Supreme Court Rules for Class Arbitration

In a rare win for a plaintiff in a Supreme Court case involving class actions and arbitration, the Court ruled today in Oxford Health Plans LLC v. Sutter that an arbitrator's decision to allow class rather than individual arbitration had to be accepted by the courts. What was decisive in the case was that the plaintiff was able to turn arguments of limited judicial review and deference to arbitrators–normally the stock-in-trade of arbitration advocates–in his favor. Justice Kagan wrote the opinion for a unanimous Court, holding that regardless of whether a court would agree with the arbitrator's decision that the arbitration agreement permitted class proceedings, the court had to defer to it as long as the arbitrator was "even arguably construing" the arbitration agreement.

The case arose from a lawsuit filed against a health insurance company by a class of New Jersey doctors, challenging the insurer's policies concerning amounts of Reimbursements for particular types of procedures. The insurer moved to compel arbitration, citing provisions in the lead plaintiff's contract with the company requiring arbitration of all disputes.

Once the case was before the arbitrator, the plaintiff sought to proceed on behalf of a class. After the Supreme Court decided Green Tree Financial Corp. v. Bazzle, a fractured decision upholding a state court's affirmance of a class arbitration, the arbitrator concluded that class proceedings were permissible. The insurer asked the arbitrator to reconsider when the Supreme Court later decided Stolt-Nielsen SA v. AnimalFeeds International Corp., holding that class arbitration is permissible only when the parties agreed to it in their arbitration clause. The arbitrator again held that the parties' agreement allowed class arbitration.

The insurer sought review of the decision in the federal courts, and the U.S. Court of Appeals for the Third Circuit upheld the arbitrator's decision. The insurer asked for Supreme Court review, claiming that there were differences in approach among the federal courts of appeals in evaluating claims that arbitrators erred in permitting class actions after Stolt-Nielsen.

The Supreme Court affirmed the Third Circuit's highly deferential approach to an arbitrator's decision to permit class arbitration. Critical to the decision was the insurer's concession that the arbitrator had authority to construe the contract and determine whether it allowed class proceedings. Given that the arbitrator was acting within the scope of his conceded authority, the Court held that judicial review was very limited, as arbitral awards can be vacated only in "very unusual circumstances." To show that an arbitrator acted outside his authority, the insurer would have to show that he was not "evenly arguably" interpreting the agreement, and here the decision was "through and through" an interpretation of the contract, even if not the best interpretation or even a correct one. Stolt-Nielsen, the Court held, allows overturning an arbitrator's decision to allow class proceedings only when the decision lacks "any contractual basis." An error–"even [a] grave error"–is not enough. That is "the price of agreeing to arbitration."

Justices Alito and Thomas added a short concurrence expressing concerns about the rights of class members, and whether they ever assented to the decision of the issue by the arbitrator, even though the insurer had. But because the insurer did not raise any such argument, they joined the opinion of the Court.

The decision is likely to mean that in those post-Stolt cases where arbitrators have allowed class arbitration under contracts that do not expressly prohibit it, the courts will have to allow those decisions to stand. The increasing prevalence of agreements expressly forbidding class arbitration in the wake of the Supreme Court's decision in AT&T Mobility LLC v. Concepcion may, however, limit the opinion's significance in the long term.

More generally, the decision illustrates the perils of getting what you ask for. If companies want to arbitrate, they may find themselves stuck with what arbitrators decide. Many corporations seem to have decided that the benefits of arbitration to them are worth accepting that consequence, but the Oxford decision illustrates that when arbitration does not work out the way a company may have anticipated, the courts will not always bail the company out.

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