California Labor &
Employment Law Blog

Jun. 17 2013

Courts Continue to Weigh in on Impact of Arbitration Agreements on Class Proceedings

Topics: Arbitration Agreements, Class Actions, Court Decisions

Last week the United States Supreme Court issued its decision in Oxford Health Plans LLC v. Sutter, refusing to vacate an arbitrator’s finding that a doctor’s arbitration agreement with a health plan permitted class-wide arbitration.  Sutter, a pediatrician, had entered into a fee for service contract with Oxford Health, whereby Oxford Health agreed to pay Sutter certain rates for services he provided patients.  Sutter initiated a lawsuit on behalf of himself and other doctors also under contract with Oxford Health, alleging that Oxford Health failed to pay the doctors in accordance with the contract terms.  Oxford Health moved to compel arbitration, relying on the following arbitration provision in the contract with Sutter: 

“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 in New Jersey, pursuant to the rules of the American Arbitration Association before one arbitrator.”

The agreement did not expressly authorize nor expressly prohibit claims from proceeding in arbitration on a class-wide or collective basis.  However, the parties agreed that the arbitrator should decide whether the agreement permitted  class-wide arbitration or whether Sutter would be limited to pursuing only his individual claim in arbitration.  The arbitrator thereafter concluded that the agreement permitted class-wide arbitration.  The arbitrator reasoned that the agreement’s use of the term “civil action” was not limited to only certain types of civil actions, that a class action is a common type of civil action, and that by agreeing that all “civil actions” (without limitation) would be resolved by way of arbitration, the parties must have intended to include class claims in its scope. 

Oxford Health petitioned to vacate the arbitrator’s decision, but its efforts were unsuccessful.  While the arbitration process continued, the United States Supreme Court issued its decision in Stolt-Nielsen v. Animal Feeds International, 559 U.S. 662 (2010), holding that a party cannot be compelled to arbitrate claims on a class basis unless there is a contractual basis for concluding that the party agreed to do so.  In Stolt-Nielsen, the parties (very unusually) stipulated that they had no agreement concerning the use of class-wide arbitration.  Notwithstanding this fact, a panel of arbitrators ordered class-wide arbitration.  In those circumstances, the Supreme Court held that the arbitration panel exceeded its authority because it did not conclude class-wide arbitration was appropriate based on interpretation of the parties’ contract.  It could not have done so, given that the parties stipulated their contract did not cover the issue of class arbitration.  Instead, the panel ordered class arbitration as a matter of public policy.  According to the Supreme Court, this was not a proper exercise of the arbitrator’s power and as, such, the order was overturned.

Relying on Stolt-Nielsen, Oxford Health renewed its efforts to undo the arbitrator’s decision that the claims against it could proceed on a class basis in arbitration.  This time the challenge made its way to the Supreme Court, which issued its decision last week, disagreeing with Oxford Health’s position and limiting the scope of Stolt-Nielsen.  In its unanimous opinion, the Supreme Court held that this case was different than Stolt-Nielsen because in Stolt-Nielsen the parties had stipulated that they had no agreement concerning the use of class arbitration.  Here, by contrast, the parties simply disagreed about whether or not the subject was covered by the arbitration provision in their contract.  More significantly, the parties specifically agreed that the arbitrator should decide, as a matter of pure contract interpretation, whether the agreement permitted class arbitration.  By giving the arbitrator this power, the parties largely forfeited any meaningful judicial review of the arbitrator’s decision.  The Supreme Court explained that judicial review of an arbitrator’s rulings is extremely limited under the Federal Arbitration Act and a decision will only be vacated if clearly in excess of the arbitrator’s authority.  A decision that is simply a “wrong interpretation” is not in excess of authority.  The arbitrator was authorized to interpret the contract and did so.  The fact that he may have gotten the result wrong is not a proper ground for reversal. 

The Supreme Court hinted that had Oxford Health not stipulated that the arbitrator should decide the issue of class arbitration, Oxford Health could have argued that the issue was an issue of arbitrability in the first instance and one that a court, not an arbitrator, must decide.  If a court had issued the decision, judicial review would have been broader and the outcome quite possibly different. 

The Oxford Health case is a good reminder that employers must carefully review the language of their arbitration agreements to ensure that the subject of class/collective arbitration is expressly addressed and prohibited.  Employers should also consider and address in their agreements the issue of whether an arbitrator or a court will decide issues of arbitrability pertaining to the agreement.  Limited judicial review is great when the decision is in your favor, but cuts the other way too—as the Oxford Health case demonstrates.  The Oxford Health case is available here.

In a related development in California, yet another California has weighed in on the issue of whether a class waiver provision in an arbitration agreement precludes an employee from pursuing a representative claim under PAGA.  California state and federal courts have disagreed on this issue, with some concluding that class and representative claims, including those brought under PAGA, may be barred by an arbitration agreement, and others concluding that an arbitration agreement cannot preclude an employee from pursuing a representative action under PAGA.  Earlier this month, the Sixth District Court of Appeal handed down a decision in the Plaintiffs’ camp, holding that a plaintiff may pursue a representative claim under PAGA, notwithstanding an otherwise valid arbitration agreement precluding class/collective claims.  The decision is Brown v. Superior Court (Morgan Tire & Auto) and the decision is here.  Employers should note that the California Supreme Court is expected to resolve the issue of whether representative PAGA claims are excluded from the scope of an otherwise valid class waiver provision in an arbitration agreement sometime in the next year in Iskanian v. CLS Transportation (which reached the opposite conclusion with respect to the impact of a class waiver provision on a PAGA claim).  In the meantime, employers can expect continued assertion of PAGA claims by Plaintiffs’ lawyers in an effort to circumvent applicable arbitration agreements with class waivers. 

We will continue to post developments as they arise in this important area.

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About the Editor

Robin Largent represents employers, including major food and retail companies, in all types of employment litigation: wrongful termination, retaliation, breach of contract, wage and hour (California Labor Code) and unfair competition. She also regularly counsels and advises California employers on issues of compliance with California and federal employment laws.
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