Class Action Arbitration

Pic_Oxford Health Plans

On June 10, 2013, the Supreme Court of the United States affirmed the Third Circuit Court of Appeals ruling that Dr. John Ivan Sutter, a New Jersey physician, may continue with his class arbitration on behalf of 20,000 New Jersey physicians against Oxford Health Plans, one of the largest health insurance companies in the United States, to fight Oxford’s unfair claims processing and other abusive business practices.  This significant ruling allows thousands of physicians to use class arbitration against a health insurer that has underpaid them for more than a decade.  Without class arbitration, physicians would have no practical recourse to challenge the unfair payment practices of Oxford and other managed care insurance companies. 

In a significant and (highly unusual) 9-0 unanimous decision delivered by Justice Elena Kagan, the Court reaffirmed the two century bedrock legal principle that when parties contract to have their disputes heard by an arbitrator, as opposed to a court, the parties must accept the decision of the arbitrator regardless of whether a court may have decided the matter differently.  This is because the power given to the arbitrator by the parties to interpret a contract also includes the power to interpret that contract incorrectly:

[C]onvincing a court of an arbitrator’s error – even his grave error—is not enough.  So long as the arbitrator was “arguably constructing” the contract – which this one was – a court may not correct his mistakes . . . .

In 1998, Dr. John Sutter (“Sutter”), a pediatrician, and Oxford Health Plans (“Oxford”) entered into a provider agreement (“Agreement”) requiring Sutter to provide medical care to members of Oxford’s network and, in return, Oxford would properly adjudicate Sutter’s claims for those services at prescribed rates.  The Agreement contained the following arbitration clause:

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 in New Jersey, pursuant to the rules of the American Arbitration Association with one arbitrator.

In 2002, Sutter sued Oxford on behalf of a proposed class of other New Jersey physicians under the same Agreement, alleging that Oxford had failed to make full and prompt payment to the physicians. Oxford successfully moved to compel arbitration arguing that “all actions” brought by Sutter must be sent to arbitration.  After the arbitration was filed, the parties agreed that the arbitrator should decide whether the Agreement authorized class arbitration.

In 2003, the arbitrator found that the Agreement authorized class arbitration, concluding that everything that was prohibited from litigation had to be arbitrated, and relying in part on Oxford’s interpretation of its own contract in the state court that “all actions” go to arbitration.  Reasoning that a class action is included in “all actions,” the arbitrator held that the language of the Agreement, as buttressed by Oxford’s own interpretation of what the clause meant, demonstrated the parties’ express agreement to arbitrate the class claims.  The arbitrator’s ruling prompted Oxford to move to vacate that decision in federal district court. The district court denied the motion, and the Third Circuit Court of Appeals affirmed.  This matter was certified as a class action and the arbitration continued.

In 2010, the Supreme Court issued its decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 U.S. 1758, 1776 (2010) finding 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.” Oxford again went back to the arbitrator, requesting that he reconsider his decision on class arbitration in light of the Stolt-Nielsen decision.  The arbitrator again ruled that the language of the Agreement authorized class arbitration, finding that Stolt-Nielsen had no effect on his earlier analysis. Oxford moved to vacate the decision, which the district court again denied, and the Third Circuit again affirmed.

On June 10, 2013, following a spirited oral argument, the Supreme Court affirmed the decisions of the lower courts, finding that the arbitrator did not “exceed his powers” under section 10(a)(4) of the Federal Arbitration Act when deciding that the Agreement allowed for class arbitration.  In doing so, the Court flatly rejected Oxford’s contentions that the arbitrator ran afoul of Stolt-Nielsen and had exceeded his authority by inferring an agreement to arbitrate on a class-wide basis.   The Court observed that unlike in Stolt-Nielsen, where the parties had reached an “unusual stipulation” that they had never reached an agreement on class arbitration, here no such stipulation was present and the arbitrator thus was properly charged and carried out his assigned task to interpret the parties’ agreement, leading to his conclusion that the Agreement authorized class arbitration.

Moreover, because Oxford – not once but twice – conceded that the issue of the availability of class arbitration was for the arbitrator to make, the Court found that the arbitrator’s decision could only be disturbed if he exceeded his powers. Here, the Court concluded, the arbitrator did not exceed his powers, even if he was incorrect in his interpretation of the contract. Justice Elena Kagan wrote for the unanimous Court:

As we have held before, we hold again: “It is the arbitrator’s construction [of the contract] which was bargained for; and so far as the arbitrator’s decision concerns construction of the contract, the courts have no business overruling him because their interpretation of the contract is different from his.” . . . The arbitrator’s construction holds, however good, bad, or ugly.

Justice Samuel Alito, joined by Justice Clarence Thomas, issued a concurring opinion stating that were the Court permitted to reach the issue de novo, they would have interpreted the Agreement differently than the arbitrator.  However, because Oxford had consented to the arbitrator deciding the class arbitration issue, the justices joined the opinion of the Court.

Although the Court left open the critical question of whether the availability of class arbitration is a “question of arbitrability” that is presumptively for a court to decide, a question the Court did not have to tackle in light of Oxford’s concessions in 2002 and 2010, the importance of Oxford v. Sutter cannot be understated.  Not only does the decision reinforce that class actions remain viable in arbitration should the parties’ contract authorize such procedures — even when that authorization is implicit — the decision also re-affirmed the longstanding axiomatic principle that an arbitrator’s decision, no matter what the issue is, will be left undisturbed as long as he/she was given the power to interpret a contract by the parties and did so.  The Court’s ruling is important not only to physicians, but employees and consumers alike that are often subjected to arbitration clauses and thus denied any practical means to enforce their rights unless allowed to prosecute those rights in a class setting.  We can expect, however, that the business community will ratchet up their defense to class arbitration by ensuring that they have iron clad class action prohibitions in their arbitration agreements going forward, something that has been the trend in recent years even before the Oxford case got to the Supreme Court.  Nevertheless, there still remain countless older agreements containing no class action prohibitions, and in these instances class arbitration may now be a very viable means to resolve any disputes that may arise under those agreements.