Supreme Court Confirms Arbitrator’s Broad Discretion in Construing Contract Language

June 17, 2013

In Stolt-Nielson v. AnimalFeeds Int’l Corp., 558 US 662 (2010), the Supreme Court held that, where the parties to a contract containing an arbitration provision stipulated that they had never reached agreement as to whether arbitrators could handle claims on behalf of a class, an arbitration panel exceeded its authority by ordering class arbitration at the request of one party and over the objection of the other. The Court ruled that the arbitration panel had necessarily exceeded its powers because the stipulation precluded a finding that the contract authorized arbitration of class claims. The Court left open such questions as (1) whether class claims present a “question of arbitrability” for the courts to decide, or (2) what language in an arbitration agreement would suffice to support a finding that an arbitrator was authorized to handle class claims.

In Oxford Health Plans v. Sutter, decided June 10, the Supreme Court partially answered the second of those two questions but not the first. Pediatrician John Sutter had a contract with health insurance company Oxford Health Plans to provide medical care to members of Oxford’s network on a fee-for-service basis. Sutter sued Oxford in New Jersey Superior Court on behalf of himself and a proposed class of other New Jersey doctors who had similar contracts with Oxford, alleging that Oxford had failed to make full and prompt payment to the doctors, in violation of their agreements and various state laws. At Oxford’s request, the court ordered arbitration of the dispute, based on the contract’s arbitration provision:

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.

When Sutter and Oxford agreed to ask the arbitrator to rule on whether their contract authorized arbitration of the class claims, he ruled that it did, saying that he read the arbitration clause to provide for arbitration of “the same universal class of disputes” that were barred from being brought “as civil actions” in court, and that the “intent of the clause” was “to vest in the arbitration process everything that is prohibited from the court process.” A class action, he continued, “is plainly one of the possible forms of civil action that could be brought in a court.” Accordingly, he concluded that “on its face, the arbitration clause . . . expresses the parties’ intent that class arbitration can be maintained.”

Oxford, disagreeing as to what its intent had been, twice asked the federal court to vacate the arbitrator’s ruling, first before and then after the Supreme Court decided Stolt-Nielson, arguing that the arbitrator had erred as a matter of law and exceeded his authority in construing the terms “civil action” and “dispute” in the arbitration provision to include class-based claims. The District Court denied both motions, and the Court of Appeals affirmed.

The Supreme Court unanimously affirmed, saying that the parties had agreed that the arbitrator should decide the matter. “[T]he arbitrator did what the parties had asked: He considered their contract and decided whether it reflected an agreement to permit class proceedings. That suffices to show that the arbitrator did not ‘exceed [ ] [his] powers’ under Federal Arbitration Act § 10(a)(4).” Whether a court would agree or disagree with the arbitrator’s analysis was beside the point:

All we say is that convincing a court of an arbitrator’s error — even 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). The potential for those mistakes is the price of agreeing to arbitration. As we have held before, we hold again: It is the arbitrator’s construction [of the contract] which was bargained for; and so far as the arbitrator’s decision concerns construction of the contract, the courts have no business overruling him because their interpretation of the contract is different from his. The arbitrator’s construction holds, however good, bad, or ugly. 

(Internal quotations and citations omitted.) As in Stolt-Nielson, the Court did not have to rule as to whether pursuing claims on behalf of a class presents a question of arbitrability, to be ruled on by the courts in the absence of an agreement otherwise between the parties. But the Court made clear that if the issue is properly before the arbitrator, judges are not going to rule on the merits of the arbitrator’s interpretation of the contract.

When arbitration agreements are silent on the issue, as in Oxford v. Sutter, and are interpreted by a third party, i.e., an arbitrator or a judge ruling on the issue of arbitrability, beauty often is in the eyes of the beholder. An employer wishing to avoid arbitration of class-based claims should explicitly state in its arbitration agreement that it does not cover claims made on behalf of a class and that the arbitrator has no authority to hear such claims. As for agreements already in place with arbitration provisions such as in Sutter, employers should consult with their labor counsel as to how best to clarify that the agreement was not and is not intended to include class-based claims.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:


This article was originally published by Bingham McCutchen LLP.