The U.S. Supreme Court issued its decision in Sutter today, unanimously holding that as long as the arbitrator bases a decision to allow or disallow class arbitration on the text of the parties’ agreement, her “construction holds, however good, bad, or ugly.” Oxford Health Plans LLC v. Sutter, 569 U.S. ___ (June 10, 2013). The case resolved a circuit split on how to interpret SCOTUS’ Stolt-Nielsen decision. It also proved me right (yahoo!). (I predicted the Court would affirm the Third Circuit both when it granted review, and when it heard the argument.)
As you may recall, this case involves a putative class of doctors who sued a health insurer over allegedly inadequate payments for services. The case was brought in state court, the insurer successfully compelled arbitration, and the parties then agreed that the arbitrator should decide whether the contract authorized class arbitration. The contract did not explicitly allow or disallow class actions in arbitration. The arbitrator construed the text of the arbitration agreement and found that the parties’ intent was to allow class arbitration.
In the District of New Jersey, the Third Circuit and again the Supreme Court, the insurer argued that the arbitrator had “exceeded [his] powers” within the meaning of Section 10(a)(4) of the FAA by allowing class arbitration. In its decision, the Supreme Court firmly refused to look behind the curtain of an arbitration. Because it was clear that the arbitrator was given authority to determine whether the contract authorized class arbitration, and he based his decision on the text of the arbitration clause, the Supreme Court would not consider whether “he performed that task poorly.”
This is a big defeat for opponents of class arbitration. Not only does the Sutter decision do away with the Fifth Circuit’s interpretation of Stolt-Nielsen, which was essentially that class arbitration was precluded unless the parties agreement explicitly allowed it, it also refuses to create any kind of exception for really bad contract interpretations. The insurer argued strongly that the arbitration agreement at issue in this case was “garden-variety” and contained no indicia that the parties intended to use class procedures in arbitration, so the arbitrator’s decision was wrong. But, Justice Kagan, writing for the Court, declined the insurer’s invitation to consider the merits of the arbitrator’s decision. Once the court is satisfied that the arbitrator was “arguably construing the contract,” his or her decision will be affirmed even in the case of “grave error.” Indeed “[t]he potential for those mistakes is the price of agreeing to arbitration.” In that regard, this decision is not limited to class arbitration at all, but is a strong decision for affirming arbitration awards in general. It further calls into question whether “manifest disregard of the law” is a legitimate basis for vacating an arbitration award.
This decision opens the door to more arbitrators authorizing class actions. Arbitrators now have the confidence that as long as the class arbitration decision is grounded in the text of the parties’ agreement, it will not be overturned. (Of course, if the parties’ arbitration agreement explicitly precludes class actions, an arbitrator would exceed his or her power by authorizing a class.) Even an arbitrator who believes as a matter of public policy that plaintiffs with small-dollar claims should be able to assert those claims as a class in arbitration will be affirmed, as long as the official decision is based in the language of the contract.
There are two issues that the Court left for another day, and those could eventually be the death knell of class arbitrations. First, a long footnote suggests that the availability of class arbitration could be one of the gateway questions of arbitrability that are presumptively for courts (not arbitrators) to decide. Second, Justices Alito and Thomas wrote a concurrence suggesting that there may be no satisfactory procedure for conducting class arbitrations — because the absent members cannot consent to the arbitrator’s authority and opt-out notices are not effective. However, because the insurer agreed to have the arbitrator decide the issues of class arbitration, neither of these issues was before the Court in Sutter.