Over a decade ago, Petitioner Oxford Health Plans, LLC (Oxford) agreed to pay Respondent Dr. Ivan Sutter for providing medical services to members of Oxford’s managed care network. Their contract contains a broad arbitration clause which prohibits litigation of their disputes in court and instead requires that they arbitrate their disputes. In 2002, Sutter complained that Oxford failed to pay him and other primary health care providers for medical services. After an arbitrator decided that their contract clause allowed “class arbitration,” or the consideration of an arbitration claim on behalf of a group of similar claims, Oxford went to federal court to vacate the arbitration award, arguing that the arbitrator exceeded his power to arbitrate. Both the District Court and the United States Court of Appeals for the Third Circuit denied Oxford’s motion to vacate and instead upheld the arbitrator’s decision to hear Sutter’s claim in class arbitration. Oxford argues that the arbitrator’s decision for class arbitration must be vacated because Oxford and Sutter never agreed to class arbitration in their contract exchanging medical services for compensation. In contrast, Sutter argues that the Court should uphold the award because the arbitrator acted within his powers and based his decision on the terms of the agreement between the parties. Oxford warns that a holding for Sutter would discourage parties from agreeing to arbitration to avoid the risk of being saddled with the costs of class arbitration. In contrast, Sutter argues that a holding for Oxford would encourage parties to challenge arbitration decisions in court, undermining the purpose of arbitration to avoid the costs of litigation, and effectively prevent individuals from pursuing their small claims by robbing them of the opportunity to present their claims as a group rather than individually.
Questions as Framed for the Court by the Parties
In Stolt-Nielsen v. AnimalFeeds International Corp., 130 S. Ct. 1758, 1776 (2010), this Court made clear that "class-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to arbitration." In this case, an arbitrator concluded that the parties affirmatively consented to class arbitration on the basis of a contract provision stating: "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."
The question presented is:
Whether an arbitrator acts within his powers under the Federal Arbitration Act (as the Second and Third Circuits have held) or exceeds those powers (as the Fifth Circuit has held) by determining that parties affirmatively "agreed to authorize class arbitration," Stolt-Nielsen, 130 S. Ct. at 1776, based solely on their use of broad contractual language precluding litigation and requiring arbitration of any dispute arising under their contract.
Can an arbitrator decide that a contract broadly requiring arbitration of disputes also allows for "class arbitration" or the hearing of a claim on behalf of an entire group of similar claims?
In 1998, Petitioner Oxford Health Plans, LLC (“Oxford”) agreed to pay Respondent Dr. Ivan Sutter for providing primary health care services to members of Oxford’s managed care network. The contract contains a broad arbitration clause which states, “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 American Arbitration Association with one arbitrator.”
In April 2002, Sutter claimed that Oxford underpaid and failed to reimburse him for his medical services. Sutter filed a complaint against Oxford on behalf of himself and a class of health care providers in New Jersey Superior Court. Oxford petitioned the court to compel the individual arbitration of Sutter’s claim under the arbitration agreement. Opposing the petition, Sutter asked the court to allow the arbitration of a class of claims instead of sending his to an individual arbitration.However, in October 2002, the Superior Court granted Oxford’s motion to compel arbitration and ordered that all procedural issues, including class certification, be resolved by the arbitrator.
Oxford and Sutter submitted to the arbitrator the question as to whether the arbitration clause in their agreement allowed for “class arbitration” or filing a claim on behalf of a similarly situated group. The arbitrator decided that their arbitration clause authorized class arbitration because the clause is “much broader than the usual broad” and that without an express prohibition of class arbitration, the broad clause must be read to include it. He explained that the clause’s first phrase, "No civil action concerning any dispute arising under this Agreement shall be instituted before any court," includes all possible court actions. Further, he explained that because the second clause sends “all such disputes” to arbitration, the class disputes must be arbitrated.
Then in April 2005, Oxford filed a motion in the United States District Court for the District of New Jersey to vacate the arbitration award. Oxford argued that the arbitrator exceeded his powers and violated the law in deciding that the arbitration clause authorized class arbitrations. The District Court denied Oxford’s motion. On appeal, the United States Court of Appeals for the Third Circuit affirmed stating that the arbitrator did not exceed his powers by construing the parties’ arbitration agreement to authorize class arbitration.
Petitioner Oxford Health Plans, LLC (“Oxford”) argues that federal law allows an arbitrator to consider individual claims as a group or class only if the parties in the original contract agreed to “class arbitration.” In contrast, Respondent Dr. Ivan Sutter argues that a court may overturn an arbitration award only in exceptional circumstances and that an arbitrator correctly decided to consider several similar claims as a class rather than individually.
Supporting Sutter, the American Medical Association and the Medical Society of New Jersey (collectively “AMA”) argue that class arbitration is the only viable means for individuals whose only legal recourse is arbitration to secure relief for their small claims. They argue that class arbitrations are essential because the costs of individual arbitration are too high and so discourage any one individual from pursuing a claim despite the merits of the claim. Additionally, they note that many disputes between doctors and health insurers, and consumers and large corporations, involve small amounts of money. They explain that prosecuting such disputes in individual arbitration is impossible due to the high costs of arbitration which will almost always exceed the amount an individual could potentially recover. They offer a report by the American Arbitration Association (“AAA”) stating that the daily fee for a single arbitrator ranges from $1,000 to $5,000. They add that, on top of paying for an arbitrator to hear the case, an individual must pay initial filing fees, attorney’s fees, fees for expert witnesses, and many other fees associated with arbitration. Thus, they argue, an individual who is forced to individually arbitrate a small claim will likely choose not to bring their complaint because they know the arbitration will only result in a net loss.
Furthermore, the AMA argues that requiring individual arbitrations would fail to address the pervasiveness of business practices at issue in many class arbitrations. The AMA argues that if consumers must each individually pursue their claims and then choose not to because of the costs, lenders and corporations will be immunized from liability for all but a tiny proportion of the legal wrongs they commit. Even if an individual does choose to bring a claim to individual arbitration, individual arbitrations, unlike class arbitrations, do not allow an individual to present evidence of the systemic nature of the wrongful practices alleged.
In support of Oxford, the Chamber of Commerce argues that the arbitrator’s reading of the arbitration clause to allow class arbitration fundamentally changed the bargain the parties struck when they agreed to arbitration. The Chamber of Commerce argues that class arbitration greatly increases the costs, duration, and procedural complexity of the arbitration. With regards to duration, the Voice of the Defense Bar (“the Defense Bar”) explains that class arbitrations take much longer than individual arbitrations. The Defense Bar notes that according to AAA, the average time frame from filing a claim to settlement, withdrawal, or dismissal is 630 days. To make this statistic more shocking, the Defense Bar additionally notes that 85 percent of the cases included in that average ended before there was any ruling on class certification and none resulted in a final award on the merits. The Defense Bar also explains that class arbitrations require complex procedures not required in individual arbitration, such as full briefings, notifying absent members of the class, expensive merits discovery, and a full hearing with the opportunity for each party to present individualized arguments.
Furthermore, the Chamber of Commerce argues that class arbitration increases a defendant’s financial exposure and prevents spreading the risk of bad arbitration decisions across multiple decision makers. The Chamber of Commerce additionally argues that the risk of subjective decisions compounds with the lack of many procedural safeguards such as judicial review and dispositive motions which would protect a defendant in a court of law. Further, the Chamber of Commerce claims that with individual arbitrations, a defendant is willing to waive these procedural safeguards because the risks of erroneous decision making and financial exposure is bearable; however, a party would likely not choose to waive these procedural safeguards if they knew they would face class arbitration.
Petitioner Oxford Health Plans, LLC (“Oxford”) argues that because its contract with Respondent Dr. Ivan Sutter did not contain any clause allowing an arbitrator to hear several claims at once as a group, the Court of Appeals for the Third Circuit was wrong in affirming the arbitrator’s decision to hold a proceeding called “class arbitration” for Sutter’s and similar claims against Oxford. In opposition, Sutter argues that because federal law provides only very narrow grounds for vacating arbitration awards and the parties asked the arbitrator to decide whether to hold a class arbitration, the Third Circuit Court rightly affirmed the arbitrator’s decision to hold a class arbitration.
EXPRESS AGREEMENT TO CLASS ARBITRATION, EXCEEDANCE OF ARBITRAL POWER, AND JUDICIAL REVIEW OF ARBITRAL DECISIONS
Oxford argues that the Federal Arbitration Act ("FAA") permits class arbitration only where the parties have affirmatively agreed to authorize it. Oxford notes that in Stolt-Nielsen v. AnimalFeeds International, the Supreme Court held that, under the FAA, a party may be required to submit to class arbitration only if the contract shows that the parties agreed to do so. Oxford further notes that in AT&T Mobility v. Concepcion, the Court affirmed its ruling in Stolt-Nielsen, holding that the fundamental differences between arbitration and court litigation require the parties to expressly agree to class arbitration. Oxford contends that the arbitrator exceeded his powers by forcing it to submit to class arbitration based on a broad arbitration clause which did not expressly authorize class arbitration.
Oxford further argues that the Third Circuit failed to consider whether the arbitrator’s construction of the arbitration clause was correct or, at the very least, plausible. The court, argues Oxford, was extremely deferential when it reasoned that courts should uphold arbitral decisions as long as arbitrators articulate a rational contractual basis for their decisions. Oxford finds that such extreme deference is misguided and contrary to any meaningful judicial review; arbitrators would need only to say that they interpreted the arbitration clause to mirror the parties’ intent thus preventing future court intervention. Oxford argues that meaningful judicial review becomes particularly important in class arbitrations. Arbitrators, argues Oxford, may find it difficult to approach class arbitrations with impartiality, as arbitrators may favor a policy of class arbitration because arbitrators are remunerated based on time.
In opposition, Sutter first responds that FAA § 10(a)(4) permits a court to vacate an arbitration decision only on very narrow grounds. Sutter argues that under section 10(a)(4), an award will be vacated because an arbitrator exceeded the power to arbitrate by (1) resolving a dispute that parties have not submitted to arbitration, or (2) resolving a submitted dispute on a ground different from that agreed upon by the parties. Section 10(a)(4), argues Sutter, is primarily concerned with whether the arbitrator had power to hear the dispute in question, not whether the arbitrator rendered the correct decision. Sutter notes that in Steelworkers of America v. Enterprise Wheel (“Enterprise Wheel”), the Supreme Court held that when an arbitrator interprets a contract, and the arbitrator makes his award based on that interpretation, the “courts have no business overruling him because their interpretation of the contract is different from his.” The power to interpret a contract, argues Sutter, includes the power to incorrectly interpret a contract.
Sutter also argues that Oxford wants to expand review of arbitral decisions in a manner inconsistent with the FAA. First, Sutter contends that Oxford’s argument that judicial review will support the arbitration process is the same argument posited by challengers of the award at issue in Hall Street Associates v. Mattel; there the Court found that judicial review would only increase post-award litigation and undermine the finality the awards. Second, Sutter argues that Oxford’s impartiality argument is off the mark because the procedures for selecting arbitrators from institutional providers—e.g., the American Arbitration Association ("AAA")—provide parties with adequate tools to assure the selection of an unbiased arbitrator. Most importantly, argues Sutter, an argument concerning the impartiality of the arbitrator cannot be made as a claim under FAA § 10(a)(4) dealing with the power of an arbitrator to arbitrate, because another section, FAA § 10(a)(2) law deals with evident partiality of arbitrators.
CONTRACTUAL BASIS FOR CLASS ARBITRATION
Oxford argues that here, there is no textual basis for class arbitration in the arbitration agreement; thus, the arbitrator may not infer an agreement to class arbitration. Oxford contends that the contract clause “no civil action concerning any dispute arising under this Agreement shall be instituted before any court” prohibits the parties from litigating any dispute in the courts, while the clause “and all such disputes shall be submitted to final and binding arbitration” simply sends all disputes to arbitration. Furthermore, Oxford argues that the arbitration clause, by the very words of the contract, sends only the disputes between Sutter and Oxford to arbitration, not the disputes between Oxford and other parties. Oxford also argues that there is no non-textual basis for finding consent to class arbitration in this arbitration clause. Finally, Oxford argues that the Stolt-Nielsen decision leaves no room for an arbitrator to decide issues before them based on their policy considerations. Here, argues Oxford, the arbitrator based his decision that the arbitration clause must include class arbitration on his opinions regarding the procedural options Sutter ought to have available to him.
Sutter argues that the arbitrator properly interpreted the arbitration clause to authorize class arbitration. Sutter argues that the dispute over the meaning of the arbitration clause was properly submitted to the arbitrator and points out that it was Oxford who originally fought for the issue to be decided by an arbitrator. Further, Sutter argues that Oxford is not really challenging the authority of the arbitrator to issue the award, but improperly challenging the correctness of the award. Additionally, Sutter argues that the arbitrator’s interpretation that the contract arbitration clause includes class arbitration is the same argument successfully advanced by Oxford in state court. Sutter argues that the arbitrator’s decision was based on the interpretation of the clause that Oxford used in state court. The arbitrator, argues Sutter, simply relied on Oxford’s own earlier interpretation and a reasonable reading of the contract to find that the parties agree to class arbitration.
The Supreme Court’s ruling in this case will decide whether an arbitrator acted within his powers under the Federal Arbitration Act by determining that parties agreed to authorize class arbitration based on their use of broad contractual language prohibiting litigation and requiring arbitration of any dispute arising under their contract. According to Petitioner Oxford, a holding for Respondent Sutter would chill future agreements for arbitration because the costs of class arbitrations are so much greater than those of individual arbitrations. According to Sutter, a holding for Oxford will prevent individuals with small claims from securing relief because arbitrators will no longer interpret broad arbitration agreements to authorize class arbitration and the costs of individual arbitration will be prohibitive.