The SCOTUS says class-wide arbitration is back on the menu

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On Monday, upholding the Federal Arbitration Act’s (FAA) strong deference to arbitral decisions, the United States Supreme Court unanimously held, in Oxford Health Plans, LLC v. Sutter, that where an arbitrator interprets an arbitration agreement to include class arbitration, even if that interpretation is incorrect, it will be upheld. At first blush, this decision appears to contradict the High Court’s 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (2010), widely haled as the death knell to class-wide – as opposed to individual – arbitration where the parties do not expressly agree to class arbitration in the arbitration agreement. But on further analysis, Justice Kagan, writing for a unanimous court, distinguished Stolt-Nielsen and created a roadmap for arbitrators on how to interpret arbitration agreements to avoid having their decisions overturned on appeal.

Stolt-Nielsen held that the FAA bars class arbitration unless the parties specifically agreed to allow it, and virtually no arbitration agreements include express class-arbitration authorizations. But in that case the parties stipulated that there was no such agreement. Thus, the Court was able to sidestep the issue decided in Oxford Health: what contractual basis may support a finding that the parties agreed to authorize class-action arbitration. In fact, Justice Alito’s opinion for the Stolt-Nielsen majority left unresolved whether the parties’ consent to class-wide arbitration had to be express, or whether it could be inferred from the arbitration agreement or parol evidence. In fact, before Oxford Health, there had been a five-way split in the circuit courts on this unresolved issue.

Section 10 of the FAA sets forth the limited bases for challenging an arbitral award. In essence, in the absence of fraud, corruption or a conflict of interest, an arbitral award will stand up to a challenge unless “the arbitrators exceeded their powers” – a standard much more deferential than de novo review. Whereas Stolt-Nielsen held 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,” Oxford Health held that were there is evidence that the arbitrator analyzed the contract to determine whether the parties agreed to that procedure, that decision will stand – regardless of its correctness – in the absence of fraud, corruption or a conflict of interest.

Distinguishing Stolt-Nielsen, the Court explained 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.”

In contrast, in Oxford Health, the arbitrator clearly had purported to interpret the contract (instead of relying on the parties’ stipulation) – 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.”

Questions of arbitrability are reviewed de novo, taking the review outside of the limited bases for challenging an arbitrator’s award. It is important to note that Oxford Health did not challenge the arbitrability of the propriety of class-wide arbitration, so the case did not reach the issue of which standard of review was appropriate. Of course, it remains to be seen whether this issue constitutes a “question of arbitrability.”

After Oxford Health, it is clear that Stolt-Nielsen’s holding is limited and that class arbitration may still be viable, even in the absence of the parties’ agreement to it. But this decision leaves some unresolved issues:

  • What does it mean for an arbitrator to be “arguably construing” the arbitration agreement, e.g., is it enough for an arbitrator to simply state that his finding of class arbitration is based on the parties’ agreement or must there be additional analysis?
  • Would the result have been different if the party challenging the arbitral decision claimed that it was on a “question of arbitrability,” as opposed to a matter clearly within the arbitrator’s discretion?

Nonetheless, in light of the holding of Oxford Health, it is important to review your arbitration agreements with counsel and to draft or revise them in such a way that it is undeniable that the parties do not consent to class arbitration.