Supreme Court Says "Wait a Minute!" to Using Arbitration to Prevent Class Action Claims

In the past couple of years, the United States Supreme Court has issued several arbitration decisions that many have thought might spell the roadmap for avoiding the wave of class action litigation brought against employers. Specifically, in Stolt-Nielsen v. Animal Feeds International, the Court ruled that arbitration could not be conducted on a class action basis unless the arbitration agreement specifically allowed for class claims. In AT&T Mobility v. Concepcion, the Court further stated that states generally cannot impose non-contract restrictions on the enforcement of arbitration agreements because the Federal Arbitration Act creates a national policy favoring enforcement. In response to these decisions, many have suggested that employers can prevent class action claims by having employees sign arbitration agreements requiring the resolution of disputes through arbitration and require such arbitration proceedings to occur only on an individual basis.Slow down the celebration, the Supreme Court has essentially said in its recent Oxford Health Plans LLC v. Sutter decision.

In the case, a doctor and an insurer had agreed to submit disputes arising out of the contract between them to arbitration. However, the arbitration agreement neither specifically permitted nor specifically prohibited arbitration claims to be brought on a class basis. When the doctor sought to bring his claim in arbitration on a class basis, the insurer claimed, in reliance on Stolt-Nielsen, that because the arbitration agreement did not specifically allow for class claims in arbitration, the doctor could not proceed with his class claims.

The arbitrator disagreed and interpreted the agreement to include class claims and, despite repeatedly suggesting its disagreement with that interpretation, the Supreme Court refused to disturb the result. The key to the ruling was that the arbitration agreement at issue left interpretation of the agreement to the arbitrator such that, because the arbitrator’s interpretation was based on the language of the agreement itself, the Court had to allow the result to stand. The Court further explained that the reason for the apparent departure from Stolt-Nielsen was that in the earlier decision, the parties had specifically agreed that the interpretation of the arbitration agreement was not the purview of the arbitrator, such that he could not conclude class arbitration was permissible where the agreement did not expressly say so.

Oxford Health Plans offers two immediately important lessons for employers that have either adopted arbitration agreements for the resolution of employment claims or are considering doing so: (1) make sure the arbitration agreement expressly covers the types of claims subject to arbitration and expressly precludes the types of claims — particularly class claims — that are barred from arbitration so that there is no ambiguity for an arbitrator to misinterpret; and (2) remember that arbitration is not a panacea for favorable resolution of employment claims. While arbitration offers important potential advantages, it is also subject to one major concern: an arbitrator’s seemingly illogical decision. As the Supreme Court pointed out, courts can vacate arbitration rulings only if the arbitrator strays from the task of interpreting the agreement, but cannot do so if the arbitrator performed that task and simply did so poorly. In other words, even if an arbitrator’s decision seems plainly erroneous, if the decision has a basis in the language of the arbitration agreement, the erroneous decision will stand. We thus again suggest that before adopting a strategy of requiring employment disputes be resolved through arbitration, employers should carefully think through and consult with counsel regarding the pros and cons of doing so.