In today’s world, parties are often encouraged to settle legal disputes through means of alternative dispute resolution such as arbitration. However, in order to prevent the losing party to an arbitration dispute from essentially requesting the court to re-try the case, the Federal Arbitration Act (“FAA”) provides very narrow grounds for vacatur of an arbitration award. Section 10 of the FAA allows an arbitration award to be vacated when the award was procured by fraud or corruption, where the arbitrator was guilty of misconduct, misbehavior or evident partiality, or where the arbitrator exceeded his authority.
In Sutter v. Oxford Health Plans, Respondent John Sutter, a pediatrician, provided medical services to the members of Oxford Health Plans' (“Oxford”) network under a fee-for-services contract that required binding arbitration of contractual disputes. However, when a contractual dispute arose, Sutter joined a class action with other physicians, alleging that Oxford failed to make full and timely payments. The court granted Oxford’s motion to compel arbitration and referred the claims to arbitration. The parties agreed that the arbitrator should decide whether the contact authorized class arbitration. The arbitrator reasoned that the parties’ agreement barred the parties from bringing any civil action in court and thus, the intent of the clause was to “vest in the arbitration process everything that is prohibited from the court process.” The arbitrator found that class actions are clearly the type of claim that could be brought in court absent the parties’ agreement and, therefore, the arbitration clause expressed the parties’ intent to provide for class arbitration.
Oxford filed a motion to vacate the arbitrator’s decision in federal court on the grounds that the arbitrator exceeded his powers under §10(a)(4) of the FAA. The District Court of New Jersey denied the motion and the Court of Appeals for the Third Circuit affirmed.
While the arbitration was pending, the United States Supreme Court held in Stolt-Nielsen that "a party may not be compelled under the FAA to submit to class arbitration unless there is no contractual basis for concluding that the party agreed to do so." 559 U.S. at 684. The parties in Stolt-Nielsen had stipulated that they had never reached an agreement on class arbitration. Therefore, the arbitrator had no basis for finding that the parties’ intended for the arbitration clause to include class arbitration. The Supreme Court vacated the arbitrator’s decision pursuant to §10(a)(4) of the FAA because the arbitrator exceeded his powers.
In light of Stolt-Nielsen, Oxford requested that the arbitrator reconsider his decision allowing class arbitration. The arbitrator issued a new opinion finding that Stolt-Nielsen had no effect on the case because unlike Stolt-Nielsen, the parties disputed the meaning of their contract and agreed that the arbitrator should interpret that meaning.
Oxford filed another motion to vacate in federal court which the District Court of New Jersey again denied and the Court of Appeals for the Third Circuit affirmed. The Third Circuit held that if the arbitrator makes a good faith attempt to interpret an agreement, “even serious errors of law or fact will not subject his award to vacatur.” 675 F.3d at 220.
On certiorari, the Supreme Court affirmed the decision of the Third Circuit reasoning that vacatur of an arbitrator’s decision only occurs in very limited circumstances. Justice Kagan’s opinion provided that allowing parties to take full legal and evidentiary appeals would cast arbitration as a “prelude to a more cumbersome and time-consuming judicial review process." Thus, parties requesting vacatur where the arbitrator exceeds his powers under §10(a)(4) of the FAA bear a heavy burden and must show more than serious error. The Court found that because the parties bargained for the arbitrator’s construction of the agreement, a decision that even arguably construes or applies the contract must be upheld even if the Court disagrees with the arbitrator’s interpretation.
Oxford argued, relying solely on Stolt-Nielsen, that the high burden of §10(a)(4) is overcome when an arbitrator imposes class arbitration without a sufficient contractual basis. However, the Court disagreed with Oxford’s interpretation of Stolt-Nielsen and noted that the arbitral decision in Stolt-Nielsen lacked any contractual basis for class-actions because the parties entered into a stipulation that they had never reached an agreement on class arbitration. Thus, the arbitrator’s decision could not have been based on the parties’ contractual intent.
In sum, the Court stated, “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…a court may not correct his mistakes under §10(a)(4). The potential for those mistakes is the price of agreeing to arbitration. 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 lesson to be learned from Oxford Health Plan is if a company wants to avoid class actions/arbitrations, its agreements should include an express class action waiver because an arbitrator’s construction of that agreement is given substantial deference.