Ruling gives power to arbitrators

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In a ruling that boosts the authority of arbitrators to interpret crucial contract provisions, the U.S. Supreme Court upheld an arbitrator’s decision to allow a plaintiff to bring a class-wide arbitration proceeding when the parties did not expressly agree to allow class-wide relief.

“The impact of the Supreme Court decision is that once parties enter into a contract with an arbitration agreement, they have authorized an arbitrator — rather than a court — to interpret and decide the intent of the agreement,” said Jeffrey E. Crane, a partner in the Chicago office of Edwards Wildman Palmer LLP.

The case, Oxford Health Plans LLC v. Sutter, stems from a dispute between a New Jersey managed care plan and one of the plan’s physicians, who claimed that the plan underpaid reimbursement claims. The standard contract between the health plan and its physicians contained a clause requiring arbitration of all claims and prohibiting any “civil action [in court] concerning any dispute.” But the agreement was silent as to whether classwide arbitration was permitted.

When the physician filed a putative class action in federal court, the district court judge ordered the case to arbitration. An arbitrator then determined that the arbitration clause authorized classwide arbitration. The physician ultimately prevailed and was issued an award by the arbitrator.

Meanwhile, the Supreme Court decided the case of Stolt-Nielsen v. AnimalFeeds International Corp., holding that the Federal Arbitration Act only authorizes class arbitration in cases in which the parties consented to it. The health plan immediately asked the arbitrator to reconsider his decision on class arbitration in light of the ruling. When the arbitrator again found that the agreement authorized a class proceeding, the plan asked a federal court to vacate the arbitrator’s award in light of the ruling, arguing that it had not consented to classwide arbitration.

The district court declined, and the 3rd U.S. Circuit Court of Appeals affirmed, holding that Stolt-Nielsen allowed arbitrators the authority to draw inferences as to whether classwide arbitration was contemplated by the parties. With a circuit split on the issue, the health plan petitioned the Supreme Court for relief.

The justices affirmed the decision Monday. Underscoring the limited review courts have over arbitrators’ rulings under the FAA, which allows courts to vacate an arbitrator’s decision “only in very unusual circumstances,” the court lacked authority to step into the shoes of the arbitrator, the justices held.

“[T]he sole question for us is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong,” Justice Elena Kagan wrote for the court, which was unanimous in its judgment. (Justice Samuel A. Alito Jr. wrote a concurrence that was joined by Justice Clarence Thomas.)

The arbitrator construed the agreement to allow for class proceedings, and then on Oxford’s request for reconsideration, came to the same conclusion a second time, Kagan pointed out.

“Twice, then, the arbitrator did what the parties had asked: He considered their contract and decided whether it reflected an agreement to permit class proceedings,” Kagan wrote. “That suffices to show that the arbitrator did not ‘exceed [his] powers.’”