In the past two weeks, the Supreme Court announced two major
class arbitration decisions.
In Oxford Health Plans LLC v. Sutter, handed down on June
10, the Court unanimously held that an arbitrator does not exceed
his powers under the Federal Arbitration Act when he decides, with
the parties' agreement, whether a contract authorizes class
arbitration. Given the limited review of arbitrators' decisions
under § 10(a)(4) of the FAA, the Court refused to vacate the
arbitrator's decision to allow class arbitration, even though
the arbitration agreement was silent on the issue.
On June 20, in American Express Co. v. Italian Colors
Restaurant, a majority of the Court held that a contractual
waiver of class arbitration is enforceable under the Federal
Arbitration Act, even where the costs of individual arbitration
would exceed the potential recovery should the claimant prevail. As
a result, Italian Colors and other merchants can pursue their
antitrust claims in individual arbitrations or not at all.
Although one of these opinions allows a class arbitration to
proceed while the other mandates individual arbitrations, the
decisions, read together, provide guidance for companies that wish
to avoid class arbitration.
Oxford Health Plans LLC v. Sutter
Background. In 1998, Ivan Sutter, a New Jersey
doctor, signed a contract with Oxford Health Plans that gave Sutter
preferred access to Oxford's members in exchange for his
providing services to those members at prescribed rates. See
Sutter v. Oxford Health Plans LLC, 675 F.3d 215, 217 (3d Cir.
2012). The contract required the parties to arbitrate any disputes,
but "[n]either the arbitration clause nor any other provision
of the agreement makes express reference to class
arbitration." Id. In 2002, Sutter filed suit,
accusing Oxford of "improperly denying, underpaying, and
delaying reimbursement of physicians' claims for the provision
of medical services." Id. The trial court granted
Oxford's motion to compel arbitration, and the parties
"agreed that the arbitrator should decide whether their
contract authorized class arbitration." Oxford Health
Plans LLC v. Sutter, No. 12-135, slip op. at 2 (U.S. June 10,
2013).
The arbitrator ruled that the contract authorized class
arbitration. Id. Oxford challenged that ruling in court
but lost, both in the district court and on appeal. While the
arbitration was proceeding, the Supreme Court decided
Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559
U.S. 662, 684 (2010), which vacated an arbitration panel's
decision to allow class arbitration on the basis 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." Citing Stolt-Nielsen,
Oxford asked the arbitrator to reconsider his earlier ruling to
allow class arbitration. Oxford, slip op. at 3. The
arbitrator reiterated that class arbitration was available, and
Oxford again sought judicial review. Id. Both the trial
court and the Third Circuit again affirmed the arbitrator's
decision. Id.
The Supreme Court's Decision. The Supreme
Court decided Oxford on narrow grounds. Instead of
clarifying what constitutes "a contractual basis for
concluding that the part[ies] agreed to" class
arbitration, as required by Stolt-Nielsen, the Court
stressed that both Oxford and Sutter had agreed to allow the
arbitrator to determine the scope of the arbitration agreement.
Thus, the "sole question" before the Court was
"whether the arbitrator (even arguably) interpreted the
parties' contract, not whether he got its meaning right or
wrong." Id. at 5. The Court likely would have
approached the case differently had Oxford objected below that the
question of class arbitration was not one of contract
interpretation but of arbitrability. See id., n.2. But,
once the parties agree to entrust a decision to an arbitrator, a
court "may vacate an arbitrator's decision only in very
unusual circumstances" and "'[i]t is not enough to
show that the arbitrator committed an error—or even a serious
error.'" Id. at 4 (quoting
Stolt-Nielsen, 559 U.S. at 671). "Because the parties
bargained for the arbitrator's construction of their agreement,
an arbitral decision even arguably construing or applying the
contract must stand, regardless of a court's view of its
(de)merits." Id. (internal quotation marks
omitted).
Oxford had argued that, under Stolt-Nielsen, the
arbitrator exceeded his authority by interpreting an arbitration
agreement to authorize class arbitration where there was no
evidence, in the agreement or otherwise, that the parties had
agreed to such a procedure. The Oxford Court rejected that
approach, explaining that Stolt-Nielsen "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." Id. at 6. The Court refused to consider
Oxford's argument about what the arbitration agreement,
properly construed, means "because, and only because, [that
argument] is not properly addressed to a court." Id.
at 8.
The Court did not hold that an arbitration agreement
silent with respect to class arbitration implicitly authorizes
classwide proceedings. But it made clear that federal courts will
not step in to review decisions that the parties agreed an
arbitrator should make: "In sum, Oxford chose arbitration, and
it must now live with that choice.... The arbitrator did what the
parties requested: He provided an interpretation of the contract
resolving that disputed issue. His interpretation went against
Oxford, maybe mistakenly so. But still, Oxford does not get to
rerun the matter in a court." Id. at 8-9. In the
Court's words, "[t]he arbitrator's construction holds,
however good, bad, or ugly." Id. at 8.
The "Question of Arbitrability" and Justice
Alito's Concurrence. The Oxford Court noted,
"[w]e would face a different issue if Oxford had argued below
that the availability of class arbitration is a so-called
'question of arbitrability,'" because such matters
"are presumptively for courts to decide." Id. at
5 n.2. Because questions of arbitrability are entrusted to courts
and not to arbitrators, courts need not defer to the
arbitrator's ruling on such issues, and "[a] court may []
review an arbitrator's determination of such a matter de
novo absent clear and unmistakable evidence that the parties
wanted an arbitrator to resolve the dispute." Id.
(internal quotation marks omitted). Whether the availability of
class arbitration is a question of arbitrability remains
effectively unresolved by the Court, see id. (citing
Stolt-Nielsen, 559 U.S. at 680), and circuit courts have
approached the question in different ways.
Justice Alito (who authored Stolt-Nielsen) provided a
short concurrence in which he makes clear that he thinks the
arbitrator erred: "If we were reviewing the arbitrator's
interpretation of the contract de novo, we would have
little trouble concluding that he improperly inferred 'an
implicit agreement to authorize class-action arbitration from the
fact of the parties' agreement to arbitrate.'" See
Oxford, slip op. at 1 (Alito, J., concurring). (quoting
Stolt-Nielsen, 559 U.S. at 685).
Justice Alito goes on to explain why allowing an arbitrator to
determine whether an agreement authorizes class arbitration
"should give courts pause" in those cases where the issue
is litigated. Id. at 2. His concern is that "an
arbitrator's erroneous interpretation of contracts that do not
authorize class arbitration cannot bind someone who has not
authorized the arbitrator to make that determination."
Id. This raises the possibility of post-arbitration
collateral attacks by absent class members, who can "unfairly
claim the benefit from a favorable judgment without subjecting
themselves to the binding effect of an unfavorable one."
Id. In other words, in cases like Oxford, where
the arbitration agreement, properly read, does not authorize class
arbitration but the arbitrator is entrusted with contract
interpretation and says that class arbitration is proper, unnamed
class members gain an unfair advantage. If the result of class
arbitration is positive, they can accept the arbitration award. But
if the defendant wins, the absent class members can attack the
arbitration award and insist that, because they never agreed to
allow the arbitrator to interpret the arbitration agreement, they
should have another opportunity to litigate the agreement's
meaning and to arbitrate individually. Thus, absent class members
would gain a procedural advantage that would not be available to
them either in court or in class arbitration based on a court's
interpretation of the arbitration agreement. Treating class
arbitration as a question of arbitrability to be decided by a
court, rather than an arbitrator, may alleviate this concern.
American Express Co. v. Italian Colors Restaurant
Background.Italian Colors Restaurant and other
merchants that accept American Express cards filed a class action
against American Express asserting federal antitrust claims. The
merchants' contract with American Express requires all disputes
between the parties to be resolved in arbitration. See American
Express Co. v. Italian Colors Restaurant, No. 12-133, slip op.
at 1 (U.S. June 20, 2013). It also states that "[t]here shall
be no right or authority for any Claims to be arbitrated on a class
action basis." Id. (quoting In re Am. Express
Merchs.' Litig., 667 F.3d 204, 209 (2d Cir. 2012)).
American Express moved to dismiss the case in favor of arbitration
and specifically sought an order compelling each plaintiff to
arbitrate individually. See id. at 2. The district court
granted American Express's motion. See id.
The Second Circuit held that the trial court should not have
ordered arbitration. Relying on a declaration from the plaintiffs
about the substantial expense required to prove their antitrust
claims, the appellate court found the class arbitration waiver
unenforceable because individual arbitrations would impose costs on
each merchant that far exceeded their potential recoveries. See
id. (citing In re Am. Express Merchs.' Litig.,
554 F.3d 300, 315-16 (2d Cir. 2009)). The Second Circuit
subsequently held that neither Stolt-Nielsen nor
AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740
(2011), which held that the FAA preempts state laws barring
enforcement of class arbitration waivers, applied to this case.
See In re Am. Express Merchs.' Litig., 634 F.3d 187
(2d Cir. 2011), adhered to on rehr'g, 667 F.3d 204 (2d
Cir. 2012).
The Supreme Court's Decision. Unlike the
narrow opinion in Oxford, the majority opinion in
Italian Colors is broad. It holds that the FAA requires
courts to enforce arbitration agreements by the terms the parties
adopted, "unless the FAA's mandate has been overridden by
a contrary congressional command." Italian Colors,
slip op. at 4 (internal quotation marks omitted). The majority
finds no such contrary command in the antitrust laws, which
"do not guarantee an affordable procedural path to the
vindication of every claim," or in congressional approval of
procedural rules for class action litigation, which does not
"establish an entitlement to class proceedings for the
vindication of statutory rights." Id. at 4-5.
Nor does the majority accept that enforcing the class arbitration
waiver in this case would "prevent the 'effective
vindication' of a statutory right" because the merchants
"have no economic incentive to pursue their antitrust claims
individually in arbitration." Id. at 5. The Court
asserts that the "effective vindication" exception to
enforcement of arbitration agreements under the FAA is about
preventing "prospective waiver of a party's right to
pursue statutory remedies." Id. at 6 (quoting
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,
473 U.S. 614, 637 n.19 (1985)). That exception does not apply here,
because "[t]he class arbitration waiver merely limits
arbitration to the two contracting parties. It no more eliminates
those parties' rights to pursue their statutory remedy than did
federal law before its adoption of the class action for legal
relief in 1938." Id. at 7. And, the Court notes,
"the fact that it is not worth the expense involved in
proving a statutory remedy does not constitute the
elimination of the right to pursue that remedy."
Id.
Lessons from Oxford and Italian Colors
First, businesses that prefer to arbitrate disputes but do not
want to engage in class arbitration should continue to include
class arbitration waivers in their contracts. The Court has now
twice held that such waivers are valid and enforceable, because
"the FAA's command to enforce arbitration agreements
trumps any interest in ensuring the prosecution of low-value
claims." Italian Colors, slip op. at 9 n.5 (citing
Concepcion).
Second, companies seeking to avoid class arbitration where the
agreement is silent on class arbitration should not agree that the
arbitrator has authority to decide whether class arbitration is
available. Instead, they should insist that the issue is one of
arbitrability to be decided by a court. Justice Alito's
concurrence in Oxford provides guidance on the issue.
See Oxford, slip op. at 1 (Alito, J., concurring).
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