Class arbitration issue splitting lower courts could go to US high court

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After several U.S. Supreme Court rulings that toughened the standards for bringing class-action claims and boosted companies’ ability to compel arbitration to resolve conflicts, a new focus for litigation has emerged: class arbitration.

But because there are often more questions than answers, litigants are turning to the Supreme Court for guidance. A certiorari petition pending in the 3rd Circuit case of Oxford Health Plans v. Sutter asks the Court to decide whether class arbitration is allowed in cases where an arbitration agreement is silent on the issue.

“This [case] is sort of the ‘son of Stolt-Nielsen,’” said Andrew J. Pincus, a partner in the Washington office of Mayer Brown, referring to the 2010 Supreme Court decision in Stolt-Nielsen v. AnimalFeeds International Corp., which held that class arbitration is inconsistent with the Federal Arbitration Act unless the parties consent to it. But a key question remained: What qualifies as consent, particularly in contracts that are silent or ambiguous on the issue of class proceedings?

Though companies began including unambiguous language in arbitration contracts barring class proceedings in the wake of rulings in Stolt-Nielsen and the 2011 case AT&T Mobility v. Concepcion, there are still many arbitration contracts that predate the decisions and can create big headaches for judges across the country.

“The lower courts have been in conflict about whether this plain vanilla silent agreement can be interpreted to give rise to class-wide arbitration,” said Pincus.

The issue:

Is class arbitration allowed where the arbitration agreement is silent or ambiguous on the issue?

The break:

• 3rd Circuit: Affirmed an arbitrator’s ruling in favor of class arbitration finding an implied agreement to class arbitration since the parties did not prohibit it in the contract. The 2nd Circuit has ruled similarly.
• 5th Circuit: Reversed an arbitrator’s ruling finding an implied agreement to class arbitration, ruling instead that the U.S. Supreme Court’s 2010 ruling in Stolt-Nielsen v. AnimalFeeds International Corp. prohibits such an implicit agreement finding.

The solution:

A petition for certiorari has been filed with the U.S. Supreme Court in the 3rd Circuit case, but, at press time, the Court had not yet decided whether to take up the case.

The case with a petition for certiorari pending involves a professional services contract between a doctor and a health plan which contained a broad arbitration clause that read in part: “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.”

The doctor filed a putative class action against the company for contract violations. The judge referred the question of whether class arbitration was available to an arbitrator. The arbitrator concluded that it was.

Soon after, the Supreme Court handed down its opinion in Stolt-Nielsen. The health plan asked the arbitrator to reconsider his decision in light of the ruling, but he distinguished Stolt-Nielsen, holding that the parties in the instant case must have agreed to allow class arbitration or else the contract would have prohibited it. The 3rd Circuit agreed with the arbitrator.

The circuits are split on this issue. While the 2nd Circuit has come to the same conclusion as the 3rd, the 5th Circuit took a different approach in Reed v. Florida Metropolitan University, reversing an arbitrator’s decision that allowed class arbitration based on a contract that provided in part that “any suit filed in violation of the agreement shall be dismissed by the court in favor of arbitration.” The agreement also stated that “any remedy available from a court under the law shall be available in the arbitration.”

The arbitrator had ruled that the agreement implied an agreement to arbitrate as a class. But the 5th Circuit disagreed, concluding that that “Stolt-Nielsen makes clear [that] an ‘implicit agreement to authorize class-arbitration … is not a term that the arbitrator may infer solely from the fact of the parties’ agreement to arbitrate.’”

Interpreting silence

The case gives the Court an opportunity to rein in class arbitration, a litigation device that was rarely used at the time most arbitration agreements were drafted, said Jerrold J. Ganzfried, a partner in Holland & Knight’s Washington office and co-author of an amicus brief in the case filed on behalf of defense attorney group DRI. “It’s a concept that has no longstanding history.”

Ganzfried said the case gives the Court a chance to buttress its ruling in Stolt-Nielsen.

“It should be clear after Stolt-Nielsen that in order for class arbitration to proceed, the arbitration agreement has to have something more than silence,” he said. “You need an express agreement to arbitrate as a class.”

But lawyers representing consumers and other plaintiffs who may be bound by pre-dispute arbitration agreements say proceeding as a class is often the only way to obtain relief in certain cases.

Jonathan E. Levitt is a founding partner of the firm Frier & Levitt in Pine Brook, N.J., where he represents a number of independent pharmacies in litigation against pharmacy benefit managers – known as PBMs – which administer prescription drug programs.

In contracts involving his clients, “there are arbitration provisions that you can’t arbitrate over $500,” Levitt said. “The class action is the only remedy for a pharmacy in any dispute because it’s not feasible to do it any other way.”

Levitt said that the agreements used by PBMs to contract with pharmacies have a striking similarity to consumer product agreements with cell phone carriers or credit card companies. His clients lack negotiating power at the front end and can be shut out of a remedy when things go wrong.

“In reality these are true contracts of adhesion,” Levitt said.

Other lawyers say the facts of Sutter could give the Court an easy opportunity to restrict courts from allowing class proceedings where they weren’t contemplated.

“That case has a ‘give-me-a-break quality,’” said Lisa Blatt, a partner in the Washington office of Arnold & Porter, during a U. S. Chamber of Commerce media briefing previewing the Supreme Court term. The Chamber has filed an amicus brief in the case urging the Court to grant certiorari.

Blatt said the basic premise of the 3rd Circuit’s ruling is flawed, making it an easy case for the Supreme Court.

“The arbitration [agreement] says, ‘You agree that none of your dispute will be resolved outside of arbitration.’ So the court said, ‘Well, if you agree to arbitrate everything that also means your class action,’” which doesn’t make sense, Blatt said.

The court’s 2012-2013 term began Oct. 2.