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.

While the oral argument before the United States Supreme Court in Sutter today was ostensibly about whether to affirm an arbitrator’s decision that the parties’ contract authorized class arbitration, the decision really turns on how the Court will review all arbitration decisions.  (Transcript here.)  Multiple Justices expressed an unwillingness to create a special standard for reviewing arbitrator decisions involving class arbitration.  (Info on the underlying case here.)

Appellant’s counsel tried valiantly to express some standard of review that fit within the Court’s past jurisprudence, but also allowed for vacatur of this particular result.  In response to questions like “how wrong does an arbitrator’s decision have to be to become an issue of law?” (from Justice Sotomayor), counsel advocated that Stolt-Nielsen and Concepcion established a “presumption” that there is no consent to class arbitration without a “very clear statement of a meeting of the parties’ minds.”  However, Justice Kagan quickly noted that the Court had never suggested such a presumption in either of those cases.  Appellant’s counsel later advocated for a slightly different formulation: a reviewing court may vacate the arbitrator’s decision to allow class  arbitration if the contractual language “leaves no room for a conclusion that the parties agreed to” arbitrate on a classwide basis.  Justice Kennedy, who often casts a deciding vote in close cases,  expressed skepticism about whether the Court’s repeated and highly deferential standard of review for decisions by arbitrators allowed any kind of inquiry into the merits of the arbitrator’s contractual analysis.

Respondent’s counsel, of course, emphasized the very limited grounds for vacating an arbitration award.  He noted that Appellant argues the arbitrator “exceeded his power,” but because Appellant consented to giving the arbitrator authority to determine whether the arbitration could proceed as a class, the only way the arbitrator could have exceeded his power was by basing his award on something other than an interpretation of the contract.  This led to a series of amusing hypotheticals in which Justice Breyer asked Respondent’s counsel to assume that an arbitrator made her decision based on consulting a “magic 8-ball” (Justice Scalia pretended not to know the reference) and then asked whether that would constitute “manifest disregard” of the law or otherwise serve as grounds for vacating the award.  Justice Breyer’s questions hint that the Court may give “manifest disregard of the law” new life as a separate basis for vacating arbitration awards, and that the Court is looking for a backstop beyond just the four bases in the FAA for parties to rely on if arbitrators get the law or facts really, really wrong.

Curiously, from a Court that has vigorously enforced arbitration agreements for all types of cases, the Justices appeared skeptical of arbitrators’ capability to handle class actions, and questioned whether arbitrators were wrongly incentivized.  Justices asked how the arbitrator was compensated in this case, whether he was experienced, how many class actions were handled in arbitration (neither side could answer, since that information is not public), and whether an arbitrator would be incentivized by his own fees to create a class action after seeing a case like Sutter drag on for eleven years.  To that, Respondent’s counsel gave a good soundbite: “if we trust arbitrators to handle such important issues as civil rights issues and other very important matters [], we have to expect that they will follow the precepts of this Court and the FAA as to what constitutes grounds for class arbitration.”

 

Just last Friday, the Supreme Court agreed to review a second circuit court case that allowed a class action to proceed, despite arguments that the arbitration clause precluded any collective actions.  The granting of these petitions is a fitting way to end a year in which there has been considerable discussion about how to apply Stolt-Nielsen, Concepcion, and other precedent in the context of claims by a group (or defined class) of plaintiffs.  Here is a preview of what is at issue, and at stake, in this arbitration double-feature.

CASE ONE: OXFORD HEALTH PLANS, LLC V. SUTTER

Summary: The Third Circuit affirmed an arbitrator’s decision to allow doctors’ claims against a health plan to proceed on a class basis.  The arbitrator had analyzed the text of the broad arbitration agreement at issue, which lacked any explicit language about whether class actions were authorized, and concluded the parties intended to allow class arbitration.  The Third Circuit said this did not amount to “exceed[ing] [his] powers” within the meaning of Section 10(a)(4) of the FAA.  The Third Circuit refused to vacate the award largely because the arbitrator made a rational attempt to interpret the parties’ arbitration agreement and that attempt is entitled to great deference by the courts.

Issue:  The Petitioner argued for review of this case based on the difference in how the circuit courts have interpreted Stolt-Nielsen (with some seeming to require explicit consent within the arbitration clause for any collective action to proceed in arbitration, but the majority noting that as long as the arbitration clause does not prohibit class arbitration, the arbitrator should use general contract interpretation principles to discern the parties’ intent regarding class actions).  It noted that “at least seven cases on this issue have reached the courts of appeals in just the last two years.”

The parties’ framing of the “question presented” reflect the different legal lenses through which the Court could view this case.  The Petitioner framed the question presented as: “Whether a contract provision requiring arbitration rather than litigation of any dispute, without more, can be a sufficient ‘contractual basis [to] support a finding that the parties agreed to authorize class-action arbitration,'” quoting from Stolt-Nielsen.  The Respondent framed the question very differently, following the Third Circuit’s lead: “Did the arbitrator exceed his powers under the [FAA] when he interpreted the atypical terms of the agreement in this case to authorize the arbitration of class claims?”

If this case were simply about the appropriate deference that courts should grant arbitrators, SCOTUS would not have granted review.  In my mind then, the relevant issue is how does SCOTUS plan to clarify its ruling in Stolt-Nielsen?  Possible options include indicating that:

  1. Stolt-Nielsen was unique, because the parties had stipulated that the arbitration provision was “silent” regarding class arbitration and the arbitrators applied their own policy judgments. The point is that arbitrators should try and determine the parties’ intent; this outcome would affirm the approach of the First, Second and Third Circuits ;
  2. Broad arbitration clauses, like the one at issue in Sutter, cannot reasonably be interpreted to authorize class arbitration; or
  3. As a matter of substantive federal law, class arbitration is precluded unless the arbitration clause explicitly allows it.

I don’t see a clear path that SCOTUS could take to reach conclusion 2 or 3, however, because contract interpretation is a matter of state law and the deference granted to an arbitrator’s decision on the merits is so great.  Of course, Justice Scalia could always surprise me. . .

Two groups already have permission to file amici — the Chamber of Commerce and DRI (“The Voice of the Defense Bar”).  They are firmly in favor of outcome 2 or 3 above.

CASE TWO: AMERICAN EXPRESS CO. V. ITALIAN COLORS RESTAURANT (a/k/a “Amex III”)

Summary: The case is called “Amex III” because the Second Circuit has issued three opinions in the dispute, two after remand from SCOTUS to consider the impact of first Stolt-Nielsen and then Concepcion.  The Second Circuit never changed its holding — it concluded that the parties’ clause prohibiting class arbitration was unenforceable.  The Second Circuit said that antitrust claims like those of these plaintiffs are so expensive to prosecute that it would never be rational for any individual claimant to bring them, therefore denying class actions would effectively preclude the plaintiffs from vindicating their rights under antitrust laws.  The Second Circuit grounded its decision in Green Tree Financial Corp-Ala. v. Randolph, 531 U.S. 79 (2000), and the strong expert testimony the plaintiffs presented with respect to the viability of individual suits.  (However, the language at issue in Green Tree is a pretty thin reed upon which to rest such a significant decision.)

Issue: The petitioner in this case framed the issue as: “Whether the [FAA] permits courts, invoking the “federal substantive law of arbitrability,” to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.”  The respondent has a different view of the issue: “[W]hether an arbitration clause should be enforced when there is no dispute that a litigant has shown it would be unable to effectively vindicate its federal statutory rights in the arbitral forum.”

In my view, the real issue here is will SCOTUS acknowledge any expense-based exception to its arbitration precedent.  It could conceivably say that: 1) economic realities of litigation are never a sufficient reason to invalidate an arbitration agreement (if Congress wants to preclude arbitration, it can do that in the statutes); or 2) more narrowly, it could say that there is no federal substantive rule that arbitration can only proceed if it is economically viable, and leave any review of state-based arguments for another time.  In either case, this decision is likely to be reversed.

Four outside groups have already weighed in on this issue — the New England Legal Foundation (“protecting the free enterprise system”), Chamber of Commerce, DRI, and a group of “senior legal officers for public companies” — all of whom advocate for reversing AmexIII.  The amici worry about an exception that could swallow the rule, and present the situation in the most dire of terms — DRI, for example, argues that AmexIII affects the enforceability of millions of arbitration agreements and “substantially undermines” the federal right to enforce arbitration agreements.

No matter how SCOTUS decides Sutter, corporations are likely to continue drafting arbitration agreements that explicitly exclude class arbitrations.  If those are strictly enforced (without any state law exceptions, see Concepcion), then we must acknowledge that our justice system is writing off a significant amount of smaller cases that cannot effectively be arbitrated on an individual basis, like those at issue in Amex III.  Some of those cases may even have significant public value.  Yet we are not likely to see amici briefs in favor of making sure claims with small dollar values have a cost-effective way of being arbitrated.