"Until the 'question of arbitrability' issue is decided, this decision is likely to result in fewer defendants moving to compel class actions to arbitration where the arbitration agreement does not expressly preclude class actions," he said.
Arbitrator Allows Class Arbitration
In 2002, Sutter sued Oxford in New Jersey state court on behalf of a proposed class of health care providers alleging that Oxford had improperly denied, delayed or reduced reimbursements.
Oxford successfully moved to compel arbitration, and the arbitrator ultimately determined that the parties' arbitration clause permitted class arbitration.
The parties' arbitration agreement stated, "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." The agreement contained no language about class actions or class arbitration.
The arbitrator focused on the text of the clause and said that the clause sent to arbitration the "same universal class of disputes" that it barred the parties from bringing "as civil actions" in court.
A class action is one of the possible forms of civil actions that could be brought in court, absent the agreement, the arbitrator continued. Accordingly, the arbitration clause "expresses the parties' intent that class arbitration can be maintained," it said.
Oxford filed a motion in federal court to vacate the decision on the ground that the arbitrator exceeded his power under § 10(a)(4) of the FAA. The district court denied the motion, and the U.S. Court of Appeals for the Third Circuit affirmed.
After the Supreme Court's decision in Stolt-Nielsen in 2010, Oxford asked the arbitrator to reconsider his decision to allow class arbitration.
The arbitrator affirmed his opinion stating the case had no effect because the parties here disputed the meaning of their contract, whereas in Stolt-Nielsen the parties stipulated that they had never reached an agreement on class arbitration.
Oxford again asked the district court to vacate the award under § 10(a)(4). The district court denied the motion, and the Third Circuit affirmed.
Oxford petitioned for certiorari. The court heard oral argument in the case March 25 (14 CLASS 414, 4/12/13).
'Stark' Contrast With Stolt-Nielsen
The Supreme Court said that courts may vacate arbitrators' decisions "only in very unusual circumstances" under § 10(a)(4).
Only if an "arbitrator acts outside the scope of his contractually delegated authority-issuing an award that simply reflects his own notions of economic justice rather than drawing its essence from the contract-may a court overturn his determination."
Accordingly, the question before the court was "whether the arbitrator (even arguably) interpreted the parties' contract, not whether he got its meaning right or wrong."
Here, the arbitrator's decisions are textual interpretations of the contract, the court said. "That suffices to show that the arbitrator did not exceed his powers," the court said.
Oxford pointed to Stolt-Nielsen for support of its view of overreaching. In Stolt-Nielsen, the parties had stipulated that they never reached an agreement on class arbitration. The Supreme Court relied on § 10(a)(4) and vacated the arbitrators' decision approving class proceedings because the arbitrators had "simply imposed their view of sound policy."
Oxford argued here that "even the high hurdle of Section 10(a)(4) review is overcome when an arbitrator imposes class arbitration without a sufficient contractual basis." Oxford contended that a court may vacate an arbitral decision like this one for misinterpreting a contract to allow class proceedings.
But the Supreme Court said that in Stolt-Nielsen the arbitration panel did not base its decision on the parties' intent, nor did it attempt to discern whether federal or state law provided a default rule to take effect in the absence of an agreement on class arbitration.
Instead, the panel exceeded its powers by imposing its own policy choice, the court recounted.
The contrast between Stolt-Nielsen and this case is "stark," the court said. In Stolt-Nielsen, the court found that the arbitrators had "abandoned their interpretive role," not that they had misinterpreted the contract.
Here, the arbitrator construed the contract. Section 10(a)(4) bars overturning an arbitrator's decision on that basis, the majority said.
Section 10(a)(4) "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," the court held. "Stolt-Nielsen and this case thus fall on opposite sides of the line that § 10(a)(4) draws to delimit judicial review of arbitral decisions."
Price of Arbitration
The court also rejected Oxford's argument attacking the arbitrator's interpretation of the contract.
This argument was not properly addressed to the court, the opinion said.
But the court said that nothing in the opinion "should be taken to reflect any agreement with the arbitrator's contract interpretation, or any quarrel with Oxford's contrary reading."
But even a "grave error" is not enough; a court may not correct mistakes under § 10(a)(4).
"The potential for those mistakes is the price of agreeing to arbitration ... The arbitrator's construction holds, however good, bad, or ugly."
Oxford chose arbitration, the court said, "and it must now live with that choice."
Concurrence: Absent Class Members Bound?
In his concurrence, Alito, joined by Justice Clarence Thomas, said that the court's ruling was based on Oxford's agreement to allow the arbitrator to decide whether the contract permitted class arbitration, and the narrow judicial review allowed.
However, Alito said that absent class members did not concede that the contract authorized the arbitrator to decide whether the contract permitted class arbitration.
Alito said that the contract did not authorize the arbitrator to decide the issue. Alito further concluded that the arbitrator incorrectly inferred an implicit agreement to authorize class arbitration in the contract.
The concurrence said that it was difficult to see how absent class members could be bound by the arbitrator's decision to conduct class proceedings unless they opted in to the class.
"Class arbitrations that are vulnerable to collateral attack allow absent class members to unfairly claim the benefit from a favorable judgment without subjecting themselves to the binding effect of an unfavorable one," the concurrence said.
"This possibility should give courts pause before concluding that the availability of class arbitration is a question the arbitrator should decide," the concurrence said.
Alito said he joined the opinion of the court because this argument was not available to Oxford. Oxford conceded that the arbitrator should decide the issue of whether class arbitration was allowed under the contract.
Eric D. Katz of Mazie Slater Katz & Freeman LLC in Roseland, N.J., argued for Sutter.
Seth P. Waxman of Wilmer Cutler Pickering Hale & Dorr LLP in Washington, D.C., argued for Oxford.
For More InformationThe opinion is at http://op.bna.com/class.nsf/r?Open=jkas-98jkc2.