Let’s say you are in a dispute covered by an arbitration agreement that is vague as to whether class action arbitrations can be brought. You want to ensure that any class claims end up in a court of law instead of before an arbitrator, because you want the right to a rigorous review of any class certification decision that does not go your way. Well, as of today, unless you can convince your opponent to sign a new agreement, you have two choices: (1) find a way to get them to stipulate that the two of you agree that you have never reached any agreement about whether your agreement allows class arbitration (good luck with that); or (2) ask a court to decide the complicated and unsettled question of whether an arbitrator or a court should decide that issue in the first place (get ready to enter the “arbitrability” fray).
So said the Supreme Court today said on a 9-0 vote in Oxford Health Plans LLC v. Sutter, No. 12-135 (2013). To be sure, the Supreme Court did not directly lay out the two choices as we have. But as a practical matter, when we read today’s opinions — Justice Kagan wrote for the Supreme Court, and Justice Alito wrote separately to concur, with Justice Thomas joining him — they seem to be the likely consequences of this ruling, which has significantly limited the reach of the Supreme Court’s previous decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 684 (2010), to the point where Plaintiffs are likely to argue that it will carry little, if any, precedential weight.
The Supreme Court considered whether an arbitrator exceeded his authority by finding that the arbitration agreement at issue provided for class arbitration. Oxford Health, slip op. at 1. That agreement does not specifically mention class actions, but says in relevant part, “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.” Id. at 2.
The Supreme Court reasoned that once the parties submitted the question of interpreting this language to the arbitrator, the narrow scope of judicial review under section 10(a)(4) of the Federal Arbitration Act limits a court to simply asking whether or not the arbitrator construed the agreement. In other words, courts may not second-guess the correctness of an arbitrator’s construction of an arbitration clause. See Oxford Health, slip op., at 5 (“the sole question for us is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong”).
Moreover, the Supreme Court concluded that Oxford Health misread Stolt-Nielsen when arguing that the “‘high hurdle’ of section (10)(a)(4) is overcome when an arbitrator imposes class arbitration without a sufficient contractual basis.” Id. at 6. Stolt-Nielsen was different, the Supreme Court said, having “overturned the arbitral decision . . . because it lacked any contractual basis for ordering class procedures, not because it lacked, in Oxford’s terminology a ‘sufficient’ one.” Id. at 6. The parties in Stolt-Nielsen had entered into “an unusual stipulation” that they had never reached an agreement on class arbitration. Id. See also Oxford Health, slip op. at 3 (“The parties in Stolt-Nielsen had stipulated that they had never reached an agreement on class arbitration. Relying on § 10(a)(4), we vacated the arbitrators’ decision approving class proceedings because, in the absence of such an agreement, the arbitrators had simply . . . imposed [their] own view of sound policy.” (internal quotation marks and citation omitted) (alterations in original)). In Oxford Health, the opposite was true: the parties disputed the meaning of the arbitration clause. Id.
The arbitrability option arises from footnote 2, where the Supreme Court explains that the outcome might have been different had Oxford Health asked a court to decide whether the question submitted to the arbitrator was even arbitrable. Id. at 5 n.2. There, Justice Kagan points to the Supreme Court’s plurality opinion in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 452 (2003), as a guide. (Anyone who has read it knows it will be a murky guide, at best.) Had one of the parties asked a court to rule on the arbitrability of the issue of whether they consented to class arbitration, the court’s standard of review would have been de novo, absent clear and unmistakable evidence that the parties wanted an arbitrator to decide it. But even if this route had been taken, the Supreme Court made clear that it has not yet decided whether the availability of class arbitration even is a question of arbitrability. Id., slip op. at 5 n.2. This case did not give the Supreme Court an opportunity to decide that question because Oxford Health twice asked the arbitrator to make the decision. “In sum, Oxford chose arbitration, and it must now live with that choice.” Id. at 8.
Clearly, this footnote reflects an internal debate in the Supreme Court. Justice Alito wrote, “Today’s result follows directly from petitioner’s concession [that whether class arbitration is allowed is an arbitrable question] and the narrow judicial review that federal law allows in arbitration cases.” Id., slip op. at 1 (Alito, J., concurring). Then he wonders whether absent class members would ever have an opportunity to “agree” to class arbitration. Id. (“absent members of the plaintiff class never conceded that the contract authorizes the arbitrator to decide whether to conduct class arbitration. It doesn’t.”). If the class proceeds on an opt-out basis, “it is difficult to see how an arbitrator’s decision to conduct class proceedings could bind absent class members who have not authorized the arbitrator to decide” on a classwide basis how to conduct the arbitration. Id. at 2. As a result, he worries about such arbitrations being subject to collateral attacks and in that situation, class members would not be bound by an unfavorable decision, but would benefit from a favorable one. Id. (citing Am Pipe & Constr. Co. v. Utah, 414 U.S. 538, 546-47 (1974)).
Implications Of This Decision
As the strategic choice of defending a high stakes workplace class action in a federal court or in an arbitration setting is stark, corporate counsel will watch closely to see how courts apply this decision going forward.