Supreme Court Seal.jpgCo-authored by Richard Alfred and Patrick Bannon

For an employer, what could be worse than a class action lawsuit?  Quite possibly, a “class arbitration.”  Like a class action suit, class arbitration is a proceeding in which one or a few claimants try to assert claims on behalf of many, sometimes hundreds or thousands, of other current and former employees.  But a class arbitration is decided by an arbitrator rather than in court.  There is no judge or jury, and the relatively clear rules of procedure or evidence that apply in court may or may not be followed.  The arbitrator has almost plenary authority over the proceedings, subject to only very limited appeal rights.  For employers facing wage and hour claims under the Fair Labor Standards Act, class arbitration poses the additional risk that an arbitrator might disregard the special opt-in procedures that apply to FLSA collective actions in favor of generic opt-out class action rules — a change that could dramatically raise the monetary stakes.

Last Friday, December 7, 2012, the U. S. Supreme Court agreed to decide Oxford Health Plans LLP v. Sutter, a case that could determine whether employers that have arbitration agreements with their employees that are silent about class or collective actions are nonetheless subject to class and collective arbitration.  (The Supreme Court’s order describing the question it has agreed to decide is here.)  The stakes are high.  The Court’s decision will determine whether an arbitrator can require an organization to defend itself in class arbitration based solely on the existence of an agreement with a broad arbitration clause providing for arbitration of “all disputes” or “all claims” without mentioning class or collective proceedings.   Such broad arbitration clauses have for decades been commonly included in agreements of all kinds, including arbitration agreements with employees.  If such clauses are sufficient to authorize class-wide arbitration, employers that have arbitration agreements may be subject to a wave of class arbitration claims, including class claims under state wage and hour law, collective claims under the FLSA and, even claims that collective claims under the FLSA should be subject to class arbitration procedures, a possibility raised by the Fourth Circuit’s 2008 Long John Silver’s Restaurants, Inc. v. Cole decision.

Many observers, notably including a panel of appellate judges on the Court of Appeals for the Fifth Circuit, thought the Supreme Court had already ruled, in Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp., that employers cannot be forced to participate in class or collective arbitrations based on arbitration agreements that do not expressly give arbitrators the authority to proceed on that basis.  However, the Second Circuit and perhaps the First Circuit have expressed a different view.  So has the Third Circuit in Sutter, the case the Supreme Court will review. 

Dr.  John Sutter sued Oxford Health on his own behalf and on behalf of a class of other physicians, claiming failures to reimburse the physicians in accordance with Oxford Health’s contracts.  Because Sutter’s contract included a broad arbitration clause, Oxford Health argued and the trial court agreed that he could pursue his claims only in arbitration.  Sutter then asked the arbitrator to authorize class arbitration — to decide not only his own claims but the claims of the other physicians described in his class action lawsuit.  Oxford Health protested and argued, based on the language of its arbitration clause contained in the physician contracts, that it had never agreed to participate in class arbitration and that, therefore, under Stolt-Nielsen, it could not be required to  do so.  But the arbitrator ruled, based on the fact that the arbitration clause expressly covered “all” disputes (even though it didn’t mention class arbitration), that Oxford Health had implicitly agreed to class arbitration.  Emphasizing the importance of deferring to arbitrators when they interpret contracts subject to arbitration, the trial court and the Third Circuit Court of Appeals refused to disturb the arbitrator’s ruling.  Whether the Third Circuit’s ruling is consistent with Stolt-Nielson, and the subsequent Supreme Court opinion in AT&T Mobility v. Concepcion, will now be decided by the Court.

Employers can hope that the Supreme Court’s decision to review the Third Circuit’s Sutter decision arises from the concern of a majority of the justices that the Third Circuit’s reasoning (and similar reasoning by the Second and First Circuits) could undermine what the Court decided in Stolt-Nielsen.  If an arbitrator is free to interpret any arbitration agreement that provides for arbitration of “all” disputes or “all” claims as an implicit authorization of class arbitration, then the overwhelming majority of parties to arbitration agreements could be forced to defend class arbitrations, even though the vast majority of them never even contemplated, much less agreed to participate in, any such proceedings.  Employers with arbitration agreements should watch Sutter closely — a favorable Supreme Court decision could protect them against a legal problem worse than a class action lawsuit. 

The Court has not yet announced the schedule for its consideration of Sutter.  We will keep our readers informed of further developments.  A decision may not be issued until June 2013.