Yesterday, the U.S. Supreme Court issued its opinion in Oxford Health Plans LLC v. Sutter, No. 12-135, addressing whether an arbitrator exceeded his powers in deciding that a contract provided for class arbitration (i.e., a class action arbitration proceeding).  The Court held that the arbitrator did not exceed his powers in making that ruling, although I expect this decision to have little impact beyond the unusual circumstances of this case, in which Oxford Health agreed to have the arbitrator decide whether the arbitration provision allowed a class arbitration procedure.  In future cases, it will almost always be the case that either: (1) the arbitration clause will explicitly prohibit class arbitrations; or (2) the defendant will not agree to allow an arbitrator to decide whether the contract permits a class arbitration, and the question of arbitrability will be litigated.  The Oxford Health Plans decision does not impact the Court’s ruling in AT&T v. Concepcion (blog post), which upheld the use of an arbitration clause containing a class action waiver, finding that state law invalidating that waiver was preempted by the Federal Arbitration Act. 

In Oxford Health Plans, an arbitrator had concluded that the arbitration provision in the governing contract between Oxford and certain physicians implicitly allowed class treatment, where the arbitration provision failed to expressly address that subject.  In a short opinion authored by Justice Kagan, the Court held that, where the parties had agreed that the arbitrator would decide whether the contract authorized a class arbitration, and the arbitrator decided that question based on his interpretation of the arbitration provision, the arbitrator did not exceed his powers under § 10(a)(4) of the Federal Arbitration Act.  The Court explained that § 10(a)(4) “permits courts to vacate an arbitral decision only when the arbitrator strayed from his delegated task of interpreting a contract, not when he performed that task poorly.”  (Slip op. at 7.)  “So long as the arbitrator was ‘arguably construing’ the contract—which this one was—a court may not correct his mistakes under § 10(a)(4).  . . . The arbitrator’s construction holds, however good, bad or ugly.”  (Id.) 

Footnote 2 of the opinion is particularly important.  It explains that the Court “would face a different issue if Oxford had argued below that the availability of class arbitration is a so-called ‘question of arbitrability,’” which a court may review “de novo absent ‘clear[] and unmistakeable[]’ evidence that the parties wanted an arbitrator to resolve the dispute.”  (Id. at 5 n.2.)  I would expect nearly all defendants to challenge arbitrability when this issue comes up in future cases.  

Also significant was Justice Alito’s concurring opinion (joined by Justice Thomas) explaining that absent class members should not be bound by the outcome of a class arbitration if they never agreed to a class arbitration procedure.  A majority of the Court might well not allow class arbitrations either based on arbitrability or the grounds articulated by Justice Alito. 

So how does this impact insurance class actions?  The insurance industry has not moved to expand the use of arbitration clauses following Concepcion.  So arbitration remains in relatively limited use – typically it applies to uninsured/underinsured motorist auto insurance claims in some jurisdictions.  If a class arbitration were sought, an insurer is likely to have a strong argument with respect to arbitrability and that a class arbitration procedure could not bind absent class members.