Supreme Court Rules Even “Good, Bad, or Ugly” Arbitrators’ Decisions Must Stand

This morning, in a unanimous decision, the Supreme Court of the United States refused to overturn, under section 10(a)(4) of the Federal Arbitration Act (FAA), an arbitrator’s decision that a contract authorized class arbitration. Writing for the Court, Justice Kagan found that section 10(a)(4) 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.” According to the Court, “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).” In arriving at this conclusion, the Court distinguished this case from Stolt-Nielsen S. A. et al. v. AnimalFeeds International Corp., which according to Justice Kagan, falls on the “opposite side of the line that §10(a)(4) draws to delimit judicial review of arbitral decisions.” Oxford Health Plans LLC v. Sutter, No. 12–135, U.S. Supreme Court (June 10, 2013).

Factual Background

John Sutter, a pediatrician, was under contract with a health insurance company, Oxford Health Plans, to provide medical care to its members. The contract included the following arbitration clause:

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.

As a result of a dispute about payments, Sutter sued Oxford on behalf of himself and a proposed class of physicians who were also under contract with Oxford for violations of their agreements and state law. The state court granted Oxford’s motion to compel arbitration and referred the suit to arbitration. The arbitrator decided that Oxford’s arbitration clause authorized class arbitration. In response, Oxford moved to vacate the arbitrator’s decision on the ground that he exceeded his power under section 10(a)(4) of the FAA. The U.S. District Court for the District of New Jersey denied Oxford’s motion and the Third Circuit Court of Appeals affirmed.

During the course of arbitration, the Supreme Court, decided Stolt-Nielsen S. A. et al. v. AnimalFeeds International Corp., in which it 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.” In light of the Stolt decision, Oxford asked the arbitrator to reconsider his decision authorizing class arbitration. The arbitrator did so, but distinguished Stolt in which the parties had stipulated that they had never reached an agreement on class arbitration. In his new opinion, the arbitrator explained that in this case the parties had disputed the meaning of their contract, and that, as a result, he had been required to construe the contract in order to glean the parties’ intent (which he found was to allow class arbitration).

Oxford again attempted and failed to vacate the arbitrator’s decision. The Supreme Court then agreed to hear the case to resolve whether an arbitrator acts within his powers under the FAA (as the Second and Third Circuits have held) or exceeds those powers (as the Fifth Circuit has held) by determining that the parties affirmatively agreed to authorize class arbitration, based solely on their use of broad contractual language precluding litigation and requiring arbitration of any dispute arising under their contract.

Legal Analysis

Justice Kagan first noted the standard for relief under §10(a)(4) of the FAA, which authorizes a federal court to set aside an arbitral award where the arbitrator exceeds his or her powers. An arbitral decision even arguably construing the contract—even if the arbitrator had made a “serious” or “grave” error—must stand, the Court found. According to Justice Kagan, the arbitrator had twice conducted a textual analysis of the contract to determine the parties’ intent. The Court thus concluded that the arbitrator’s decisions were “through and through, interpretations of the parties’ agreement” and thus that the arbitrator had not exceeded his power under section 10(a)(4).

In so finding, the Court distinguished this case from Stolt in which the arbitrators did not construe the contract and did not identify an agreement to authorize class arbitration. The Court also was sure to point out that nothing in its opinion, “should be taken to reflect any agreement with the arbitrator’s contract interpretation, or any quarrel with Oxford’s contrary reading.”

Practical Impact

John F. Martin, a shareholder in the Washington, D.C. office of Ogletree Deakins comments that “As an initial matter, it’s important to note that Oxford is a narrow ruling. The Court did not decide whether the availability of class arbitration is a ‘question of arbitrability,’ i.e., a ‘certain gateway matter’ that courts get to decide. Why not? Because Oxford did not make that argument below in the lower courts.”

According to Martin, “this decision reminds litigators how hard it is to overturn an arbitrator’s decision on any issue, even a really bad decision. At best, the clause is ambiguous on the issue of class arbitration; I think most people would conclude that the clause is silent on the issue. There is no question that the Court agreed with Oxford that the arbitrator misinterpreted the arbitration clause by reading an authorization of class arbitration into it.”

“Justice Kagan’s opinion suggests as much in several places in the decision, most notably when she writes that ‘[n]othing 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.’ Alito’s concurring opinion also points out that if the Court were allowed to review the arbitrator’s interpretation of the contract de novo, there’s no question it would have reversed his ruling. But because the arbitrator was doing something the parties agreed he had the authority to do—interpret the arbitration clause to determine whether it allowed class arbitration—the Supreme Court said its hands were tied under section 10(a)(4) of the FAA.”

Martin continued, “The Court’s point is that no matter how badly the arbitrator did his job, that’s not a good enough reason to go into court and try and overturn it. You live by arbitration, you die by arbitration. It’s intended to be a short, quick process. If you get a bad arbitrator . . . well, too bad. As the Court stated, ‘Oxford chose arbitration, and it must now live with that choice.’”

“The take-away for companies and clients that wish to avoid class arbitration is: (1) to remove any and all ambiguity from their arbitration clauses on the issue of class arbitration and to state that class arbitration is not authorized or permitted; and (2) to challenge the arbitrator’s authority to determine the availability of class arbitration. If the parties consent to the arbitrator deciding the issue, then no matter how clear you think the clause may be, the parties will be bound by whatever he or she decides it says.”