Arbitration: Be Careful What You Ask For

In the past I’ve written about the importance of reading and understanding the Arbitration Clause in your contracts, and warned you not to sign until you fully understood the consequences. I also noted that the U.S. Supreme Court had granted certiorari to hear arguments in a case that raised the question whether the arbitrator had interpreted the parties” contract in determining that the parties had authorized a class action.  The case, Oxford Health Plans LLC v. Sutter, 675 F.3d 215, was affirmed on June 10 by the U.S. Supreme Court.

Dr. Sutton is a pediatrician who provided medical services under contract with Oxford Health Plan.  The contract included a binding arbitration clause for any contractual disputes. Alleging that Oxford had failed to fully and promptly pay him and other physicians with similar contracts, Dr. Sutton filed a proposed class action.  Oxford moved to compel arbitration, and the court granted the motion. The parties agreed that the arbitrator should decide whether or not the contract authorized class arbitration, and the arbitrator concluded that it did. Oxford then filed a motion to vacate the arbitrator”s decision, claiming he had exceeded his powers under Section 10(a)(4) of the Federal Arbitration Act.

While the case was pending, the U.S. Supreme Court issued a ruling in the case of Stolt-Nielson S.A. v. AnimalFeeds Int”l Corp., 559 U.S. 662 (2010), which held that an arbitrator may employ class procedures only if the parties have authorized them.  In Stolt-Nielson, the parties stipulated they had never reached an agreement on class arbitration, so the arbitrator”s decision approving the class action in the Stolt-Nielson case was held casino online to be in excess of his powers.  Based on the ruling in Stolt-Nielson, Oxford asked the arbitrator to reconsider his decision. The arbitrator issued a new opinion saying that Stolt-Nielson did not apply; in the Oxford case the parties disputed whether the contractual language authorized class actions, whereas in Stolt-Nielson, the parties agreed they had not established intent.  The arbitrator in the Oxford case reaffirmed his conclusion that class arbitration was permitted based on the intent of the parties.

The key lesson of Oxford is the extremely limited scope of judicial review available to vacate arbitration rulings. Under the Federal Arbitration Act (FAA), courts may vacate the arbitrator”s decision “only in very unusual circumstances.” The Court goes on to note that FAA Section 10(a)(4) authorizes a federal court to set aside an arbitration award where the arbitrator exceeded his powers, but declares that a party seeking relief bears “a heavy burden.” “It is not enough … to show that the arbitrator committed an error–or even a serious error.”  The Oxford Court went on to declare that “the sole question … is whether the arbitrator (even arguably) interpreted the parties” contract, not whether he got its meaning right or wrong.” (Oxford; emphasis added.)  In other words, The arbitrator”s decision, even if he committed a serious error or got it wrong, will withstand a legal challenge to vacate unless the aggrieved party can show that arbitrator”s actions were outside the scope of his contractually delegated authority.

Driving home the point, the Court ruled that Oxford chose arbitration, and “it must now live with that choice.” Even if the arbitrator made a “grave error,” it would not be sufficient to vacate the award. “The potential for those mistakes is the price of agreeing to arbitration.” Agreeing to submit a dispute to arbitration is a bargained-for risk.

In other words – be careful what you ask for!