Supreme Court To Clarify Key Issues Regarding The Permissibility Of Class Arbitration

In the last several years, the enforcement of agreements to arbitrate disputes, whether between businesses or between businesses and their employees, has become a hotly contested issue in the courts. The U.S. Supreme Court issued two significant pronouncements in this area in the past few years. In 2010, in Stolt-Nielsen S.A. v. Animalfeeds International Corp., 130 S.Ct. 1758 (2010), the Court held that where an agreement to arbitrate is silent on the question of whether a plaintiff can arbitrate her claims on behalf of a proposed class of similarly situated individuals (similar to a class action lawsuit), class arbitration is not permissible. Last year, in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), the Court held that (1) under the Federal Arbitration Act (“FAA”), arbitration agreements are to be enforced “according to their terms”; and (2) state law rules prohibiting the use of “class-action waiver” provisions, in which a party waives his or her right to arbitrate claims on a class basis, are preempted by the FAA. Together, these cases stand for the fundamental proposition that the parties to arbitration agreements should be bound by the clear terms of such agreements, especially with respect to class arbitration issues. 

The Supreme Court recently granted certiorari in two cases that should further clarify the law in this area. In In Re American Express Merchants’ Litigation, No. 12-133, (petition granted Nov. 9, 2012), the Court will address the question of whether a plaintiff who has signed an arbitration agreement containing a valid class-action waiver provision can avoid the enforcement of the provision where she demonstrates, through competent evidence, that it would be “economically irrational” to arbitrate her claims on an individual basis. The decision that will go before the Supreme Courtissued by the Second Circuit Court of Appealsholds that a plaintiff may avoid having to arbitrate her claims on an individual basis where she makes such a showing. This appears to flatly contradict the Supreme Court’s recent pronouncements in the Stolt-Nielsen and Concepcion cases. It also conflicts with Coneff v. AT&T Corp., 673 F. 3d 1155 (9th Cir. 2012), in which the Ninth Circuit Court of Appeals expressly disagreed with the Second Circuit on this issue.

In Oxford Health Plans LLC v. Sutter, No. 12-135 (petition granted Dec. 7, 2012), the Court is poised to resolve a circuit split regarding the proper interpretation of Stolt-Nielsen in the context of generally worded arbitration agreements that do not expressly reference class arbitration. On one hand, the Second and Third Circuits have held that arbitrators have virtually unlimited discretion to impose class arbitration proceedings as long as they find at least an implicit agreement to arbitrate on a class basiseven if the contractual language at issue states nothing more than that the parties agree to resolve all disputes through arbitration. In Jock v. Sterling Jewelers, Inc., 646 F. 3d 114, 117 (2d Cir. 2011), a divided Second Circuit panel upheld an arbitrator’s determination that an arbitration contract implicitly authorized class arbitration notwithstanding the absence of any reference to class claims in the contract. And in Sutter v. Oxford Health Plans LLC, 675 F. 3d 215, 224 (3d Cir. 2012)the decision now on appeal to the Supreme Courtthe Third Circuit upheld an arbitrator’s decision to order class arbitration despite the lack of any express language authorizing it based on a finding that the arbitrator’s determination in this regard was not “totally irrational”. On the other hand, the Fifth Circuit has held that (1) under Stolt-Nielsen, courts must meaningfully review the contractual basis underlying an arbitrator’s decision to impose class arbitration; and (2) broadly worded arbitration clauses cannot alone be the basis for class arbitration. See Reed v. Florida Metro. Univ., Inc., 681 F. 3d 630, 642-43, 646 (5th Cir. 2012), reh’g denied, June 15, 2012.

The American Express and Oxford Health Plans cases should provide much-needed clarity in an area of law in which decisions have been all over the map. American Express provides an opportunity for the Supreme Court to reverse a troubling trend within the Second Circuit in which courts invalidate otherwise-valid class action waiver provisions in the face of Concepcion and Stolt-Nielsen, often at the expense of businesses in the financial services industry. Oxford Health Plans provides an opportunity for the Court to reiterate and re-emphasize its directive in Stolt-Nielsenthat class arbitration cannot be imposed unless the parties expressly agree to it. We should expect decisions from the Court in these cases sometime in the summer of 2013.