U.S. Supreme Court Decision Creates Class Action Concerns When Enforcing Arbitration Agreements

Contributed by Michael Wong

On June 10, 2013, the U.S. Supreme Court created some concern for employers in enforcing arbitration agreements.  The Court held that an arbitrator has the power to interpret an arbitration agreement to permit class arbitration, even when the agreement does not expressly permit class-wide arbitration. 

In Oxford Health Plans LLC v. Sutter, after the complaint was filed the defendant moved to compel arbitration.  The defendant’s motion to compel arbitration was granted and the parties agreed that the arbitrator should decide whether the contract authorized class arbitration.  The arbitrator held that the intent of the parties was to allow class arbitration, despite the absence of express language permitting it.  The defendant then sought judicial review of the arbitrator’s decision.  Ultimately the issue was presented to the U.S. Supreme Court, which held that since the parties agreed the arbitrator should determine whether the parties intended the agreement to authorize class arbitration the Court was limited to only reviewing whether the arbitrator (even arguably) interpreted the parties’ contract, not whether the arbitrator got its meaning right or wrong or even committed a serious error of law or fact.  As the Supreme Court explained, a court may vacate an arbitrator’s decision only when the arbitrator “strayed from his delegated task of interpreting a contract, not when he performed that task poorly.”  In essence, since the defendant had chosen arbitration, it had to live with that choice. 

The Supreme Court recognized that had it been argued that the availability of class arbitration was a “question of arbitrability” it would have been an issue for the court to decide, which based on the Court’s comments likely would have led to a different result.  At first blush, this case appears to conflict with the U.S. Supreme Court’s previous decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., that a party may not be subjected to class arbitration unless there is language in the agreement expressly allowing class arbitration.  However, in reaching the decision in that case, the Supreme Court held the arbitrator had exceeded his authority when interpreting the agreement to allow class arbitration, absent express language, as unusually the parties had stipulated that they had never reached an agreement on class arbitration. 

Take-Away for Employers:  The recent U.S. Supreme Court decision impacts the language that should be included in mandatory arbitration agreements, as well as employers’ strategy in responding to claims by employees who are subject to mandatory arbitration agreements.  First and foremost, you should carefully review your arbitration agreement and consider the pros and cons of including a section that expressly prohibits class, collective, and representative arbitration, thereby avoiding the court or arbitrator attempting to divine the parties’ intent.  Secondly, if faced with a claim that involves potential class arbitration issues or an arbitration agreement that you could use to compel arbitration, you should carefully consider your options and should not stipulate that the issue of whether the parties agreed to class arbitration is for the arbitrator to decide.  Based on the U.S. Supreme Court’s clarification, if you allow an arbitrator to decide whether an arbitration agreement permits class arbitration, even if the arbitrator commits a serious error of law or fact, there is limited to no judicial review available to remedy the error.