supreme court.jpgCo-authored by Richard Alfred and Patrick Bannon

Can an employer that has agreed to arbitrate “all disputes” with its employees be required to participate in “class arbitration,” even if its arbitration agreement doesn’t mention class proceedings? 

The Supreme Court heard argument this morning in Oxford Health Plans LLC v. Sutter, a case that will likely have an important impact on the answer to this question.

Sutter arose from a suit by a physician (Dr. John Sutter) claiming that a health insurer (Oxford Health) breached a physician-reimbursement contract.  The contract called for arbitration of all disputes arising out of the contract and Oxford Health succeeded in having the dispute submitted to arbitration.

The contract said nothing about class arbitration.  Nevertheless , the arbitrator interpreted the general arbitration clause as an agreement to participate in class arbitration.  Dr. Sutter estimated that the class arbitration would include reimbursement claims by up to 20,000 physicians.

Oxford Health asked a federal district court and the Third Circuit appellate court to overturn the arbitrator’s ruling, citing the Supreme Court’s 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds.  There, the Court made two important rulings:  that a party cannot be required to participate in class arbitration unless it agreed to do so; and that agreement to class arbitration cannot be inferred from an agreement to arbitrate that is “silent” about class arbitration.  Both lower courts, however, let the Sutter arbitrator’s decision stand, finding that it, unlike the arbitrator’s decision in Stolt-Nielsen, was based on the arbitrator’s interpretation of the parties’ contract. 

(More background about Sutter can be found in our two previous posts about the case: February 3, 2013 and December 9, 2012.) 

Today’s Argument.

As expected, at today’s Supreme Court argument, the Justices pressed Oxford Health’s counsel to explain why the court should not defer to the arbitrator’s efforts to interpret the arbitration clause.  Justice Sotomayor asked how wrong an arbitrator’s decision has to be before a court can overturn it.  Justice Kennedy asked why normal judicial deference to arbitrators’ contract interpretations should not apply here.  Justice Ginsburg questioned Oxford Health’s right to complain about the arbitrators’ interpretation given that it had never expressly challenged the arbitrator’s authority to rule on class arbitration. 

Justice Breyer asked whether the court should apply a “manifestly wrong” standard to the arbitrator’s interpretation, referring to his 1995 opinion in First Options of Chicago v. Kaplan.  Justice Kagan asked whether courts should presume no agreement to class arbitration unless the parties state clearly that they are agreeing to it. 

In questioning Oxford Health’s attorney, the Justices seemed to be trying to decide what standard courts should apply in reviewing arbitrators’ interpretation of agreements providing for class arbitration.

Taking up the same theme with Dr. Sutter’s attorney, Justice Scalia asked whether the courts should really do nothing, even if an arbitrator’s finding that the parties agreed to class arbitration was “wildly inconsistent” with the language of their agreement.  Justice Breyer facetiously imagined an arbitrator using a “Magic-8 Ball” to interpret the arbitration clause.  While Justice Scalia had to ask Justice Breyer what a Magic-8 Ball was (with laughter in the courtroom), Justice Scalia expressed the view that the arbitrator’s interpretation had to be plausible and pressed Sutter’s counsel to explain how the arbitrator’s decision to allow class arbitration met that standard. 

Justices Alito and Kennedy went even further. They suggested that a heightened standard of review might be appropriate because of the financial incentives an arbitrator might have to find that the parties had agreed to class arbitration, given the large fees the arbitrator would stand to realize from such a large proceeding. 

Toward the end of the argument, Justices Alito and Roberts asked Dr. Sutter’s counsel what gave an arbitrator, selected by Dr. Sutter and Oxford Health, the authority to decide a class action involving thousands of other physicians.  Why should the court defer to the arbitrator’s decision that the contract authorized class arbitration, they asked, where that decision could affect parties who never agreed to let that arbitrator decide it?  There followed several questions about whether class arbitration is a well-established type of proceeding.  These questions suggest that at least some of the Justices may have doubts about the viability of the very concept of class arbitration. 

Looking Ahead.

The stakes in Sutter are high.  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. 

Based on today’s argument, we are optimistic that the Supreme Court will reinforce Stolt-Nielsen and hold that an agreement to arbitrate “all” disputes is an insufficient basis to require class arbitration. 

The Supreme Court’s decision is expected by the end of June.