The Supreme Court decided the two class arbitration cases before it in June. Neither decision was surprising, and together, they reinforce the Court’s prior jurisprudence permitting companies to draft class action waivers under the Federal Arbitration Act (“FAA”) and avoid class litigation.
Oxford Health Plans LLC v. Sutter, dealt with the issue of whether an arbitrator exceeded his authority under Section 10(a)(4) of the FAA in finding that the parties’ contract provided for class arbitration. The Court decided simply that it had no basis to overturn the arbitrator’s construction of the contract. It did not reach the weightier issue of whether the availability of class arbitration is a threshold question of “arbitrability,” which is a question for the courts to decide.
Oxford Health relied on the Court’s ruling in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), to argue that the arbitrator had misconstrued the contract, in effect, compelling arbitration in contravention of Stolt-Nielsen. In a unanimous decision written by Justice Kagan, the Court held that this case did not present a difficult issue because the parties had agreed that the arbitrator was to decide whether the contract called for class arbitration, which made the case different from Stolt-Nielsen. In Stolt-Nielsen, the Court held that class arbitration cannot be compelled, but rather, must have been agreed upon: “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.” Here, in contrast, there was an agreement: “Stolt-Nielsen made clear that this Court has not yet decided whether the availability of class arbitration is a question of arbitrability….But this case gives us no opportunity to do so because Oxford agreed that the arbitrator should determine whether its contract with Sutter authorized class procedures.”
In a concurring opinion by Justice Alito and joined by Justice Thomas, Justice Alito made clear that while review of the arbitrator’s decision was not appropriate, if that decision were reviewed, it would be found to be wrong: “[i]f we were reviewing the arbitrator’s interpretation of the contract de novo, we would have little trouble concluding that he improperly inferred ‘[a]n implicit agreement to authorize class-action arbitration …from the fact of the parties’ agreement to arbitrate.'” Justice Alito’s point is simply that absent class members cannot agree to arbitrate, and the individual parties’ intent to arbitrate cannot bind absent class members. Justice Alito points to a fundamental issue with the notion of class arbitration, because if absent class members cannot be bound by an individual party’s agreement, they will have an argument to collaterally attack an outcome that is not favorable to them.
The obvious lesson for defendants is that they should not agree to let an arbitrator decide whether a contract allows for class arbitration. But, beyond that, the decision does little to advance the debate on class arbitration. It does not address the more fundamental question of whether class arbitration should be allowed at all, as per Justice Alito’s concerns. Nor does it address the related question of “arbitrability,” as Justice Kagan notes.
In a much anticipated decision, the Supreme Court next decided American Express Co. v. Italian Colors Restaurant, No. 12-133. The Court held that a class arbitration waiver was enforceable under the FAA even when the cost of individual arbitration would be greater than any potential recovery, and as a result, a federal statutory right could not be pursued. The decision comes in the wake of a controversial Second Circuit holding to the contrary (see my March 8, 2013 post for background).
Writing for the majority, Justice Scalia held that unless the FAA has been “overridden by a contrary congressional command,” arbitration agreements must be enforced according to their terms. The antitrust laws at issue in the case did not preclude class action waivers. Indeed, the class action laws were enacted long after the Sherman and Clayton Acts.
As to the Second Circuit’s view that an exception exists when it comes to the vindication of federal statutory rights, the Court found no such exception in Rule 23, and held that any such exception did not relate to circumstances when pursuing a statutory remedy was too costly. Relying on its seminal decision in Concepcion, the Court held that class arbitration was not required to rescue claims that could not otherwise be brought.
The American Express decision settles the doubt that existed in the aftermath of the Second Circuit’s decision about whether companies could effectively foreclose class litigation through contract. Class action waivers under the FAA are enforceable, even when federal statutory rights would not otherwise be heard. While American Express does not end the debate — state law contract issues may still arise — it provides much needed clarity.