Authored by Robert S. Whitman

Surprising many observers, the Supreme Court on Monday upheld an arbitrator’s decision to permit class arbitration even though the parties’ agreement did not explicitly provide for such procedures.

In Oxford Health Plans LLC v. Sutter [here], the arbitration clause stated in part that “[n]o civil action concerning any dispute arising under this Agreement shall be instituted before any court.”  The Court said that the arbitrator, who read the clause to permit arbitration on a classwide basis rather than limiting it to bilateral disputes between the contracting parties before him, did not exceed his powers in doing so.

Pundits had expected that the Court’s grant of certiorari in Sutter – in combination with the Justices’ comments at oral argument – signaled its intention to follow its 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. [here], in which the Court held that an arbitration panel exceeded its powers under section 10(a)(4) of the Federal Arbitration Act by imposing class action procedures where the parties’ agreement was silent on whether such procedures were permitted.  The Sutter arbitrator had reached a similar result, and Oxford argued that Stolt-Nielsen required a similar reversal.

But the Court distinguished Stolt-Nielsen by noting that the parties in that case “had entered into an unusual stipulation that they had never reached an agreement on class arbitration.”  Thus, the Court said, the panel’s imposition of class procedures was not based on a reading of the contract or the parties’ intent, but on a policy choice in favor of class proceedings.

Not so in Sutter.  Noting a “stark” contrast with the facts of Stolt-Nielsen, the Court said that the Sutter arbitrator did base his decision, “through and through,” on the parties’ contract, which the parties had authorized him to interpret.  And because he “did what the parties had asked,” he could not be said to have exceeded his powers, regardless of what the Justices may have thought about the merits of the ruling.

Perhaps more important is what the Court, in a long footnote, said it would not decide:  whether the availability of class arbitration is a “question of arbitrability.”  If it is, then absent “clear[] and unmistakabl[e]” evidence that the parties agreed to submit that threshold issue to the arbitrator, the availability of class arbitration is reserved for a court.  That issue was not presented in Sutter, although the apparent message of its footnote is that the Court may be interested in taking up this issue soon.  (The Court similarly left this issue unresolved a decade ago in Green Tree Financial Corp. v. Bazzle.)

Sutter was decided on this relatively narrow basis, without any sweeping pronouncements (or reiterations of earlier sweeping pronouncements) about the propriety of class arbitration.  Even the concurring opinion by Justice Alito (author of Stolt-Nielsen), in which Justice Thomas joined, merely nodded in that direction.

Yet despite the narrowness of the ruling, Sutter does contain important lessons for companies with arbitration agreements with their employees:

• A forceful reaffirmation of limited judicial review of arbitration awards – Again and again, Justice Kagan’s opinion – often deploying strategic use of parenthetical clauses – reminds courts of their extremely limited role in reviewing arbitrators’ decisions.  After discussing the parties’ arguments in support of and opposition to the arbitrator’s decision to permit class arbitration, the Court explicitly refused to weigh in.  Instead, it offered the following, all of which are sure to be cited repeatedly in coming years by parties defending arbitral rulings in court:  “[C]onvincing a court of an arbitrator’s error – even his grave error – is not enough.”  “The potential for those mistakes is the price of agreeing to arbitration.”  “The arbitrator’s construction holds, however good, bad, or ugly.”  “[A]n arbitral decision even arguably construing or applying the contract must stand, regardless of a court’s view of its (de)merits.”  “So the sole question for us is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.”                                                                                          
• A lesson on clear drafting – The Sutter case, like Stolt-Nielsen before it, concerned an arbitration clause that was silent on the class action issue.  For employers, the takeaway is clear:  going forward, if you like arbitration but don’t want your arbitrations to proceed on a class basis, make sure the agreement states explicitly that such procedures are not permitted.  That avoids the “silence” issue altogether, and renders Stolt-Nielsen, Sutter and their ilk irrelevant.

That last point likely illustrates why, as one veteran Supreme Court observer noted, Sutter “is unlikely to have much if any broader significance.” [here]  The number of arbitration clauses that are silent on the issue of class procedures is, or should be, rapidly dwindling, as is the number of cases construing those clauses.  Ever since AT&T Mobility v. Concepcion [here], the real battleground has been whether agreements with explicit class waivers can be upheld.

On that score, while some questions of enforceability are still lingering [here], the judicial trend has been strongly in favor of enforcement.  Employers interested in that issue will want to stay tuned for decisions this summer from the Supreme Court, the Second Circuit, and other federal courts.