Class-wide arbitration allowed by U.S. Supreme Court

July 11, 2013 by

Supreme Court BlogResolving a split in the circuits, a unanimous U.S. Supreme Court in Oxford Health Plans LLC v. Sutter  found that courts should almost never vacate an arbitrator’s interpretation of an arbitration agreement as to whether or not the agreement provides for class-wide arbitration.

The agreement at issue in Sutter provided that “no civil action concerning any dispute arising under this Agreement shall be instituted before any court and all such disputes shall be submitted to final and binding arbitration…”

This agreement is not explicit as to whether class-wide arbitration is or is not allowed. Such an agreement is often termed a “silent” agreement and the issue before arbitrators and the courts is whether an action forced into arbitration can proceed on a class-wide basis if the arbitrator interprets the silent agreement as allowing class-wide arbitration, and then later decides to certify the class.

The arbitrator in Sutter looked to the meaning of the above quoted language and decided that a class action was a “civil action concerning any dispute” and that the arbitration provision required that “all such disputes” (i.e. class actions) be submitted to arbitration.  The Supreme Court found that the arbitrator did not exceed his powers (one of the few bases to vacate an arbitration decision) because the arbitrator was seeking to interpret the agreement, which is one of the powers of an arbitrator.

The standard for a reviewing court in deciding whether to vacate an arbitrator’s interpretation of the agreement is solely “whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.”  The Court reiterated “convincing a court of an arbitrator’s error — even his grave error — is not enough. So long as the arbitrator was ‘arguably construing’ the contract — which this one was — a court may not correct his mistakes under [the grounds to vacate an award as exceeding the arbitrator’s powers]…. The arbitrator’s construction holds, however good, bad, or ugly.”

The Court distinguished its 2010 ruling in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp.,  where the Court found the arbitrators in providing for class arbitration did exceed their authority. The facts of that case were unique in that the parties stipulated that the parties had never reached an agreement on class arbitration, and then the arbitrators made a determination on policy grounds. The Court stated that making policy decisions was beyond the arbitrators’ authority and that they should instead interpret the contract, which is exactly what the arbitrator did in Sutter.

Sutter only has implications for silent arbitration clauses. Many arbitration agreements today are not silent but explicitly prohibit class-wide arbitration, and the Supreme Court in 2011 in  AT&T Mobility LLC v. Concepcion, upheld such a ban even though the California Supreme Court found it to be unconscionable in the facts of that case.

The viability of the best remaining challenge to a ban on class arbitration may be determined by the Supreme Court any day now, in In re American Express Merchants’ Litigation. The Second Circuit found that a ban on class arbitration made the arbitration agreement unenforceable because the facts of the case made impractical the plaintiffs’ attempt at vindication of their federal statutory rights. In that case, the cost to litigate a complex federal anti-trust claim was beyond the financial means of an individual plaintiff. The right to have practical vindication of federal statutory rights must supersede the Federal Arbitration Act’s policy of enforcing arbitration agreements. The Supreme Court accepted certiorari in American Express Merchants’ Litigation, oral argument was completed on February 27, and a decision should be forthcoming this month.

While class arbitration faces high hurdles if the agreement prohibits class arbitration, many arbitration agreements today are still silent as to the availability of class-wide arbitration. As long as the arbitrator seeks to interpret the arbitration agreement, courts are unlikely to overturn the arbitrator’s clause construction.

Thus an arbitrator may find class arbitration allowed where an otherwise-silent arbitration clause states that it allows the arbitrator to award any kind of relief that a court could award. Similarly, where an arbitration clause provides that it applies to any claim that would be resolved in a court under applicable state and federal law, an arbitrator could reasonably view this as allowing class arbitration since federal and state law authorize class treatment. The same might be interpreted from the fact that the arbitration agreement applies broadly to any dispute with itemized exceptions, and class arbitration is not one of those exceptions.

An arbitration clause’s requirement that arbitration proceed under AAA or JAMS rules may indicate an intent to allow class arbitration because those rules provide for class arbitration.  Interpreting ambiguous language as to the parties’ intent, an arbitrator might be guided by certain general principles. Ambiguous terms are construed against the drafter. Once the existence of an arbitration agreement is established, federal law favors an expansive treatment of that arbitration agreement.

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Steve Larson
An experienced trial lawyer who handles both hourly and contingent fee cases, Steve has expertise in class actions, consumer cases, antitrust litigation, securities litigation, corporate disputes, intellectual property disputes, unfair competition claims, employment matters, and disputes involving family wealth. Steve regularly represents individuals and businesses in federal and state court and has obtained class-wide recovery in multiple class actions. A veteran practitioner, Steve's clients value his creative approach to resolving complex litigation matters.

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