August 01, 2013 Articles

Arbitral Decisions Upheld under the FAA

By Crystal R. Axelrod and James Hatchitt

In Oxford Health Plans LLC v. Sutter, the U.S. Supreme Court held that where the parties agreed to let the arbitrator decide whether their contract authorized class arbitration and the arbitrator made a good-faith attempt to interpret the contract, the arbitrator did not exceed his powers under section 10(a)(4) of the Federal Arbitration Act (FAA), regardless of the correctness of his interpretation. No. 12-135, 2013 WL 2459522 (June 10, 2013) (citing 9 U.S.C. § 10(a)(4)). “Under § 10(a)(4), the question for a judge is not whether the arbitrator construed the parties’ contract correctly, but whether he construed it at all.” Accordingly, the Court affirmed the judgment of the Third Circuit in denying Oxford’s motion to vacate the arbitrator’s decision.

Procedural Background
Respondent John Sutter, a New Jersey pediatrician, entered into a contract with petitioner Oxford Health Plans LLC, a health-insurance company, under which Sutter agreed to provide care to Oxford’s members and Oxford agreed to pay prescribed rates for those services. Sutter later filed a complaint against Oxford in New Jersey Superior Court on behalf of himself and a proposed class of similarly situated physicians, alleging that Oxford failed to make full and prompt payment, in violation of their contracts and various state laws.

Oxford moved to compel arbitration of Sutter’s claims because of an arbitration clause in its contract, which provided that “[n]o 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. . . .”  The state court granted Oxford’s motion and referred the suit to arbitration.

Importantly, Sutter and Oxford disputed whether their contract permitted class arbitration and agreed to submit this issue to the arbitrator. Based on his construction of the text of the parties’ agreement, including the language quoted above, the arbitrator reasoned that the intent of the clause was “to vest in the arbitration process everything that is prohibited from the court process.’” Accordingly, the arbitrator concluded that “on its face, the arbitration clause . . . expresses the parties’ intent that class arbitration can be maintained.”

Oxford disagreed with this conclusion and filed a motion to vacate in the U.S. District Court for the District of New Jersey, complaining that the arbitrator had “exceeded [his] powers” under section 10(a)(4) of the FAA. The district court denied Oxford’s motion, and the Court of Appeals for the Third Circuit affirmed. Id. (citing No. 05-CV-2198, 2005 WL 6795061 (D.N.J. Oct. 31, 2005), aff’d, 227 F. App’x 135 (3d Cir. 2007)).

While the arbitration proceeded between Sutter and Oxford, the U.S. Supreme Court held in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (2010), 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.” Oxford Health Plans, 2013 WL 2459522, at *3 (quoting Stolt-Nielsen, 559 U.S. at 684). In Stolt-Nielsen, the parties submitted the issue of class arbitration to the arbitrator. In contrast to Oxford Health Plans, where the parties asked the arbitrator to determine whether their agreement allowed for class arbitration, the parties in Stolt-Nielsen stipulated that they had never reached any sort of agreement on class arbitration. In the absence of an agreement on this issue, the arbitrators had “simply . . . imposed [their] own view of sound policy.” Id. (quoting Stolt-Nielsen, 559 U.S. at 672). The Court, therefore, vacated the arbitrator’s decision under section 10(a)(4) of the FAA.

Immediately after Stolt-Nielsen was decided, Oxford moved the arbitrator to reconsider his class-arbitration decision in light of the Court’s ruling. The arbitrator issued a new opinion holding that Stolt-Nielsen was inapposite because there was no applicable agreement in that case, whereas here the parties disputed the meaning of their agreement as it applied to class arbitration and requested his interpretation of the agreement. The arbitrator then reiterated his reasons for finding that “the arbitration clause unambiguously evinced an intention to allow class arbitration.”

Unsatisfied with the arbitrator’s opinion on reconsideration, Oxford renewed its motion to vacate in federal court under section 10(a)(4). Once again, the district court denied Oxford’s motion, and the Third Circuit affirmed. In its opinion, the Third Circuit noted that under the limited scope of judicial review provided by section 10(a)(4), if an arbitrator makes a “good faith attempt” to interpret a contract, “even serious errors of law or fact will not subject his award to vacatur.” Id. (quoting Sutter v. Oxford Health Plans LLC, 675 F.3d 215, 220 (3d Cir. 2012)). The Third Circuit held that Oxford could not prevail under that standard because the arbitrator “endeavored to give effect to the parties’ intent” and “articulate[d] a contractual basis for his decision.” Id. (quoting Sutter, 675 F.3d at 223–24).

Oxford appealed to the Supreme Court, and the Court granted certiorari “to address a circuit split on whether section 10(a)(4) allows a court to vacate an arbitral award in similar circumstances.” The Court ultimately held that it does not and, in a unanimous decision, affirmed the Third Circuit’s denial of Oxford’s motion to vacate.

The Court’s Reasoning
The Court explained that section 10(a)(4) permits a court to overturn an arbitrator’s decision only where the arbitrator acts “outside the scope of his contractually delegated authority.” Id. at *4 (quoting E. Associated Coal. Corp. v. Mine Workers, 531 U.S. 57, 62 (2000)). The “sole question” for the Court, therefore, was “whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” Finding that the arbitrator’s decisions were “through and through, interpretations of the parties’ agreement,” the Court determined that he did not exceed his powers under section 10(a)(4).

While the Court did not necessarily disagree with Oxford’s argument that the arbitrator’s decision lacked a “sufficient” contractual basis, it rejected this argument as irrelevant. See id. at *5–6 (“We overturned the arbitral decision [in Stolt-Nielsen] because it lacked any contractual basis, not because it lacked, in Oxford’s terminology, a ‘sufficient’ one.”). The Stolt-Nielsen Court found not that the arbitrators “had misinterpreted the contract,” but rather “that they had abandoned their interpretive role” altogether, thereby exceeding their contractually delegated authority. To be clear, “courts have no business” overruling the arbitrator simply “because their interpretation of the contract is different from his.”

A significant point, one underscored by a paragraph near the end of Justice Kagan’s opinion, is that “convincing a court of an arbitrator’s error—even his grave error—is not enough  . . . [to] correct his mistakes under § 10(a)(4).” Id. “The potential for those mistakes is the price of agreeing to arbitration.” Because “Oxford chose arbitration . . . it must now live with that choice,” and the arbitrator’s construction of the contract must hold, “however good, bad, or ugly.”

Practice tip. Both Justice Kagan and Justice Alito repeatedly suggest that the Court’s hands were essentially tied due to Oxford’s “concession” evidencing its intent to submit the issue of class arbitration to the arbitrator. Think carefully before making a concession as to the arbitrability of any issue: A court’s hands may be tied in an Oxford-like knot due to the narrow judicial review that section 10(a)(4) allows, even if “grave errors” have been committed.

The Concurrence: Collateral Attack of the Absent Class Members
Justice Alito’s concurrence, joined by Justice Thomas, is also significant. Although the Court declined to vacate the arbitrator’s finding that the contract authorized class arbitration, the concurrence questioned the ultimate enforceability of class-arbitration proceedings against the absent members of the plaintiff class, suggesting that the arbitrator’s finding in this regard might be “vulnerable to collateral attack.” See id. (Alito, J., concurring). Justice Alito noted that “it is far from clear that [the absent class members] will be bound by the arbitrator’s ultimate resolution of this dispute,” given that they “have not submitted themselves to this arbitrator’s authority in any way.” Unlike Oxford, the absent class members never “conceded” that the arbitrator should decide the issue of class arbitration. According to the concurrence, notwithstanding the distribution of opt-out notices, “an 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.”

Practice tip. Absent class members—and perhaps even potential parties not yet named in arbitration proceedings—who are seeking to avoid unfavorable decisions by the arbitrator may use Justice Alito’s reasoning to argue that the arbitrator’s decisions made in their absence are not binding on them, as long as they did not make any Oxford-like concession or otherwise submit to the arbitrator’s authority. See id.

The opinion and concurrence in Oxford Health Plans leave us with perhaps a bit of foreshadowing and certainly a few unanswered questions:

Is the Availability of Class Arbitration a Question of Arbitrability?
So-called “questions of arbitrability,” which “include certain gateway matters, such as whether parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy,” are “presumptively for courts to decide.” Id. at *4 n.2; Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 452 (2003). When an arbitrator has decided a question of arbitrability, a court may review an arbitrator’s determination of such matter de novo, unless the parties clearly and unmistakably agreed that they wanted the arbitrator to resolve the dispute. Oxford Health Plans, 2013 WL 2459522, at *4 n.2; AT&T Techs., Inc. v. Commc’ns Workers, 475 U.S. 643, 649 (1986).

In footnote 2 of its opinion, the Court highlighted for the second time since Stolt-Nielsen that it “has not yet decided whether the availability of class arbitration is a question of arbitrability.” Oxford Health Plans, 2013 WL 2459522, at *4 n.2 (citing Stolt-Nielsen, 559 U.S. at 680). “[B]ecause Oxford agreed that the arbitrator should determine whether its contract with Sutter authorized class procedures,” that issue was not before the Court in this case. Id.; see also id. at *7 (Alito, J., concurring) (noting that in light of Oxford’s “concession below” the question of who should decide the class-arbitration issue was not properly before the Court).

Should this question arise in a similar case in the future, where absent class members have not conceded to the arbitrator’s authority, Justice Alito warns that the repercussions of a possible collateral attack on the arbitrator’s class-arbitration decision “should give courts pause before concluding that the availability of class arbitration is a question the arbitrator should decide.”

Practice tip. If the arbitration clause is silent on the availability of class arbitration, consider arguing that it is an issue of arbitrability to be presumptively decided by the courts, citing Justice Alito’s word of warning as one source of support for your argument. At least, after having made this argument, it will be impossible for the opposing party to argue that you “clearly and unmistakably” intended for the arbitrator to decide the issue. At most, if the issue makes it to the Supreme Court and the opinions expressed by the justices in Oxford Health Plans are any indication, you may find a favorable panel.

Are Broadly Worded Arbitration Clauses Sufficient to Allow for Class Arbitration?
The Court goes out of its way to state that it does not disagree with Oxford’s arguments as to the merits of the arbitrator’s decision. See id. at *6 (principal opinion) (“Nothing we say in this opinion should be taken to reflect any agreement with the arbitrator’s contract interpretation, or any quarrel with Oxford’s contrary reading. All we say is that convincing a court of an arbitrator’s error—even its grave error—is not enough.”). Justices Alito and Thomas take a less subtle approach in voicing their disagreement. See id. at *7 (Alito, J., concurring) (“If 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.”).

Practice tip. While the Court expressed no official opinion on the merits of the arbitrator’s decision, its tone is less than favorable. Accordingly, if your intent is to allow class-arbitration proceedings, it would be wise to expressly state so in your arbitration agreement. Otherwise, notwithstanding the outcome of this case, it is not clear that a broadly worded arbitration clause will bring class-action proceedings within the realm of arbitrability.

Keywords: mass torts litigation, class action, arbitration, Stolt-Nielsen, Oxford Health Plans


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