We’ve previously blogged about the Supreme Court’s grant of review and argument in Oxford Health Plans LLC v. Sutter. Today, the Supreme Court issued its decision (pdf). In a narrowly-written ruling, the Court held that courts lack authority under the Federal Arbitration Act (FAA) to vacate an arbitral award authorizing class arbitration when when (1) the arbitrator’s decision is based on an arguable effort to construe the arbitration agreement and (2) the parties had agreed that the arbitrator should decide whether the arbitration agreement allows class-wide arbitration. Under such limited circumstances, the Court held that the FAA’s limited standard of review of arbitral awards precludes a court from correcting any mistakes in interpreting the agreement. Justice Kagan, who wrote the majority opinion, declared that “[t]he arbitrator’s construction holds, however good, bad, or ugly.”
This decision revisits the question whether an arbitrator may construe an arbitration agreement to permit class arbitration when the parties have not expressly agreed to that procedure. The Supreme Court previously addressed the issue in Stolt-Nielsen v. AnimalFeeds International Corp. (pdf), 130 S. Ct. 1758, 1775 (2010), holding 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.” And in Oxford Health Plans, the Court reaffirmed its prior holding that “[c]lass arbitration is a matter of consent,” and that an “arbitrator may employ class procedures only if the parties have authorized them.” But just as the the Court had previously declined in Stolt-Nielsen “to decide what contractual basis may support a finding that the parties agreed to authorize class-action arbitration,” it again declined to reach that issue in Oxford Health Plans. Instead, even though the arbitration provision at issue was silent about whether class arbitration was permitted, the Court concluded that because the parties had submitted the interpretation of the agreement to the arbitrator, any error by the arbitrator in construing the agreement to permit class arbitration was not subject to correction on judicial review because the FAA authorizes only limited judicial review of arbitral awards.
In a footnote, the Court reserved a crucial question that limits the practical consequences of the decision. The Court commented that it “would face a different issue” had Oxford Health Plans preserved the argument that the availability of class arbitration is a “question of arbitratibility,” which is a “gateway” issue for courts, rather than arbitrators, to decide. According to Justice Kagan, “Stolt-Nielsen made clear that this Court has not yet decided whether the availability of class arbitration is a question of arbitrability.” Because Oxford Health Plans had agreed that the arbitrator should decide whether the agreement authorized class arbitration, the Court concluded that the case did not provide a vehicle to decide whether the available of class procedures falls within the category of “questions of arbitrability.” The footnote therefore invites parties in future cases to argue that the availability of class arbitration is a threshold issue that should be decided by the courts, not by the arbitrator.
Although joining the majority opinion, Justice Alito also filed a concurrence (joined by Justice Thomas) that provides useful guidance to parties and arbitrators presented with this issue. As Justice Alito explained, when an arbitration agreement is silent with respect to class-wide arbitration, the agreement should generally not be construed to permit class arbitration because of the incompatibility of class procedures with traditional characteristics of arbitration. Justice Alito added that because absent class members have not consented to the arbitrator’s authority, they (as well as the defendant) would be able to advance substantial due process challenges to any arbitral award entered on a class-wide basis. Consequently, Justice Alito explained, absent class members would need to opt-in to the class arbitration proceeding in order to be bound by the arbitrator’s decision.
Because Oxford’s concession was central to the Court’s holding, and because the Court left the door open to obtaining judicial review of the class-arbitration question by framing the question as one of arbitrability, the Court’s ruling is narrow. Equally significant, the problem at issue in Oxford Health Plans is one that is receding: Companies increasingly have included in their arbitration agreements express preclusions of class arbitration. Today’s decision is a reminder that businesses should consider revising any arbitration agreements that remain “silent” on the issue of class arbitration.
Thus, in the long run, the most significant aspect of the Court’s decision may be Justice Alito’s concurrence, which spotlights the due process challenges to class arbitrations that proceed under contracts that do not clearly authorize the procedure.