U.S. Supreme Court Ruling Provides End Around for Class-Wide Arbitration

Businesses will have to work a little harder to avoid class-action claims in arbitration. The U.S. Supreme Court recently resolved a key split in the circuit courts over whether class-wide arbitration is permissible absent an express provision in the contract. The decision further clarified the Court’s prior decision in Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., in which the Court held that an arbitrator could compel class procedures only if the parties have authorized them.

The Facts of the Case

In Oxford Health Plans v. Sutter, the parties agreed that the arbitrator should decide whether their contract authorized class arbitration. The relevant clause stated:

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 rules of the American Arbitration Association with one arbitrator.

While the agreement was silent to class-wide arbitration, the arbitrator concluded that the provision’s broad language should be interpreted to authorize it. The question before the Supreme Court was whether in doing so he “exceeded [his] powers” under §10(a)(4) of the Federal Arbitration Act (FAA).

The Court’s Decision

The Court ultimately concluded that the arbitrator’s decision survives the limited judicial review §10(a)(4) allows. As further explained by the Court, the FAA precludes a court from determining whether that interpretation is correct. Rather, a court may only decide whether the arbitrator exceeded his powers to interpret the contract.

As Justice Elena Kagan wrote, the FAA “permits courts to vacate an arbitral decision only when the arbitrator strayed from his delegated task of interpreting a contract, not when he performed that task poorly.”

While the parties in Stolt-Nielsen had stipulated that they had never reached an agreement on class arbitration, the parties in Oxford Health Plans expressly asked the arbitrator to consider their contract and determine whether it reflected an agreement to permit class proceedings. Accordingly, the Court held that the arbitrator couldn’t be said to have exceeded his powers.

Thus, the Court did not weigh in on whether the arbitrator made the right call. “All we say is that convincing a court of an arbitrator’s error — even his grave error — is not enough. So long as the arbitrator was ‘arguably construing’ the contract — which this one was — a court may not correct his mistakes under §10(a)(4),” Kagan added.

The Practical Implications

As this case makes clear, businesses looking to prohibit class action claims in arbitration should include express provisions in the contract.  This helps ensure that an arbitrator will not interpret silence on this key term as acquiescence. If the parties cannot reach an agreement, it may also be helpful to memorialize this in the agreement in order to bring any resulting litigation under the more favorable purview of Stolt-Nielsen.

If you have any questions about this case or would like to discuss the legal issues involved, please contact me, Christine Vanek, or the Scarinci Hollenbeck attorney with whom you work.