Does Your Company’s Generic Arbitration Provision Subject It to Class Arbitration?

            The U.S. Supreme Court has issued several decisions over the past few years which have reinforced the federal policy favoring arbitration and have prevented class actions from proceeding against corporate defendants.  Among those decisions was Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758 (2010), in which the Supreme Court took steps to preclude class arbitrations by prohibiting arbitrators from ordering the class arbitration of federal antitrust claims where (1) the arbitration agreement was silent on the class issue and (2) the parties stipulated that there was no agreement on the issue. The Supreme Court in Stolt-Nielsen reasoned that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”  According to the Supreme Court, the proper question is “whether the parties agreed to authorize class arbitration.”  But, the Supreme Court in Stolt-Nielsen expressly declined to determine what constitutes a sufficient contractual basis to determine the parties agreed to class arbitration because the parties in that case had stipulated that there was no agreement on the issue of class arbitration.  While the Supreme Court had “no occasion to decide what contractual basis may support a finding that the parties agreed to authorize class-action arbitration” in Stolt-Nielsen, it is now faced with Oxford Health Plans, LLC v. Sutter, (S.Ct. No. 12-135) which presents just that occasion.  In December 2012, the Supreme Court granted certiorari to review the ruling of the Third Circuit Court of Appeals which upheld an arbitrator’s decision ordering class arbitration based on a broad and general arbitration provision that does not reference class arbitration.  All businesses with contracts that contain arbitration provisions should take notice and watch Oxford Health – the generic arbitration provision at issue may sound very familiar and, if some appellate courts have their way, many businesses may find themselves facing class arbitration which they never contemplated.

            The Generic Arbitration Provision: “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.” 

            Can an “agreement” to authorize class arbitration really be found in these words?  As it stands, in the Third Circuit and Second Circuit the answer is “yes;” although, the Fifth Circuit has disagreed, holding that a standard clause like the one above cannot provide a basis for agreement to class arbitration.  So, how did the Third Circuit get to “yes” in Oxford Health?  Physicians filed a class action in state court against Oxford Health for failure to properly reimburse them for their provision of medical services to members of Oxford’s Health’s managed care network.  The state court granted Oxford Health’s motion to compel arbitration pursuant to the arbitration provision listed above which was contained in the Physician’s Services Agreement.  Then, the arbitrator determined that the provision authorized class arbitration and certified an award for class arbitration.  The Third Circuit upheld the arbitrator’s decision twice – once before Stolt-Nielsen was decided and once after the Supreme Court issued its decision in Stolt-Nielsen.  The Third Circuit explained:

[The arbitrator] reasoned that the clause’s first phrase, “No civil action concerning any dispute arising under this Agreement shall be instituted before any court,” is broad enough to include class actions. Thus, its second phrase, “and all such disputes shall be submitted to final and binding arbitration …,” sends all conceivable civil actions—including class actions—to arbitration. In other words, the phrase “no civil action …shall be instituted in any court” meant that a class action may not be instituted in a court of law. “All such disputes” must go to arbitration.

Sutter v. Oxford Health Plans, LLC, 675 F.3d 215, 223 (3rd Cir. 2012). The Third Circuit accepted the arbitrator’s reasoning as sufficient to establish a contractual agreement to class arbitration for purposes of Stolt-Nielsen: “We are satisfied that the arbitrator endeavored to interpret the parties' agreement within the bounds of the law, and we cannot say that his interpretation was totally irrational. Nothing more is required under § 10(a)(4) of the Federal Arbitration Act.” Id. at 224-25. But will the Supreme Court clarify that more is required by the FAA and Stolt-Nielsen?

            Interestingly, the arbitrator in Oxford Health opined that “it would be bizarre for the parties to have intended to make class action impossible in any forum.” Id. at 218 (emphasis added).  Yet, the Supreme Court in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011) approved the use of class arbitration waivers which do exactly that.  Moreover, the Supreme Court stated in Concepcion that: “Arbitration is poorly suited to the higher stakes of class litigation….We find it hard to believe that defendants would bet the company with no effective means of review, and even harder to believe that Congress would have intended to allow state courts to force such a decision.” 131 S.Ct. at 1752 (emphasis added).  So, then is it actually bizarre for a court to read such a generic arbitration clause as an agreement to authorize class arbitration post-Concepcion and post-Stolt-Nielsen?

            This year promises to be an important one, as several cases facing the Supreme Court present the opportunity to further close the loop on the class arbitration jurisprudence articulated in Stolt-Nielsen and Concepcion.  The Court’s decision in Oxford Health ultimately will provide critical guidance to the many companies facing broad arbitration provisions with language similar to Oxford Health’s agreement.  Arguments before the Supreme Court will be heard on March 25, 2013.

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