Opinion analysis: Tentatively reopening the (back) door to class arbitration
on Jun 10, 2013 at 2:05 pm
For the past three years, numerous courts and commentators have understood the Supreme Court’s 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corp. as all but sounding the death knell for class-wide – as opposed to individual – arbitration. After all, Stolt-Nielsen held that the Federal Arbitration Act bars class arbitration unless parties have specifically agreed to allow it, and virtually no arbitration agreements include express class-arbitration authorizations. But as Monday’s unanimous decision in Oxford Health Plans, LLC v. Sutter makes clear, reports of the demise of class-wide arbitration may have been greatly exaggerated.
Instead, reiterating the deference due to arbitrators when it comes to their interpretation of arbitration agreements, the Court affirmed without dissent an arbitrator’s interpretation of an arbitration agreement as authorizing class-wide arbitration despite the absence of any clear language to that effect. In the process, Justice Kagan’s opinion for the Court may thereby have provided a roadmap for arbitrators going forward on how to frame decisions on class arbitrability to vitiate Stolt-Nielsen’s force – albeit with one potentially significant caveat.
As we noted in our argument preview, Oxford Health required the Court to clarify a point that it had been able to sidestep in Stolt-Nielsen: Although the 2010 decision had held – controversially – that parties must “affirmatively agree” to class-wide arbitration, the parties to that case had stipulated for purposes of litigation that no such agreement existed. Thus, although Stolt-Nielsen articulated a potentially critical principle to govern the availability of class-wide arbitration, it expressly reserved “what contractual basis may support a finding that the parties agreed to authorize class-action arbitration.” Justice Alito’s opinion for the Stolt-Nielsen majority thereby left unresolved whether the parties’ consent to class-wide arbitration had to be express, or whether it could be inferred from the four corners of the arbitration agreement and/or parol evidence.
This distinction is critical because of the deference ordinarily due to an arbitrator’s interpretation of arbitral agreements. Under the relevant provision of the Federal Arbitration Act, courts may vacate arbitral awards only “where the arbitrators exceeded their powers”—a standard far more deferential than de novo review. Whereas Stolt-Nielsen had stressed that “an arbitrator lacks the power to order class arbitration unless there is a contractual basis for concluding that the parties agreed to that procedure,” the Third Circuit had nevertheless held in Oxford Health that an arbitrator’s finding of a contractual (as opposed to extra-contractual) basis for so concluding is still entitled to deference under the FAA, thereby leaving intact an arbitrator’s interpretation of vague and ambiguous contractual language as supporting class arbitration – and joining a five-way circuit split in the process.
The Supreme Court affirmed. As Justice Kagan explained, under the FAA, “the sole question for us is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” Distinguishing Stolt-Nielsen, the Court emphasized that it “overturned the arbitral decision there because it lacked any contractual basis for ordering class procedures, not because it lacked, in Oxford’s terminology, a ‘sufficient’ one.” Put another way, “in setting aside the arbitrators’ decision, we found not that they had misinterpreted the contract, but that they had abandoned their interpretive role.”
Here, by contrast, the arbitrator clearly had purported to interpret the contract – however incorrectly. And “[s]o 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 arbitrator’s construction holds, however good, bad, or ugly.” Perhaps surprisingly, given the tenor of the oral argument, Justice Kagan’s opinion provides little in the way of clarification of what it means for an arbitrator to be “arguably construing” the arbitration agreement. Indeed, it may well be that it is enough merely for an arbitrator to say that his finding of consent to class-wide arbitration is based upon the arbitral agreement – even if the supporting analysis is utterly unconvincing, if not implausible, on its face. If so, then Oxford Health converts Stolt-Nielsen into little more than an opinion-drafting guide for arbitrators.
At the same time, and much like Stolt-Nielsen, Oxford Health reserved a potentially critical question in a footnote. As Justice Kagan explained for the Court in footnote 2, the standard of review might very well be different if the party challenging the arbitrator’s decision claimed that it was on a “question of arbitrability,” as opposed to a matter clearly within the arbitrator’s purview – since questions of arbitrability are typically reviewed de novo. Because Oxford had not challenged the arbitrability of the propriety of class-wide arbitration (indeed, Oxford twice submitted that issue to the arbitrator), the Court in this case did not need to reach whether that standard should have applied instead. (Such a concession also led Justice Alito to concur, even though, as he explained in a separate opinion joined by Justice Thomas, he does not believe that unnamed class members could otherwise have been bound by class arbitral awards when they did not individually consent to class-wide proceedings.)
Thus, footnote 2 might suggest, as Tom noted earlier, that “the case is unlikely to have much if any broader significance.” But just how large a caveat this is remains to be seen. After all, it’s not immediately clear how the question at the heart of today’s decision – whether the parties consented to class-wide arbitration – comfortably fits within the Court’s understanding of “questions of arbitrability.” Whether the parties agreed to class-wide arbitration does not go to the validity of the underlying arbitration agreement or to whether a particular controversy is covered by an arbitration clause; rather, it goes to the procedures by which a matter that has necessarily been submitted to arbitration will be resolved.
Of course, footnote 2 may portend an expansion of the Court’s jurisprudence with regard to “questions of arbitrability,” but that, too, would be a surprising development, given the trend in the Court’s jurisprudence to shift ever more decision making into arbitration. If nothing else, Oxford Health drives home the consequences of that trend – that, even when arbitrators misinterpret arbitration agreements on issues as important as whether the parties consented to class-wide arbitration, there won’t necessarily be anything courts can do to fix it.
In Plain English:
When parties agree to submit a particular dispute to arbitration, as opposed to litigation before a state or federal court, one party can represent a large class of similarly situated claimants in the dispute – rather than having each potential claimant bring his claim in a separate, individual arbitration proceeding – only if the parties have also specifically agreed to that scenario. But when an arbitrator makes a decision about whether the parties had or had not specifically agreed to class-wide arbitration based on the text of the underlying contract, courts cannot overturn that decision even if it is wrong.