Co-Authored by: Dustin Dow

A unanimous Supreme Court held on Monday that when a party agrees that an arbitrator should decide if an agreement authorizes class arbitration, that party cannot later seek judicial intervention if it disagrees with the resulting award.  Because even if the arbitrator makes a “grave error” in interpreting a contract to authorize class arbitration, a court may not correct that error “[s]o long as the arbitrator was ‘arguably construing’ the contract.”  The Court’s ruling disappointed some who expected an expansion of its 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. which held that an arbitration panel exceeded its authority when class procedures were imposed based on an agreement that was silent on whether the procedures were authorized. 

The ramifications of Monday’s opinion in Oxford Health Plans, LLC v. Sutter, No. 12-135, 569 U.S. ___ (2013), are unlikely to profoundly impact arbitration or class action law.  But the case does offer a clear lesson in what not to do.  A party hoping to avoid class arbitration should not agree that it is for the arbitrator to decide whether the parties agreed to class arbitration.  Yet, respondent Oxford Health Plans did just that and then attempted to rely on Stolt-Nielsen to argue that the arbitrator “exceeded his powers” under the Federal Arbitration Act when he decided that the parties agreed to it.  Thus, Oxford Health Plans reached the Court under significantly different circumstances than the Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), and the resulting opinion was constrained by them.

In Stolt-Nielsen, the Court held that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”  559 U.S. at 684.  In that case, the parties stipulated to the absence of an agreement on class arbitration.  And because there was no underlying agreement, the Court held that an arbitrator exceeded his authority in ordering a party to class arbitration without evidence of any agreement to participate in class arbitration. 

In contrast, Oxford Health Plans did not argue that class arbitration was outside the arbitrator’s jurisdiction.  Instead, as the Supreme Court stated in a footnote, Oxford Health did quite the opposite.  It “agreed that the arbitrator should determine whether its contract with Sutter authorized class procedures.”  Once Oxford Health agreed to an arbitral determination (and renewed it a second time in the wake of the Stolt-Nielsen decision), its fate was controlled by the arbitrator who determined that the parties had agreed to class arbitration.  Writing for the Court, Justice Elena Kagan noted that “Oxford chose arbitration, and it must now live with that choice.” 

Oxford Health Plans allowed Justice Kagan to emphasize the limited judicial review of arbitration awards.  As she reaffirmed, “the sole question for us is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.”

A concurring opinion by Justice Samuel Alito addressed the viability of class-action arbitration.  The clause from which the Oxford Health Plans arbitrator construed intent to agree to class arbitration was far from explicit, stating generally:

“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 rule of the American Arbitration Association with one arbitrator.”

Because Oxford had agreed that the arbitrator should decide whether there was an agreement to class arbitration, the Court was limited in its ability to review the arbitrator’s decision.  As Justice Alito commented:  “[i]f we were reviewing the arbitrator’s interpretation of the contract de novo, we would have little trouble concluding that he improperly inferred “[a]n implicit agreement to authorize class-action arbitration . . . from the fact of the parties’ agreement to arbitrate.’ ” (quoting Stolt-Nielsen, 559 U.S. at 685.)  Justice Alito expressed particular concern about absent class members who obviously did not stipulate for an arbitrator to decide the class arbitration issue and had never agreed to class arbitration.  Accordingly, “it is far from clear that they will be bound by the arbitrator’s ultimate resolution of this dispute,” Justice Alito cautioned,  “[A]n arbitrator’s erroneous interpretation of contracts that do not authorize class arbitration cannot bind someone who has not authorized the arbitrator to make that determination.”

Bottom Line:  The unanimous opinion in Oxford Health Plans does not expand Stolt-Nielsen but in footnote 2 gives a clue that future cases may hinge upon whether class arbitration is a gateway question of arbitrability for the court to decide.  And, that an arbitrator’s determination on such an issue may be subject to de novo review by a court.  Justice Alito’s concurrence also highlights the potentially limited benefits of agreements for class arbitration when they are found to exist.

After Stolt-Nielsen and Oxford Health Plans, employers that want to avoid class arbitration should not stipulate that the issue of whether the parties agreed to class arbitration is for the arbitrator to decide.  Further, most arbitration clauses now have class action waivers and employers should at least consider their potential impact.  Finally, employers should be aware that several key decisions on the validity of those waivers are expected shortly.