On June 10, 2013, the United States Supreme Court unanimously affirmed Oxford Health Plans v. Sutter, exhibiting a cautionary warning to employers and the particular terms they may want to include in the arbitration clauses of their employment agreements.
This case involved a situation where parties bargained for broad contractual language, stating specifically that any disputes were to be “submitted to final and binding arbitration.” The contract was silent concerning class arbitration. Sutter brought a class action claim against Oxford Health Plans. The parties agreed that the arbitrator would decide whether this broad contractual language would be inclusive of class arbitrations. The arbitrator ultimately found that since the language included the phrase “all such disputes,” class arbitrations were permitted.
Plaintiff challenged the arbitrator’s decision, bringing the case through federal District Court, the Third Circuit, and then finally to the Supreme Court, relying on a previous decision, Stolt-Nielsen S.A. v. AnimalFeeds International Corp. In that case, the contract was also silent as to class arbitrations and the Supreme Court found that the parties had not authorized such arbitration. The court in Stolt-Nielsen held that the Federal Arbitration Act (“FAA”) requires parties to specifically agree to class arbitration before arbitration can be allowed. Since virtually no arbitration agreements include express class arbitration authorizations, employers trying to avoid such class actions were not seen as a threat in the outcome of Stolt-Nielsen.
To our intrigue, the Supreme Court unanimously rejected the challenge to the arbitrator’s decision in Oxford Health Plans and allowed the class arbitration because the arbitrator had based his decision on the language of the contract. The bargained for exchange here was for the attention of an arbitrator to the matter, which the Court deemed should be honored.
Justice Kagan specifically stated: “All we say is that convincing a court of an arbitrator’s error—even his grave error—is not enough.” She further asserted that “[s]o long as the arbitrator was arguably construing the contract – which this one was – a court may not correct his mistakes under [the FAA]. . . . The arbitrator’s construction holds, however good, bad, or ugly.”
Significantly, however, the only question that the Supreme Court considered was whether the arbitrator was entitled to interpret the parties’ contract, not whether it was interpreted correctly. Accordingly, the Court could completely disagree with an arbitrator’s decision but still choose not to interfere with it because of the great deference afforded to contract terms. As a result of this decision, commentators have interpreted federal courts to be essentially unable to relieve parties from an arbitrator’s substantive interpretation of a contract’s terms, even if that interpretation is wrong. Such a holding calls for employers to attend to their arbitration clauses.
Moving forward, employers should draft their arbitration clauses unambiguously, indicating whether they would apply to class or individual arbitration or both. If an agreement is silent regarding class or collective action waiver and gives an arbitrator the right to deal with controversies rising under the contract, the arbitrator is likely to be given full and unwaiving discretion. Employers can no longer rely on silence.
Employers should contact experienced employment counsel to review their arbitration agreements to ensure their agreements provide what the employer intends them to.